Including a 51% stake in a Xintiandi site, local developer City Developments will have spent just about $2 billion on acquisitions this year-to-date. This is a far cry from the $1 billion in divestments that group CEO Sherman Kwek articulated in February. The planned divestments are part of an effort to pare debt and lower gearing.

 

Instead, in a presentation in 1HFY2024, for the six months to June 30, CDL announced it had spent $1.1 billion on acquisitions. In May, it announced it had acquired the &ldquo Paris Hilton&rdquo , officially known as the Hilton Paris Opé ra Hotel for the equivalent of $350 million in April, CDL and partner Mitsui-Fudosan were awarded a site on Zion Road for $1.1 billion. CDL also acquired rental housing properties in Tokyo and a private rental sector property in the UK. 

 

On Nov 1, CDL and its Chinese partner Lianfa Group won the tender for a 27,994 sqm, mixed-use development site in the Xintiandi area in Shanghai&rsquo s Huangpu district for RMB8.94 billion ($1.66 billion). The site was awarded following a government land tender that closed on Oct 28. CDL has a 51% stake in the joint venture.

 

CDL&rsquo s 51% stake is likely to take its acquisitions to a tad below $2 billion in acquisitions this year-to-date. 

 

During a results briefing in August this year, CapitaLand Investment&rsquo s (CLI) management articulated that divesting assets was challenging during the first half because of high interest rates and a slow investment market. CLI also has a divestment target which was helped by its divestment of a 50% stake in Ion Orchard to its REIT which completed on Oct 30. Year-to-date, despite the challenging environment, CLI has exceeded its divestment target.

 

The challenging divestment environment was echoed by Kwek. &ldquo Markets are a little tough,&rdquo he said in August. &ldquo It&rsquo s about finding the right buyer. There will be more divestments coming in the second half of this year. We could get to $400 million to $500 million of divestments this year, inclusive of the first half.&rdquo  

 

Overseas expansion efforts not encouraging so far

 

Among CDL&rsquo s properties to be divested are the legacy UK properties acquired around 10 years ago for around $1 billion. These include Teddington Riverside in Richmond, Stag Brewery Mortlake in Richmond, 31 & 33 Chesham Street in Belgravia, 100 Sydney Street in Chelsea, and Ransome&rsquo s Wharf in Battersea.

 

Yiong Yim Ming, group CFO for CDL, had said that the legacy residential sites which CDL acquired some 10 years ago are still waiting for planning permission. &ldquo The rest of the divestments will be at market value we have to take impairments from time to time,&rdquo Yiong said. 

 

When questioned about CDL&rsquo s rising debt levels, Yiong explained this is for newly acquired properties and not legacy assets acquired more than 10 years ago. 

 

CDL&rsquo s gearing as at June 30 was 116% based on historical cost, and 69% based on mark-to-market valuations. In a press release, CDL said gearing would rise to 72.5% on a pro forma basis with its share of the Shanghai acquisition. 

 

Cautiously optimistic?

 

More than just rising gearing levels, CDL has not been particularly successful with its overseas acquisitions in the UK and China. In 2021, CDL provided an impairment loss of $1.78 billion for its investment in Sincere Property, a Chinese developer, which is why analysts&rsquo reactions are neutral to cautiously optimistic on the announcement of CDL&rsquo s re-entry into China with a somewhat significant-sized acquisition. 

 

The cost of the Xintiandi site works out to RMB117,542 psm per plot ratio (ppr), which is the equivalent of $2,027 psf ppr.   The rationale for the acquisition is that there is no other residential site transfer in the Xintiandi prime area this year.  

 

A residential site in Jing&rsquo an District was transacted at RMB114,000 psm ppr in September this year, and another residential site in Xuhui District was transacted at RMB 131,00 psm ppr in August, through normal public tender. 

 

As a comparison, the Cuscaden Reserve site in Singapore was transacted $2,377 psf ppr (pre-Covid), and the Watten Estate Condominium collective sale was transacted $1,723 psf ppr. 

 

The Xintiandi mixed-use development site comprises two plots of land separated by a public road in the middle, and has a total permissible gross floor area (GFA) of 76,027 sqm. CDL says that the future development can yield up to 77% of the GFA for residential use, with at least 19% allocated for commercial purposes and 4% designated for public amenities. The lease for the residential portion is 70 years, and for the commercial portion, the lease is 40 years.  

 

" Given its prime location, the site is earmarked for upscale development. The preliminary design factors in 102 high-rise residential units, 92 luxury villas, a 100-room boutique hotel and over 5,000 sqm of retail space," a CDL press release says.

 

The historic buildings on the site are divided into different categories &mdash some to be conserved, where the buildings are not allowed to be demolished but renewed some can be demolished but certain components need to be retained and reused and some can be demolished and rebuilt into the same architectural style.

