Ascendas REIT (OCBC)

Maintain HOLD
Previous Rating: HOLD
Current Price: S$1.99
Fair Value: S$2.08

Awarded site at Fusionopolis

Award of the Fusionpolis site. A-REIT announced on 8 Jun that it has been awarded the Fusionopolis site by JTC for S$110m, which will be developed into a modern suburban business space facility. The public tender for the 6,253 sqm site at Fusionopolis Link by industrial landlord JTC Corp was launched on 28 Feb and closed on 20 May. The site, which lies within the 200-hectare one-north development housing research facilities and business parks, has a 60-year land lease and is on the confirmed list of the government's industrial land sales programme for 1H11. It has a maximum plot ratio of four and can be developed up to 160 metres above sea level.

Development Plans. A-REIT will develop a suburban business facility of 25,000 sqm GFA comprising 60% business park space and 40% office space 1 to cater to prospective tenants in the ICT and media industries as well as R&D activities in physical science and engineering. The expected completion date is 3Q2013. The strategic location of the site will also reinforce A-REIT's presence and market share within the business & science parks segment while achieving economics of scale in operations. This 6,253-sqm site is located within walking distance to the one-nor th MRT stat ion which is expected to be operational in 4Q2011 and easily accessible via the AYE. A-REIT believes that this development will provide unitholders with potentially greater returns compared to outright acquisi t ions of income-producing proper t ies. I t wi l l also improve the NAV of its portfolio as A-REIT will receive any benefit of unrealised valuation gain from the development of the site.

Maintain BUY. We have factored in contributions from the new site into our valuation. Our assumptions place the total development costs, financed entirely by debt, at S$178.8m (S$665 psf ppr), with a modest initial NPI yield-on-cost of 7% and 6.5% for the business park and office segments respectively. This is slightly above A-REIT's existing NPI yield of 6.46% in FY2010/2011. Nonetheless, we remain sceptical of the clear differentiation between the two segments, and presume A-REIT wi l l probably market the business park segment with a more R&D slant. We expect rental income to be streaming in from Oct 2013 onwards. Our RNAV-derived fair value increased from S$2.04 to S$2.08. Maintain HOLD.