CapitaMall Trust (OCBC)

Downgrade to HOLD
Previous Rating: BUY
Current Price: S$1.98
Fair Value: S$2.05

Acquisition of the Jurong Gateway site

$S969m tender award. CapitaMall Trust (CMT) has been successfully awarded the Jurong Gateway site, located at Boon Lay Way by URA on 30 May at a tender price of S$969m (S$1,1012 psf ppr). This was a joint tender by CMT, CMA and CapitaLand, of which CMT has a 30% stake in the JV. The total development cost is expected to be about S$1.5b (S$1,566 psf ppr).The land parcel has a prime location next to both Jurong East MRT station and Jurong East bus interchange. Jurong is slated to be the largest regional centre in Singapore for commercial developments outside the city centre (under URA's Jurong Lake District Masterplan). Jurong Gateway is about 2.5 times the size of Tampines Regional Centre.

"3-in-1" Mega Mall in Jurong. CMT will be building a 25-storey retail-cum-office property at the new site, adjacent to another upcoming Lend Lease office/retail building, scheduled for completion in 2014. With two other CMT malls in the vicinity (IMM and JCube), CMT's selling proposition is to create a "3-in-1" mega mall in Jurong, offering 1m sqft of retail NLA within three minutes' drive from each other in Singapore's soon-to-be largest regional hub. CMT intends to finance the development by internal funds and debt.

Downgrade to HOLD on valuat ion grounds. We have factored in contributions from both the retail mall and office building into our valuation, commencing on Dec 2013 and Jun 2014 respectively. Our total development costs for CMT works out to about S$469m, which accounts for 5.8% of CMT's total assets as of 31 Mar (within the property fund guideline of 10% development cap). CMT has guided that it is targeting rentals of S$16-S$18 psf pm and S$7-S$8 psf pm for the retail and office segments respectively, with an initial yield-on-cost of 6%. According to our model, these targets are fairly tight and require somewhat vigorous occupancy rates in the first year to attain the desired 6% yield. In addition, unlike the Tampines Regional Centre, which is hailed as the "financial hub in the east", the Jurong precinct does not have a strong financial institution catchment base. We therefore remain wary of (1) the office take-up in that area, with the nearby International Business Park, JTC summit and iHub buildings offering cheaper alternatives and (2) "retail tenants' fatigue" among the four malls within a 500m radius from the MRT station. Moreover, CMT's share price has appreciated 6.5% since our last report dated 21 Apr. Downgrade to HOLD on valuation grounds with an increased fair value of S$2.05 (prev: S$2.02). We will turn buyers at S$1.93.

Location, location, location. The Jurong Gateway site is strategically located beside the Jurong East MRT interchange station, which has two train lines, and the Jurong East bus interchange and is close to JCube and IMM, both of which are owned by CMT. The Jurong Gateway site is part of the Jurong Gateway precinct, which together with the Lakeside precinct, form the Jurong Lake District which is earmarked to be a regional centre. Jurong Gateway is to be a commercial hub with offices, retail space, hotels and homes while Lakeside is to be a leisure destination with attractions for the whole family.

25-storey retail-cum-office property. The planned 25-storey retail-cum-office development has a site area of about 195,465 sqft and maximum permissible total GFA of about 957,780 sqft. The office component will be equivalent to at least 40% of the total GFA of the development, with the remaining GFA for retail. Subject to planning approval from URA, the shopping mall is expected to have five levels including one basement level. The one-stop family mall will both cater to residents' everyday needs and offer specialty shops. Shoppers will also enjoy seamless accessibility to transport options from the mall - Level 1 will be linked directly to the new air-conditioned Jurong East bus interchange, while both Level 1 and Level 2 will be linked to Jurong East MRT station. Together with link bridges connecting the mall to the Ng Teng Fong Hospital and a neighbouring development, the shopping mall will have five direct connections to transport infrastructure and amenities. The shopping mall is expected to commence operations in time for the Christmas shopping season in 2013. In addition, the prime office tower sited on top of the shopping mall is expected to span 20 storeys (from Level 6 to Level 25) with about 383,000 sq ft of GFA. As one of the taller developments in the vicinity, the retail-cum-office development is envisaged to become a new landmark in Jurong Gateway when it opens in 2014.