SPH explains thinking behind mall bid (BT)

BackNov 18, 2009

Winning bidders looking ahead at rentals upon lease renewal

[SINGAPORE] Even as the Housing & Development Board yesterday awarded Clementi Mall to a Singapore Press Holdings-led consortium, members of SPH's top management sought to explain the rationale for the bid price, which stockbroking analysts and market watchers have said was too high.

The consortium members are taking a long-term position on the investment and looking at forward rentals at the next lease renewal cycle – instead of just immediate returns when the mall begins operating in the first half of 2011, SPH's management said at media and analyst briefings yesterday.

It also revealed that more than 300 interested parties have registered interest to potentially rent space at the mall.

And the projected fit-out cost will be under $40 million – lower than the $40-50 million that some analysts had assumed.

HDB is building only the mall's core structure and facade, which it is scheduled to hand over in August next year to the joint venture, which will then finish the project and have naming rights for the property.

NTUC FairPrice, which has a 20 per cent stake in the venture, will lease 20,000-25,000 square feet for a supermarket at basement one of the mall. It may also take up additional space for a convenience store.

NTUC Income, which also has a 20 per cent stake, and SPH, the majority shareholder with 60 per cent, may also take up space in the property. The latter is likely to be for a kiosk selling newspapers and magazines.

Clementi Mall – the working name for the 99-year leasehold property – will have an air-conditioned bus interchange on the first level. The mall's third level will be linked to Clementi MRT Station.

SPH's management yesterday explained that the venture's bid valuation was based on stabilised operations after the mall's rental renewal cycle, and enhancing yield over time.

"In other words, when we do our calculations, we are not using the rentals when we start operations. We are actually using after rental renewal cycle, whether it is after three years or six years," said SPH chief executive officer Alan Chan.

Had SPH used the typical strategy of real estate investment trusts (Reits), which assume say a 5-6 per cent return based on rents when the mall starts operating, it would have led to bids in the $300 million range – where four of the six bids came in for the mall at the close of HDB's tender last Tuesday.

"When you are a Reit, you have to ensure immediate returns. Whereas we are long-term players and we are prepared to place our bets based on forward rentals at the next cycle," Mr Chan said.

"This is the challenge the bidder is always confronted with: Do you use standard metrics or do you think out of the box?"

The venture hopes to achieve the rentals that are obtained by the best suburban malls in Singapore.

Its winning bid of $541.898 million was the highest of six offers that HDB received for the mall. The winning bid is nearly 42 per cent more than the next highest offer of $382 million.

Earlier, analysts had forecast a valuation for the property – comprising the bid price as well as assuming fit-out costs of $40-50 million – of about $3,000 per square foot of net floor area of retail space.

But SPH management yesterday said that the projected fit-out costs would be under $40 million and hence the valuation would be "somewhere south of $3,000 psf".

Along prime Orchard Road, ION Orchard was valued at $3,747 psf of net lettable area as at June 30 this year.

SPH said that it also worked in prospects for potential capital appreciation in the bid price, pointing to its successful track record with Paragon along Orchard Road.

Its valuation has increased from just under $800 million in 1997 to almost $2 billion today. Based on the current market price,

Paragon's yield is well above 4 per cent. The return on equity is above 10 per cent – a result that was achieved over the years, not overnight.

Mr Chan also sought to allay concerns in some quarters that SPH's investment in Clementi Mall could clip dividend payouts to shareholders.

Firstly, SPH's stake in the venture is only 60 per cent – and for which it has enough internal funds to pay, with the rest to be funded through borrowings.

"Secondly, our dividend track record is always a function of recurring earnings. So this investment is not going to affect the dividend track record."

And when stabilised rental income starts streaming in from Clementi Mall, SPH's recurring earnings will increase, he added.

'This is the challenge the bidder is always confronted with: Do you use standard metrics or do you think out of the box?'

– SPH CEO Alan Chan