Yesterday I wrote an article revisiting SPH as an income stock (You can read it here).
The article highlights that one of SPH’s strategy is to become a quasi-REIT to diversify its business risk from a press business whose moat is getting more narrow.
One of its recent purchase have been Clementi Mall.
The purchase of Clementi Mall
The purchase of Clementi Mall was through a consortium CM Domain Pte Ltd, which is under SG Domain Pte Ltd which is then owned by Times Properties Private Limited which is wholly owned by SPH as well as NTUC FairPrice and NTUC Income.
The breakdown of ownership is
- Times Properties (60%)
- NTUC FairPrice (20%)
- NTUC Income (20%)
- NLA of 194,000 sf or 18,000 sq metres of retail space
- Retail/Commercial GFA of 269,100 psf
- Estimated fitted out cost of SGD 50 mil
- Anchor shopping mall in the west. It should have a good catchment of NUS, Singapore Poly, Ngee Ann Poly and SIM students not to mention local residents.
- 6 storey
- Will be opening in 2 phases with the first phase contributing in first half this year (2011)
- Purchase price is SGD541 mil
- Will be fully funded by SPH equity although it looks as if it is funded by debts currently.
Expensive Winning bid
The purchase price is SGD 541 mil. This winning bid is so far higher than the next highest bid at SGD382 mil!
At this price, inclusive of fitting out, the bid works out SGD 3,003 psf of retail NFA.
How expensive is this?
- Ion Orchard: SGD 3,800 psf
- Bishan Junction 8: SGD 2,306 psf
- Serangoon Nex: SGD 2,167 psf
- North Point: SGD 2,129 psf
- Causeway Point: SGD 1,706 psf
- Paragon: SGD 2,789 psf
- Tampines Mall: SGD 2,353 psf
Estimating Yield on Property
What we do know is that it depends very much on how much retailers will pay for renting this.
- The average mall rents for $10 – $13 psf
- The good mall rents for $15 – $18 psf
So SPH is aiming for an area of $18 psf which is really pushing it. At $352 mil, Frasers should be bidding for a 6% net property yield thinking they can rent it for $15 psf.
What SPH is looking for at $541 is a yield of only around 4.8%.
Assuming that SPH owns 60% of this and it is fully funded by equities, the full year contribution would be SGD15.5 mil. If they failed to reach this it will even be lower at SGD 10 mil.
If they leverage up by using debts by 50%, their yield could be 9.6% and SGD 31 mil.
If you are thinking this would diversify away the risk from main business, this 10 mil 31 mil numbers is less than 10% of their $400 mil dividend payout.
SPH is thinking they have the Midas touch as with Paragon and can improve upon it. They bought Paragon when people think it is overpriced and proceed to grow it 8% per year since their acquisition in 1997
I am starting to wonder whether this is the right approach SPH should take. They seem to have the government mentality of grab it at all cost, hence the aggressive bid.
Clementi Mall might worked out, but if all subsequent investments are as this then as shareholders do we inevitably become buyers of overpriced malls with low yields? Only time will tell.