Terence Chua of PhillipCapital has kept his &ldquo accumulate&rdquo call and $8.86 on City Developments following news that the developer has fully sold its latest project.

 

Copen Grand, a 639-unit executive condominium, was fully sold within a month of launch. Chua estimates CDL to make a &ldquo comfortable&rdquo margin of 25% from this project from the average selling price of $1,300 psf.

 

Chua also notes that CDL&rsquo s hospitality segment continues to benefit from pent-up demand as tourists are across the world, driving up RevPAR by 100% y-o-y.

 

&ldquo Hotels in Singapore, US and Europe continued to recover faster than those in Asia, though average room rates increased across all regions, signalling a strong recovery momentum,&rdquo says Chua.

 

However, Chua warns that the Singapore residential market might see a slowdown, judging from the 3Q2022 statistics. CDL sold 95 units with total sales value of $281 million versus 414 units with total sales value of $784.4 million in the same period last year.

 

Chua&rsquo s unchanged target price of $8.86 is based on a 35% discount to CDL&rsquo s RNAV of $13.64.

 

He continues to see CDL as a proxy for the Singapore residential market and hospitality recovery.

 

&ldquo Asset monetisation, unlocking value through AEIs and redevelopments, and faster-than-expected recovery in the hospitality portfolio are potential catalysts for CDL, which could help narrow the discount between CDL&rsquo s share price and RNAV,&rdquo writes Chua.

City Developments&rsquo (CDL) shareholders would have cheered the special dividend of 12 cents per share and an ordinary interim dividend of three cents per share in 1HFY2022.

 

During the six months ended June, CDL divested the Millennium Hilton Seoul for around $1.2 billion, and a gain of some $500 million. Similarly, the deconsolidation of CDL Hospitalit Trusts (CDLHT), which was given as a dividend-in-specie to CDL shareholders, reaped the developer a further $500 million.

 

Hence, CDL announced a Patmi (profit after tax and minority interest) of $1.1 billion. Excluding those divestment gains, CDL&rsquo s 1HFY2022 Patmi is $110.3 million, a turnaround from a loss a year ago.

 

While CDL&rsquo s management made much of the upturn in the hospitality sector, legacy assets will continue to boost CDL&rsquo s earnings in 2HFY2022. The group will be reeling in the cash from Tanglin Shopping Centre and Golden Mile, which were sold in collective sales.

 

Executive chairman Kwek Leng Beng says at the end of a morning of results briefings on Aug 11: &ldquo We have heard from our authorities that there are no death duties in Singapore inflation is better than recession. Whether the borrowing cost is lower or higher doesn&rsquo t matter because of our cash position from [the sale] of Tanglin Shopping Centre.&rdquo

 

In addition, group CEO Sherman Kwek says that the CDL board is &ldquo looking at&rdquo share buybacks, but would only consider such a move if the share price is trading at a deep discount to net asset value (NAV).

 

&ldquo We are discussing share buybacks again. It&rsquo s a pity we didn&rsquo t do share buyback when our share price went to $6.30. The board is looking closely at share buybacks and it demonstrates we want to own more of our business because we believe our share price is undervalued,&rdquo the younger Kwek says.

 

As at June 30, NAV stood at $10.18, up 9.7% since end-December 2021. Revalued NAV, if the group&rsquo s investment properties and hotels are at market prices, would be a lot higher, at $16.37.

 

Lift in NAV

 

Interestingly, CDL is likely to experience a realised lift in its NAV next year. The freehold Fuji Xerox Tower is being redeveloped. Its book value prior to redevelopment was around $130 million. Assuming construction costs at approximately $450 psf for residential, $650 psf for serviced residences and $500 psf for commercial, and selling price of residential and valuation of commercial at $2,400 psf, the gross development value (GDV) could be at $1.2 billion to $1.3 billion. The uplift in valuation for the renamed Newport Plaza, Newport Residences and Newport Tower would be over $1 billion.

