Guocoland Beach Road foray

On 29 September Guocoland nets a top bid of $1.62 billion for a 2 ha site at Beach Road or $1,706 per sqft per plot ratio.

My immediate thoughts or more aptly action: “jaw dropping”.

To put it in perspective, the market capitalisation for Guocoland is about $2.5 billion and this bid price on land alone is 65% of the the Group’s market capitalisation.

The next question which pop up my mind is: Can they swallow it?

* Pro forma balance sheet on the basis Guocoland use 30% as down payment and finance the remaining via bank borrowings. This is before any development cost which will further increase the gearing ratio.

^ Making reference to the cost incurred by Guocoland on Tanjong Pagar centre, it is estimated that the construction cost to be about $900 psfppr total capital expenditure on the development of 950,593 sqft is $0.86 billion. Proforma balance sheet on the basis of 30% downpayment are indicated above.

Overnight, the risk profile of Guocoland changed as they placed a heavy bet on the development of the Beach Road site. Do note, I am making the assumption the Group will not make a single cash flow from the Beach Road development as it is a pure commercial site and on the basis it is held solely for rental (i.e. different from the Tanjong Pagar site where there is a residential component), it will earn its first dollar upon the completion of the project.

But things are not as grim as the above table suggest partly due to about $2.8 billion of inventories sitting on the balance sheet. Recent upturn in the property market should allow them to move these inventories at a premium at a fast pace to alleviate the gearing pressure shown above.

The next question to ask as investors is “Did they overpay?”

Interestingly, on 21 September 2017, Capitaland Commerical Trust bought Asia Square Tower 2 at a property value of $2.09 billion or $2,689psf (yes another significant amount but not that big relative to the size of Capitaland and CCT which has a market cap of about $15 billion and $5 billion respectively). Putting the high level assumption on the cost of $2,700psf, this actually makes the deal comparable with limited upside based on the current market environment whilst undertaking the development risk.

Conclusion:

The Beach Road acquisition is indeed a calculated risk undertaken by Guocoland which it seem to be able to swallow. With this deal, Guocoland will own yet another iconic commercial development in Singapore. And make no mistake, the site does have the potential with adjacent plots (Duo Residence and South Beach Tower) receiving strong take up rate since their opening. The Grade A office rental is still quite depressed at the moment and there could be potential upside accruing to Guocoland from this investment arising from the recovery as the supply is expected to taper off when the Beach Road development achieve completion in 3 to 4 years time. We shall see then if this is a midas touch by Guocoland on Tanjong Pagar Centre and more recently on Martin Modern which were sites bidded at record price too.

For investors who are keen on developers who have made the early move can have a more detailed look at CDL – which paid $1,069 psf ppr in 2007 for South Beach Tower or UOL who has properties within the vicinity (albeit a bit older).

Note: CK is vested in Guocoland.