CapitaLand (KimEng)

BUY
Price $3.07
Target $4.14

Coming together at the Gateway

Event:
A consortium comprising CapitaMalls Asia (CMA), CapitaMall Trust (CMT) and CapitaLand has secured a White Site at Boon Lay Way for $969m, or $1,012 psf ppr. CapitaLand will lend its expertise on the office component while CMA will lead the design for the retail portion. With this acquisition, the CapitaLand group of companies will have a strong foothold in Jurong Gateway, right in the commercial heart of the Jurong Lake District. Maintain BUY.

Our View
The Jurong Gateway (JG) site will have a total GFA of 957,781 sq ft, 40% of which will be for office use and 60% for retail. The stakes held by CMA, CMT and CapitaLand are 50%, 30% and 20%, respectively. The total development cost is estimated to be around $1.5b.

At first glance, the bid appears aggressive, as it is nearly 55% higher than the psf price paid for the adjacent site in June last year. A closer analysis, however, shows the JG site to be superior in location and with fewer site constraints. The consortium is targeting retail rents of $16‐18 psf pm and office rents of around $7‐8 psf pm. This should translate to yield on cost of about 6% for both components.

With the acquisition, the CapitaLand group of companies will have its foothold strengthened, not just in the Jurong Lake District, but also in western Singapore. In addition, it will gain exposure to quality office space in Jurong, which will be sought after in the future when the district matures as a regional commercial hub.

Action & Recommendation
While the targeted 6% yield on cost for the JG site is attractive, the actual impact on CapitaLand’s RNAV is minimal. The asset, when completed, is likely to be eventually monetised and sold to CMT and CCT. We have trimmed our target price to $4.14, pegged at par to RNAV after adjusting for the share prices of the listed subsidiaries. Maintain BUY

The price for success
The Jurong Lake District has been earmarked by the Urban Redevelopment Authority (URA) as the largest commercial hub outside the city centre, 2.5x the size of Tampines Regional Centre. To kick‐start the development, the URA tendered out the first White Site beside Jurong East MRT station in April last year. Australian group Lend Lease secured the site with a top bid of $788.9m ($645 psf ppr), while CapitaMalls Asia narrowly lost out with a bid of $728.8m ($632 psf ppr).

Nearly a year later, the adjacent site was put up for tender. This time round, the consortium comprising CMA, CMT and CapitaLand won with a top bid of $969m ($1,012 psf ppr). The price suggested to us the consortium’s determination to secure the site, despite it being a 55% premium over the price Lend Lease paid for the earlier site. That said, we note it was just 5.7% higher than the second‐highest bid jointly submitted by United Engineers and Singapore Press Holdings.

The expertise to make things work
Based on the tender conditions, at least 40% of the GFA at the Jurong Gateway (JG) site has to be for office use and the rest can be devoted to commercial, hotel or residential purposes, either solely or in combination. The consortium will allocate 40% for office use and the remaining 60% for retail use. Structurally, the combination of stakeholders allows each party to leverage on its expertise, eventhough they hold proportional stakes in both the retail and office components.

For example, CMA and CMT together have a wealth of expertise in developing and managing retail malls in Singapore. In addition, CMT already has two other malls in the vicinity, namely, IMM and JCube. The latter is undergoing redevelopment. Together with the new mall on the JG site, the three malls have an NLA of 1m sq ft, each positioned to capture a different market segment. With more than 1m residents in the western region, there will be a steady catchment area for the malls. All three malls are close to each other, which means CMA can leverage on economies of scale for both tenant and property management.

For the office component, CapitaLand Commercial Ltd (CCL) will lead in the design and leasing. According to the design scheme, the development will provide office space with typical floor plates of about 15,000 sq ft. Given the dearth of quality office supply in Jurong, CCL believes that demand will be robust, particularly from medical and pharmaceutical companies keen to be located near the upcoming Ng Teng Fong Hospital, as well as MNCs in the oil and gas and marine sectors wishing to be close to their operations in Jurong Island and Tuas.

JG site vs Lend Lease site
Besides the aforementioned attributes brought to the table by the CapitaLand group of companies, one other factor puts the JG site in a more favourable position than the Lend Lease site (Site 1 in Figures 2 and 3) – location.

The JG site provides five seamless connections to the main transport nodes (bus interchange and Jurong East MRT Station) and other nearby amenities, including the upcoming Ng Teng Fong Hospital and Site 1 itself. The JG site’s central location means that human traffic flow will inevitably be channelled through it. In addition, due to site constraints, the mall on Site 1 will be configured as a six‐storey development with about 550,000‐560,000 sq ft of NLA. The new mall on the JG site is expected to have five storeys. As retail rents flow with gravity, ie, rents decrease the higher one moves up the mall, the average rent for a six‐storey mall will be lower than that for a five‐storey mall.

In addition, Lend Lease has roped in a number of major anchor tenants, such as Robinsons department store, NTUC FairPrice Xtra hypermarket and Cathay Cinema. The mall on JG site can do away with anchors, which will be replaced by specialties and mini‐anchors instead. This will allow the average retail rent achievable on the JG site to approach the targeted $16‐18 psf.

Likely pipeline asset for CMT and CCT
Based on our estimates, the total development costs leave little upside for CapitaLand in terms of RNAV accretion. Instead, we think CMT and CCT will likely be the eventual beneficiaries, as the development will provide a high‐quality asset which both REITs may acquire upon its completion. CMT could just acquire the full stake in the mall and CCT just the office component. Alternatively, the duo could jointly own stakes in the development, just like they currently jointly own stakes in Raffles City Singapore.