SEVERAL property-related groups posted strong results for the half year ended June. City Developments Limited : C09 +0.12% (CDL) achieved a record net profit of S$1.1 billion for H1 2022, reversing a net loss for H1 2021. CDL is paying a special interim dividend of S$0.12 per ordinary share.

 

The Straits Trading Company : S20 -0.91% posted a 449 per cent year-on-year rise in H1 net profit to S$673 million. In the wake of its strong H1 results, the group declared a special dividend, distributing either ESR shares or Straits Trading shares to entitled shareholders.

 

UOL Group : U14 -0.27% and its subsidiary Singapore Land Group : U06 -1.2% (SingLand) saw year-on-year net profit rise 306 per cent to S$371 million and 290 per cent to S$360 million respectively. But both groups did not declare an interim dividend, which is in line with their practice of not declaring interim dividends.

 

Based on last year&rsquo s dividend and share price as at Aug 17, 2022, UOL and SingLand traded at dividend yield of 2 per cent and 1.4 per cent respectively. Such yield looks unappealing versus Singapore dollar fixed deposit rates of over 2 per cent for tenures of 18-24 months. However, shareholders of UOL and SingLand may want to temper hopes of receiving a much higher dividend for 2022 as profit for both groups was helped by fair-value gains.

 

A more pressing matter for UOL and SingLand is addressing their large discount to net asset value (NAV). Based on their share prices as at Aug 17, 2022, UOL and SingLand traded at discounts to end-June NAV of 39 per cent and 55 per cent respectively.

 

There is perhaps greater urgency for SingLand to unlock value for shareholders than UOL. Also, unlocking value at SingLand can be a precursor to unlocking value at UOL. Fortunately, SingLand has assets from which substantial value can be unlocked.

 

SingLand Commercial Reit

 

Investment properties, worth around S$6.6 billion, accounted for about 70 per cent of SingLand&rsquo s total assets as at end-June. An investor buying SingLand&rsquo s shares today is implicitly getting a share of prime office-centric buildings such as Singapore Land Tower, The Gateway, UIC Building and Clifford Centre at less than half-price.

 

The catch is that if one snares a physical property at a big discount to valuation, chances are one can sell the said asset for a good profit, whereas an investor who buys SingLand&rsquo s shares at substantially below NAV may see the shares persistently trade well below NAV. SingLand&rsquo s shares may be a value trap if there is no catalyst for the shares to re-rate.

 

On the local bourse, real estate investment trusts (Reits), which have regulations governing distribution payout, gearing level and scope of activities, typically trade at superior book value multiples versus asset-heavy property development and investment groups.

 

SingLand&rsquo s prime Singapore commercial property portfolio has enough scale to form a Reit. And the timing for SingLand to launch a Singapore-only office-centric Reit is opportune.

 

With the Republic&rsquo s post-pandemic reopening, workers have been returning to the Central Business District (CBD). Leasing demand for CBD Grade A office space is strong and broad-based, coming from tech firms, asset managers, insurance providers, legal firms and energy businesses. CBRE Research expects Core CBD (Grade A) office rents to grow 8.3 per cent for 2022, versus 3.8 per cent for 2021.

 

Recent new Reit listings have been led by trusts with overseas assets. The market here may welcome an initial public offering (IPO) of a Reit that owns Singapore assets, which local investors are familiar with, and assets in property segments with good prospects.

 

Privatising SingLand

 

UOL, where banker Wee Cho Yaw is a major shareholder, owns over 50 per cent of SingLand, while Filipino conglomerate JG Summit Holdings, led by the Gokongwei family, holds a deemed interest of about 37 per cent. SingLand&rsquo s free float is around 12.6 per cent, according to its latest annual report.

 

Perhaps a restructuring of SingLand can see the group&rsquo s Singapore commercial assets held by a listed Reit. If SingLand can list its commercial Reit at around NAV via an IPO, UOL and JG Summit may be happy to see their interests in the underlying assets diluted. UOL and JG Summit can form a joint venture to manage the said Reit.

 

Other assets of SingLand, such as hotels and overseas investment properties, can be retained by the group or sold. UOL can then privatise SingLand, which may be left largely holding stakes in properties under development. As it is, SingLand is UOL&rsquo s junior partner in several Singapore property development projects, including that of AMO Residence, which sold almost all its units by the first day of its launch in July.

 

Almost a year back, Jonathan Eu, who is a grandson of Wee, became chief executive officer of SingLand. Eu is leading a major asset enhancement initiative to upgrade and modernise the group&rsquo s flagship Singapore Land Tower in Raffles Place, with completion scheduled in 2023, as part of SingLand&rsquo s portfolio rejuvenation.

 

Rejuvenating assets by introducing green features among others is critical for SingLand to ensure that its assets meet the needs of today&rsquo s users. Concurrent with efforts to improve the quality of the buildings should be a strategic review by the board of directors of SingLand to unlock value for shareholders.

 

Property investors are willing to pay top dollar to buy chunky CBD office assets in safe-haven Singapore. Surely, the share market severely underprices SingLand&rsquo s commercial assets - this should be rectified urgently.