 

The Newport development will stand at 202m, with around 45 storeys. The higher floors will be the residential units, most likely with a penthouse or two on top. That would make the residential units among the highest in Singapore &mdash physically. As for the pricing, the launch is scheduled for 1HFY2023. There isn&rsquo t much detail on Central Mall and Central Square along the Singapore River, opposite Canninghill Piers (the former Liang Court), as CDL is in the process of &ldquo pursuing planning permission&rdquo . However, the broad plans are to redevelop the property into a mixed-use integrated development comprising office, retail, hotel and residential apartments.

 

On the asset management front, it appears increasingly difficult for CDL to put its two Grade-A commercial buildings in London into a REIT, along with HSBC&rsquo s London headquarters. CDL acquired 125 Broad Street for GBP385 million in October 2018 and Aldgate House for GBP183 million in September 2018. Qatar Investment Authority acquired HSBC HQ in 2014 for GBP1.1 billion, news reports had said at the time. In 2021, CDL announced it had applied for an IPO of a REIT that will own commercial assets in the UK.

 

A commercial REIT?

 

Based on conversations with investors, appetite for S-REITs with foreign assets is lukewarm. Instead, CDL should consider putting some of its Singapore commercial properties into a REIT, they suggest.

 

Singapore&rsquo s real assets are in demand. &ldquo Singapore took centrestage in the Asia Pacific commercial real estate market, with volume climbing by 74% to US$5.6 billion ($7.7 billion) &mdash the highest tally ever for a single quarter,&rdquo says a report by MSCI Real Assets titled Asia Pacific Capital Trends on 2Q2022. Demand for property was broad-based, with CBD offices garnering most of the investments. Overall transaction volume reached US$7.8 billion for the first half of 2022, an increase of 53% y-o-y, the report indicates.

 

It so turns out that the valuation of South Beach, excluding residential units which have been sold, is around $2.5 billion. South Beach is held by CDL and IOI Corp in a 50:50 joint venture. The 999-year leasehold Republic Plaza was last valued at around $2.5 billion as well. City Square Mall, a suburban mall connected to Farrer Park MRT Station, was valued at around $600 million. These assets would make a tidy commercial REIT.

 

Nowadays, many commercial REITs have a mix of office and retail assets. Mapletree Pan Asia Commercial Trust, CapitaLand Integrated Commercial Trust, Suntec REIT, Starhill Global REIT, Lendlease Global Commercial REIT, and so on, are commercial REITs comprising office and retail assets.

 

The theoretical CDL Commercial REIT would have a pipeline in the Newport Plaza and Tower complex, and the redeveloped Central Mall and Central Square project. Eventually, if City House gets redeveloped, that too could be a pipeline.

 

In the meantime, CEO Kwek is looking at recycling some of Millennium & Copthorne&rsquo s hotels into CDLHT. Following a strategic review of the M& C portfolio, Kwek says the focus is on improving asset performance for hotels that will remain as hotels, redeveloping those with latent value, AEIs to improve returns, and divestment to CDLHT or an outright sale.

 

When asked how much per year M& C would divest to CDLHT, Kwek says: &ldquo We are talking closely to the REIT and that is the purpose of the deconsolidation. It&rsquo s hard to commit to a churn, but it should be a constant churn. We have quite a big portfolio and we have purpose-built student accommodation (PBSA) and private rental sector assets (PRS). Ideally, we should see one of these three assets being injected into the REIT [regularly].&rdquo

 

Kwek is keen on the living sector because of an increasing trend of people renting in developed markets. &ldquo We want to redeploy more into the living sector. We just acquired a PBSA in UK [in Coventry], with more to come, and we acquired PRS assets in Australia, Japan and UK,&rdquo he says.

 

For now, though, CDL&rsquo s billions in earnings are likely to come from its home market of Singapore, with redevelopment and monetisation of its legacy properties. The cash inflow can either be returned to shareholders or redeployed to higher-yielding assets, but it&rsquo s difficult to envisage any assets yielding more than these Singapore properties