Analysts' reactions are neutral to positive on the announcement on Nov 1 of City Developments’ (CDL) re-entry into China with a somewhat significant sized acquisition. In 2021, CDL provided an impairment loss of $1.78 billion on its investment in the Sincere Property, a Chinese developer.
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 Sherman Kwek that he planned to divest $1 billion this year to lower gearing. In August, Kwek acknowledged that the developer is likely to achieve around $300 million in divestments instead.
On Nov 1, CDL, along with its Chinese partner Lianfa Group was awarded the tender for a mixed-use development site in the Xintiandi area in Shanghai’s Huangpu district for RMB8.94 billion ($1.66 billion). The site area is 27,994 square metres (sqm), and was awarded on Nov 1, following a government land tender which closed on October 28. CDL has a 51% stake in the joint-venture.
The cost of the site works out at RMB117,542 ($21,827) 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'an District was transacted at RMB114,000 psm ppr in Sept this year, and another residential site in Xuhui District transacted at RMB 131,00 psm ppr in Aug, through normal public tender.
In comparison, the Cuscaden Reserve site in Singapore was transacted $2,377 psf ppr, 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.
“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,” JP Morgan says.
“While the site is well-located and CDL should be able to recognize decent profit before tax margin of 21% and revalued NAV accretion of 1% based on our estimates, we expect negative knee-jerk reaction to share price given investors’ current negative views towards Singapore-listed property players’ incremental capital allocation to China (CDL’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,” notes Citigroup.
See also: Frasers Property: Narrowing the discount
Analysts at DBS Group Research reckon that “investors will likely take a close look at the execution of CDL with its recent move back into China by the group”.
The difference this time round is that CDL is acquiring a 51% stake in a site rather than a platform. “Being in control of the JV at 51% stake also 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’s partner Lianfa Group is amongst China'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,” the DBS analysts point out.
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’s RMB170,000 psm.
“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,” the DBS report says.
JP Morgan has an overweight rating on CDL as a key laggard play, while Citi suggests “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 – Keppel. and CapitaLand Investment to property developers.”
