The successful joint bid by CapitaLand and City Developments for a government land site doesn’t appear cheap, but the residential units may command “a significant premium,” Morgan Stanley said in a note on Thursday.
The two developers said on Thursday that their 50:50 joint venture won a mixed-use residential and commercial site in Singapore’s Sengkang Central at a tender price of S$777.78 million under the “two-envelope” and price revenue tender bidding system.
The investment bank noted the pricing was at a land cost of S$924 per square foot, at the upper end of consultant expectations of S$850 to S$950 psf. It estimated a breakeven cost of S$1,400 psf for the residential units, above the S$1,300psf in the resale market for nearby condo Jewel@Buangkok, a nearby condo launched by City Developments in 2013.
“While the land cost does not appear to come cheaply, we believe the residential units will be able to command a significant premium,” due to the site’s direct connection to Buangkok MRT and bus interchange and retail amenities within the complex, Morgan Stanley said.
“Much like Watertown@Punggol, Bedok Residences, and Park Place Residences in Paya lebar, we think projects integrated with transport nodes and retail space are able to price 10-20 percent higher,” it said.
It noted the site can be built for 700 condo units and 130,000 square feet of mall space.
“We believe the project will likely attract local first-time home buyers and HDB upgraders, who are largely unaffected by recently raised stamp duties applicable to investors and foreigners,” Morgan Stanley said.
It rates CapitaLand at Overweight with a S$3.80 target price and City Developments at Overweight with a S$13.60 target price.
Hefty premium not that big a deal?
Separately, Nomura said that while the bid offered “big headlines,” it didn’t believe it was really material.
“We think the market’s initial reaction to the news is likely to be neutral. The 14 percent premium over the second highest bid that CapitaLand and City Developments are paying, while hefty, is in line with the premium that was paid for the Holland Village mixed use development site, which was also awarded via the two-envelope bidding process in May,” Nomura said in a note on Friday.
It added that it estimated the project would add only 1.4 Singapore cents per share to CapitaLand’s net asset value and 6.4 Singapore cents a share to City Developments’, with the development risks shared between the two.
But it noted that the project can accomodate around 220,000 square feet of retail space, which could add to the acquisition pipeline of CapitaLand Mall Trust.
It rates CapitaLand at Buy and City Developments at Neutral.
Shares of CapitaLand were flat at S$3.32 at 10:24 A.M. SGT on Friday, while City Developments was up 1.89 percent at S$9.72.
This article was originally published on Friday, 17 August 2018 at 10:28 A.M. SGT; it has since been updated to add comments from Nomura.