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

 

CITY Developments Limited : C09 -0.12%(CDL) on Thursday (Aug 11) posted a record net profit of S$1.1 billion for the first half ended Jun 30, reversing from a net loss of S$32.1 million recorded in the same period last year.

 

This was mainly due to divestment gains from the sale of Millennium Hilton Seoul, as well as the gain from the group' s deconsolidation of CDL Hospitality Trusts (CDLHT), which resulted from the distribution in specie of CDLHT units in May 2022.

 

The board has proposed a special interim dividend of S$0.12 per share, which is 4 times&rsquo last year&rsquo s special interim dividend of S$0.03 per share.

 

The S$1.1 billion net profit was the highest net profit achieved since CDL&rsquo s inception in 1963, it said in a press statement. The results translate to earnings per share of S$1.235, against a loss per share of S$0.042 in the corresponding period a year ago.

 

Revenue was up 23.5 per cent to S$1.5 billion, from S$1.2 billion. CDL said the increase in revenue was mainly due to the hotel operations segment, although the group&rsquo s property development segment continued to lead contributions.

 

The group&rsquo s hotel revenue per available room (RevPAR) also grew 110.4 per cent, with the Europe and US markets experiencing strong improvement in occupancies and average room rates.

 

&ldquo With post-pandemic travel fuelling continued recovery, we expect hospitality to be a star performer for the rest of the year. As Covid-19 concerns wane, our hospitality portfolio will be a valuable growth engine contributing meaningfully to the group&rsquo s recurring earnings,&rdquo said CDL executive chairman Kwek Leng Beng.

 

Meanwhile, the property development segment contributed 41 per cent of total revenue for the first half, supported by &ldquo well-sold&rdquo Singapore projects like Amber Park and Irwell Hill Residences, as well as overseas projects such as Shenzhen Longgang Tusincere Tech Park and New Zealand land sales.

 

&ldquo Notably, this does not include revenue from joint venture projects such as Boulevard 88 and CanningHill Piers which are equity accounted for,&rdquo the group said.

 

Frank Khoo has resigned from his position as City Developments Limited&rsquo s (CDL) group chief investment officer.

 

According to a filing posted on SGX, Khoo is leaving CDL for &ldquo personal reasons&rdquo .

 

Khoo served the position for more than four years. His last day with CDL will be Sept 30, 2022.

 

As the group chief investment officer, Khoo assisted the group CEO in the sourcing and execution of new investment opportunities, while also setting up a dedicated fund management platform.

 

CGS-CIMB listed CapitaLand Investment (CLI), City Developments Ltd (CDL) and UOL Group under its preferred picks for Singapore&rsquo s property sector on Wednesday (Jun 8). The brokerage also reiterated its &ldquo overweight&rdquo rating on the sector&rsquo s valuations following Tuesday&rsquo s release of H2 2022&rsquo s Government Land Sale (GLS) programme.

 

According to CGS-CIMB, the slate of 14 sites - which is 12.5 per cent higher than that in H1 -   were released as the government sought to address the dwindling unsold inventory situation.

 

&ldquo While the overall residential land supply earmarked under the H2 2022 GLS is the highest level since end-2018, it is still below the average supply over the past 10 years of 9,000 units,&rdquo said analyst Lock Mun Yee.

 

Taking into account uncertainties such as rising interest rates and slower economic growth outlook, she noted that the increase in land supply will likely enable developers to replenish their landholdings and extend their development income visibility.

 

CGS-CIMB added that the URA property price index recorded a 0.7 per cent quarterly improvement for Q1 2022, supported by a 2.2 per cent price hike for outside of central region properties. The brokerage maintained its expectation that private home prices will rise by up to 5 per cent for the whole of 2022.

 

It estimated that developers&rsquo valuations are trading at a 42 per cent discount to their Revalued Net Asset Value (RNAV), close to 1 standard deviation below the long-term mean discount.

 

Lock also maintained CGS-CIMB&rsquo s &ldquo add&rdquo calls and target prices on the 3 highlighted companies.

 

She expects to see growth in funds under management, efficient capital deployment and improved operating performance to underpin CLI&rsquo s : 9CI -0.77% return on equity expansion. Lock calculated that the stock is trading at a 24 per cent discount to RNAV and maintained its target price of S$4.59.

 

CGS-CIMB also expects CDL&rsquo s : C09 +0.48% land restocking activities to extend its residential earnings, and estimated that the stock is trading at a 49 per cent discount. The brokerage&rsquo s target price for CDL is S$8.97.

 

Meanwhile, UOL&rsquo s : U14 -0.27% high recurring income base, supported by rentals, hotel operations and investment holdings, puts the company&rsquo s target price at S$8. CGS-CIMB estimated that the stock is trading at a 45 per cent discount.

 

As at 4.39pm, shares of CDL were trading 0.36 per cent or 3 Singapore cents higher at S$8.29, while shares of CLI and UOL traded lower at S$3.86 (down 0.5 per cent or 2 cents) and S$7.32 (down 0.4 per cent or 3 cents) respectively.