Thursday 3 July 2014

Singapore Property

OCBC on 3 Jul 2014

With a dearth of upcoming projects in the Orchard retail space pipeline over 2015-17, we believe there could be a greater impetus for strategic redevelopments along the western end of Orchard Road - a neglected area with relatively dated assets. In particular, Hotel Properties Ltd (HPL), which owns a large combined site in that area, has been long reported in the media to be considering a mega-development and recently saw a general offer made by a consortium comprising strategic partners, Mr. Ong Beng Seng and Wheelock Properties Ltd. (Wheelock). Our research reveals the meaningful confluence of fundamental drivers supporting the revitalization of West Orchard ahead, and we identify four developers with key assets in the area. We initiate coverage on HPL with a BUY and fair value of S$5.32 (35% RNAV disc.), and on Wheelock with a BUY and fair value of S$2.38 (30% RNAV disc.). Other potential beneficiaries in West Orchard include Hong Fok (unrated) and Bonvests (unrated), which are trading at 35%-47% discounts to RNAV.

Dry retail space supply in Orchard pipeline over 2015-17 could set up a crunch ahead
A dearth of upcoming projects in the Orchard retail space pipeline over 2015-17 would likely set up a crunch for space over that period, in our view. From 2013-17, our base case is that occupancy rates will rise from 95.8% to 97.2%, and Orchard prime retail rents will grow at a CAGR of 2.0% p.a. to S$36.9 psf pm.

Turning our eyes to quiet western end of Orchard Rd for deep value
Given this, we believe forward-looking investors should turn their eyes to the western end of Orchard Road - from Far East Shopping Center to Tanglin Mall – a neglected area of relatively dated assets that holds significant potential for redevelopment and expansion. In particular, Hotel Properties Ltd (HPL), which owns a large combined site in that area, has been long reported in the media to be considering a mega-development and recently saw a general offer made by a consortium comprising strategic partners, Mr. Ong Beng Seng and Wheelock Properties Ltd. (Wheelock).

A meaningful confluence of drivers for West Orchard revitalization ahead
From our research, we believe there is a meaningful confluence of fundamental drivers supporting the revitalization of West Orchard ahead. For instance, authorities have planned comprehensive underground links from the key Orchard MRT station to the area, and also a new MRT station near Tanglin Mall, in addition to various incentives for redevelopments through the Master Plan.

Initiate with BUY ratings on HPL and Wheelock 
In this piece, we identify four developers with key assets in the West Orchard area. In addition, our estimates indicate that a potential HPL mega-development could yield as much as S$1.25bn in surplus net present value for the company. We initiate coverage on HPL with a BUY and fair value of S$5.32 (35% RNAV disc.), and also on Wheelock with a BUY and S$2.38 fair value (30% RNAV disc.). Other potential beneficiaries in West Orchard include Hong Fok and Bonvests, which are trading at 35%-47% discounts to RNAV.

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