CCT – CIMB
Market Street Carpark approved for conversion
CCT announced yesterday that the Urban Redevelopment Authority (URA) has granted outline planning permission for Market Street Carpark to be rezoned from “transport facility” to “commercial” use. CCT plans to redevelop the carpark into a Grade A office tower, subject to financial viability evaluation.
Potential increase in portfolio. The estimated net floor area of the new development is 640,799 sf, which could add 22% to CCT’s total floor area. The new development would be the second largest property in CCT’s portfolio, after Capital Tower.
Conditions imposed on change in land use. The rezoning of the carpark is subject to CCT paying 100% of the enhancement in land value as assessed by the Chief Valuer, non-extension of the existing land lease (which has 65 years remaining) and restricted use of the redeveloped project for offices only, with activity-generating uses (retail and food and beverage uses) allowed on the first storey.
Potential impact
Potential increase in net property income. With its sizeable plot and location, conversion of the carpark could result in significant net rental income for CCT. Our model assumes that upon completion of the redevelopment, CCT would be able to command a gross rental of S$12 psf per month, representing about one third of our gross revenue estimation for CCT for 2007.
No significant development gains. We estimate that the redevelopment of Market Street Carpark would be worth S$1.65bn, or S$2,575 psf of net lettable area. However, since gains in value would be creamed off by the payment of the development premium, CCT would be effectively purchasing a new development. Furthermore, since CCT is constrained by guidelines for REITs to hold development properties upon completion, it will not be able to enjoy development gains via a sale exit strategy.
Redeveloped project may not be yield-accretive. The redeveloped office tower may not be yield-accretive as the current property yield of Market Street Carpark is high at 9.8% vs. an estimated 5.6% for the proposed office project.
Restrictions on REITs taking on development projects. Property fund guidelines for REITs stipulate that the total contract value of property development undertaken should not exceed 10% of REITs’ deposited properties. CCT’s threshold for development as at 30 Sep 07 was 10% of its deposited property of S$4.7bn, or S$467m. Deducting its prior commitments to projects related to the Malaysia Commercial Development Fund (S$30.5m) and Wilkie Edge (S$182.7m), CCT’s remaining threshold for development projects is only S$254m, or 17% of the development cost of S$1.5bn.
Joint-venture option. One of the options for CCT is to redevelop Market Street Carpark via a JV with a developer, and taking a 17% stake in the development. This is the most straightforward option which would probably see CCT gearing up to fund the development. However, as CCT is constrained by guidelines for REITs to hold the developed property upon completion, it would need some form of buyback mechanism. In view of the significant value of the proposed redevelopment, new units may be issued for the buyback, resulting in some dilution in value.
Business trust option. Another option is development via a business trust stapled to the REIT. The benefit of this option is that the business trust will not be restricted by the 10% cap on development. However, the business trust would be subject to corporate tax.
Valuation and recommendation
Although rezoning the carpark would significantly increase contributions to CCT, it is uncertain if this redevelopment would be yield-accretive, since capark properties are higher-yielding than office properties. In addition, the conversion would likely be completed in 2012, when a large supply of new office space is expected, creating uncertainties in occupancy rates and rentals. Furthermore, the scale of the redevelopment may require complicated JV structures or the addition of a business trust which could potentially dilute distribution from CCT.
Maintain Neutral and target price of S$2.80, based on DDM valuation, pending confirmation of redevelopment plans.