Cambridge – DMG

A pass at the sale of the year

As previously announced on 2nd and 24th May 2012, Cambridge Industrial Trust (CIT) has joined with other owners of Lam Soon Industrial Building to undertake an ‘en-bloc’ sale of the entire property at an indicative pricing of S$330m (equivalent to an estimated S$950 psf) – 2.5x the valuation of the property on books. Located in Hillview, Upper Bukit Timah, Lam Soon Industrial is a 230,915 sq ft freehold site zoned for residential use with a gross plot ratio of 1.92x. With regards to this matter, CIT has just announced that despite good interests on the property, a mutually agreeable pricing could not be reached and hence the en-bloc sale would not be carried out. Although this is a freehold piece of land, the indicative price may be on the high side after taking the development cost into consideration. Although CIT could have greatly benefitted from this sale, we believe CIT would continue to grow via other acquisitions and AEIs going forward while the management awaits a better time before carrying out another en-bloc sale. Maintain BUY on CIT with a DDM-based (COE: 9.8%, terminal growth: 1.0%) TP: S$0.660.

Selling price might be higher than what the developers are willing to pay. At S$330m, the indicative selling price translates to 2.5x the book value (for 79% ownership) of the property as per December 2011. Assuming a development cost of S$300-400 psf, the total cost of construction could add up to approximately c.S$1300-1400 psf. With the current selling price of S$1400-1600 psf for the residential development across the road of Lam Soon Industrial, coupled with uncertainty in the residential market, we believe the profit margin for developing this particular property may be too low for developers’ consideration.

CIT continues to remain attractive. With an estimated cap rate of 5.2% on this building, CIT could have greatly benefitted from this divestment. However, going forward, we expect CIT’s DPU to continue to remain strong from 1) additional contributions from its acquisitions, 2) resilient industrial rental rates coupled with average security deposits of 12.9 months, 3) the completion of the BTS project at Tuas View Circuit in August 2012 and 4) future AEIs in the pipeline. Maintain BUY on CIT with a DDM-based (COE: 10.7%, terminal growth: 1.0%) TP: S$0.660.