CGS CIMB analyst Lock Mun Yee has kept her "add" call and $8.97 target price on City Developments, following its largest private rental sector (PRS) transaction in Japan to date.
On Sept 28, the company announced it is acquiring a portfolio of 25 residential assets across the 23 wards in Tokyo for ¥35 billion ($321.9 million).
The portfolio just acquired has 832 residential apartments and 4 retail units. The assets have an average age of less than 2 years and are all located within a 10-minute walk from a train station. The portfolio now has a 97% committed occupancy and offers stable rental income. The sellers are affiliates of BGO, a leading global real estate investment manager.
CDL had earlier bought something similar in Osaka. Upon the acquisition, CDL's Japan assets under management will be lifted to $644 million.
"With an enlarged portfolio, CIT is poised to benefit from a recovery of Japan’s economy and net migration into Tokyo," writes Lock in her Sept 28 note.
According to property consultant Savills’ September Japan residential market updates, average residential occupancy rates in the 23 wards of Tokyo is at 96.6% as at 2Q23, the highest level since the pandemic started and almost at the highs seen in pre-pandemic times.
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The way Lock sees it, the latest acquisition is in tandem with CDL's growth strategy, and the Japan market has been under investors’ radar given the still-positive yield spread over funding cost.
The purchase is estimated to lift CDL's AUM in the 'living' sector to $1.7 billion and its overall AUM to $3.4 billion.
CDL did not disclose the transaction yield. However, based on Savills’ report, Lock figures that average residential yields could range from 2.5% to as high as 3.7%.
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"Based on this range, we believe this acquisition will likely be earnings accretive for CDL," notes Lock.
For now, she is keeping her FY2023 to FY2025 earnings forecast for CDL unchanged. Her target price of $8.97 is pegged a 45% discount to revalued NAV.
For Lock, potential re-rating catalysts for this stock are faster-than-expected AUM growth and quicker uptick towards its 8% ROE target.
On the other hand, downside risks to include demand for its commercial space dragged by slow macro outlook, and demand for its residential projects affected by more property cooling measures.
CDL shares changed hands at $6.56 ahead of the lunch break, down 0.76% thus far today.