 

The analysts have made positive comments peppered with caveats. They point out that the move to acquire an attractively priced site in the choicest area in Shanghai is contrary to the announcement in February by group CEO Kwek that he planned to divest $1 billion this year to lower gearing. 

 

&ldquo There is likely pushback from some investors to this investment given large losses from its prior Sincere investment and preference for CDL to focus on divestments to close more than 50% discount to book. Nevertheless, given the prime location of the site, with an average selling price of RMB172,000 to RMB210,000 for nearby projects including those by COLI and Cuihu, which were sold out or close to on the first day and the relatively attractive land cost, we see this as a decent risk-reward for CDL shareholders despite uncertainty over whether the China/Shanghai property market has bottomed,&rdquo JP Morgan says.

 

&ldquo While the site is well-located and CDL should be able to recognise a decent profit before tax margin of 21% and revalued NAV [net asset value] accretion of 1% based on our estimates, we expect a negative knee-jerk reaction to share price given investors&rsquo current negative views towards Singapore-listed property players&rsquo incremental capital allocation to China (CDL&rsquo s exposure +4% pts to 14%) and higher gearing (+3.3% pts to 72.5%), amid slower-than-expected pace in its ongoing asset divestment initiatives,&rdquo notes Citigroup.

 

Analysts at DBS Group Research reckon that &ldquo investors will likely take a close look at the execution of CDL with its recent move back into China by the group&rdquo .

 

Waiting for interest rates to fall 

 

China&rsquo s loan prime rate as of Oct 31 was 3.1%, and would help to lower CDL&rsquo s weighted average cost of debt from its 1HFY2024 figure of 4.5%. 

 

Part of CDL&rsquo s strategy is to wait for the US Federal Reserve to start its rate-cutting cycle as its fixed-rate debt is around 40%. The developer was rewarded when the Fed reduced its Federal Funds Rate by 50 basis points on Sept 17. The Fed may opt to cut again given the poor jobs figures for October. The Federal Open Market Committee meets on Nov 6&ndash 7 and Dec 17&ndash 18.

 

One of the reasons for CDL&rsquo s lower fixed rate debt and its higher average cost of debt of 4.5% is that the property group took on debt in the UK and Europe to acquire St Katharine&rsquo s Dock in London last year, the Parisian hotel this year, and the Zion Road property. 

 

CDL appears to have halted its share buyback programme. In 1H2024, the developer spent $79.4 million to buy back 13.5 million shares. 

 

&ldquo We had some delays and we didn&rsquo t recognise as much profit as we had hoped. In terms of metrics, our share price hasn&rsquo t performed, and on May 31, we suffered from a deletion in the MSCI Singapore Index. It doesn&rsquo t mean we can&rsquo t get back in,&rdquo Kwek had said in August of CDL&rsquo s 1HFY2024 results.

 

&ldquo Our revalued NAV has ticked up to $19.49, and we are trading at a very deep discount, which is why we did share buybacks. Our gearing has gone up, but we need the interest rate environment to be more favourable,&rdquo he added.

 

Analysts believed that CDL&rsquo s share buybacks during 1H2024 were the group&rsquo s attempt to defend the stock from exiting the MSCI Singapore Index.

 

What&rsquo s different about Xintiandi? 

 

The difference this time round is that CDL is acquiring a 51% stake in a site rather than a platform, analysts have said, referring to the group&rsquo s ill-fated attempt at acquiring Sincere. 

 

&ldquo Being in control of the joint venture with a 51% stake means that the group is in the driving seat and in our opinion, risk-rewards of this investment are likely to be well thought out and manageable. The group&rsquo s partner, Lianfa Group, is amongst China&rsquo s top 30 developers with strong contracted sales of over RMB 40 billion ($7.9 billion) in 2023 and its ultimate shareholder, Xiamen C& D Group Co, is a state-owned enterprise (SOE). According to our China real estate team, given the rare opportunity and the lack of available land-banking opportunities within Huangpu district for a long time, the pricing reflects its prime location,&rdquo the DBS analysts point out. Other market observers are questioning why a Xiamen SOE is bidding for a Shanghai property.

 

DBS estimates a breakeven cost of close to RMB140,000 psm for the site, which would give CDL a decent margin if average selling prices are in the vicinity of COLI&rsquo s RMB170,000 psm.

 

&ldquo We gain comfort that residential demand for the Shanghai property market is on the mend after a series of policy easing measures in recent times, with Shanghai seeing a strong rebound in transaction velocity in the secondary market in recent weeks,&rdquo the DBS report says.  

 

JP Morgan has an &ldquo overweight&rdquo rating on CDL as a key laggard play, while Citi suggests &ldquo select investors may also switch to UOL Group in the near term for its greater domestic exposure (86%). Overall, we continue to prefer asset managers &mdash Keppel and CapitaLand Investment &mdash to property developers.&rdquo