WILL the ongoing collective sale tender of Tanglin Shopping Centre present City Developments (CDL) with an opportunity to exit the ageing office, retail and car parking complex at a nice gain?

 

Or would CDL want to take full control of the freehold asset just off Orchard Road?

 

The mainboard-listed group, through an indirect fully-owned subsidiary of its privatised hotel arm Millennium & Copthorne Hotels, owns nearly 35 per cent of the share value and about 60 per cent of the strata area in Tanglin Shopping Centre.

 

CDL, part of the Singapore Hong Leong Group founded by Kwek Hong Png, did not develop Tanglin Shopping Centre. The property was completed in 2 phases - in the 1970s and in the early 1980s - by SK Chee (Pte) Ltd.

 

In 1981, King' s Hotel, which was then a listed subsidiary of CDL, acquired SK Chee, which had already sold some of the units in Tanglin Shopping Centre.

 

The collective sale for the property is currently on the market via a tender exercise that will close on Feb 22.

 

While the latest property cooling measures that took effect on Dec 16, 2021 are widely expected to shrink developers' appetite for most large residential collective sale sites, Tanglin Shopping Centre is in a different category.

 

From a potential bidder' s viewpoint, a key advantage that Tanglin Shopping Centre offers is that it is on a site that is zoned commercial under the Urban Redevelopment Authority' s Master Plan 2019 - that means no additional buyer' s stamp duty (ABSD) is payable by the successful bidder.

 

This is the case even if up to 40 per cent of the gross floor area (GFA) in the new project developed on the site is for residential use, though such a project would be subject to URA' s approval.

 

In contrast, for a typical collective sale involving a residential-zoned site, the successful bidder is now liable to pay ABSD of 35 per cent on the land purchase price. This is up from 25 per cent just prior to Dec 16.

 

Housing developers may apply for upfront remission of this ABSD, but it is subject to conditions, including having to complete the new project and sell all its units within 5 years of the site purchase.

 

Clearly, the risk to a developer of not being able to fulfil these conditions has increased since Dec 16, when the government also jacked up ABSD payable by Singapore citizens and permanent residents buying their second or subsequent residential property as well as on foreigners regardless of whether they already own property here.

 

The ABSD rates for the above categories of home buyers now range from 17-30 per cent and that' s on top of the 4 per cent standard buyer' s stamp duty (BSD).

 

Another plus point for Tanglin Shopping Centre is that associated acquisition costs will be lower.

 

The successful bidder will pay only 3 per cent BSD as it is a commercial property. This is lower than the total of 9 per cent that a developer buying a residential-zoned site would have to pay, comprising 4 per cent BSD and a 5 per cent non-remittable ABSD.

 

Not a cheap option

 

That said, is the S$785 million reserve price set by Tanglin Shopping Centre' s owners attractive to potential bidders?

 

The price works out to S$2,504 per square foot per plot ratio (psf ppr) based on the existing GFA of 313,435 sq ft and assuming full commercial usage for the new project on the site. (No development charge or DC would be payable.)

 

Industry watchers who have done back-of-the-envelope calculations say this would translate to breakeven costs of about S$4,200 psf for developing offices and S$4,600 psf for retail space.

 

At these levels, it may be challenging to redevelop Tanglin Shopping Centre into strata office and retail units for sale.

 

An alternative scheme, still under commercial zoning, is to have at least 60 per cent of total GFA in the new project for commercial uses such as office and retail, and the balance for other uses to be evaluated by the authorities.

 

If the authorities decide to allow all of the 40 per cent to be set aside for residential use, the S$785 million reserve price would translate to an even higher S$2,764 psf ppr as DC would be payable. Thus the breakeven costs for the office and retail components in a mixed-use scheme would be higher.

 

The residential component, assuming it is a luxury product, could break even at about S$3,900-4,000 psf. About 70 apartments could be carved out based on an average size of 1,800 sq ft, or 50 units averaging 2,500 sq ft.

 

Considering the risks involved, a developer may want a 20-25 per cent profit margin for the residential component. This would mean selling the units for around S$4,700-5,000 psf, or S$8.5-12.5 million per apartment.

 

On the positive side, these will be luxe freehold apartments along Tanglin Road opposite the prestigious Nassim residential belt and a short walk from the Singapore Botanic Gardens UNESCO World Heritage Site.

 

However, it remains to be seen if buyers from China, who have been snapping up pricey residences in Singapore in the past few years, would be willing to fork out the revised 30 per cent ABSD rate on foreigners.

 

There is also the possibility of tapping US nationals, who are accorded the same stamp duty treatment as Singapore citizens under the US-Singapore free trade agreement. This means no ABSD on their first residential property here.

 

Some affluent Singaporean families may also consider buying a luxe apartment in this project, perhaps for their next generation.

 

CDL' s advantage

 

CDL owns 85 strata retail and office units and all 325 car park lots in the development. Having acquired the developer of the complex 4 decades ago, its acquisition cost would have been low.

 

If CDL does attempt to gain full ownership of the complex, it would only have to pay the current market price for the segment it does not already own. So, CDL' s effective price for acquiring Tanglin Shopping Centre would be lower than the competition.

 

But whether CDL makes a serious bid at Tanglin Shopping Centre hinges on whether it deems the returns from a redevelopment of the site to be sufficiently attractive.

 

If it doesn' t, it might as well sell its stake via the en bloc sale to a party willing to bid at least S$785 million.

 

CDL already has a significant presence in the locale. It holds a stake in the St Regis Singapore hotel next door. It is also part of a joint venture developing The Singapore Edition hotel and Boulevard 88 condo along Cuscaden Road. The group' s portfolio also includes Orchard Hotel, Claymore Connect, Palais Renaissance and a chunk of strata units in Delfi Orchard.

 

Given the significant exposure it already has, there is something to be said for CDL standing back and allowing other developers to bid up land prices in the area.

 

Tanglin Shopping Centre' s collective sale may appeal to some foreign developers - including from Hong Kong - that have been eyeing development opportunities in the Orchard Road area. They may be keen to take a longer-term approach and hold the office and retail space for rental income.

 

While the retail market in the Orchard area has been challenging, Tanglin Shopping Centre' s 105-metre long frontage would be ideal for flagship outlets of high-end speciality retailers - including luxury watch brands or kitchen and household appliances.

 

Singapore developers known for taking a long-term approach may also be drawn into bidding for Tanglin Shopping Centre.

 

One example could be the Ng family' s Far East Organization. The group, including its listed vehicles, owns 4 office units in Tanglin Shopping Centre, and the next-door Orchard Rendezvous Hotel .

 

The Kwee family' s Pontiac Land Group is another blue-chip Singapore property group known for holding on to assets that it has developed.

 

It has developed and retained ownership of several properties in the area. These include the Regent Singapore and a residential and commercial property called Hana along Cuscaden Road. Other assets in its fold are Camden Medical, Ardmore Residence and The Colonnade on Grange Road.

 

A successful outcome for the Feb 22 tender closing for Tanglin Shopping Centre' s en bloc sale would pave the way for an interesting redevelopment of an ageing property in one of Singapore' s most prime locations.