TA Research believes Shenton House redevelopment holds promising prospects.
PETALING JAYA: IOI Properties Group Bhd
’s (IOIProp) proposed acquisition of Singapore-based Shenton 101 Pte Ltd is expected to pave the way for a real estate investment trust (REIT) listing but it will further elevate the company’s already high net gearing level.
On June 25, IOIProp said it has received a a letter of proposal from Lee Yeow Seng, who is the group chief executive officer and a substantial shareholder of IOIProp, informing the board of a proposal for IOIProp to acquire Shenton 101 Pte Ltd for the redevelopment of “Shenton House”, a commercial property located in Singapore that his private vehicle has successfully tendered for S$538mil (RM1.9bil).
Yeow Seng has proposed that IOIProp acquire all or part of his private vehicle, Shenton 101 Pte Ltd, which is planning to redevelop Shenton House, works for which are scheduled to start at the end of 2025.
TA Research believes Shenton House redevelopment holds promising prospects given the limited supply of new Grade A offices in the core of the central business district and the limited availability of luxury rental housing.
The research house pointed out that Singapore saw a surge in rents for large luxury homes in the first quarter of 2024 (1Q24) despite a general market decline.
There was high demand from wealthy foreigners, driven by geopolitical tensions and a limited supply of large units, led to a 6.5% increase in rents to an average of S$17,467 per month.
Despite the robust outlook on the Shenton House project, TA Research raised concerns over the property developer’s high gearing.
“If IOIProp accepts the proposal, the group’s already high net gearing level of 0.73 times is expected to increase further.
“Assuming IOIProp acquires a 100% stake in Shenton 101 at an acquisition cost of RM3.5bil (total effective cost of S$1.01bil), which is an unlikely scenario, the net gearing of IOIProp would substantially rise to 0.88 times, assuming the acquisition is financed entirely through debt.”
The research house believes IOIProp is likely to establish a REIT, given its increasingly mature investment properties portfolio.
It added that there were no timelines and details on the REIT initial public offering, but estimated that the carrying value of IOIProp’s investment properties stood at RM18bil, according to the FY23 annual report.
“By creating a REIT, IOIProp can unlock value from its investment properties, reduce debt, and improve its balance sheet, thereby mitigating the impact of the Shenton 101 acquisition on its net gearing ratio, TA Research explained.
The research house has maintained a “buy” recommendation on IOIProp with an unchanged target price of RM3 per share.
Similarly, MIDF Research is “neutral” on the proposal given the impact on the company’s gearing.
However, the research house expected the redevelopment project will help strengthen IOIProp’s presence in Singapore after the completion of its Central Boulevard Towers which are Grade A office towers in Marina Bay.
“Besides, IOIProp is also developing Marina View Residences which is earmarked for residential and hotel use.
“Nevertheless, the total cost for the proposal (assuming acquisition of 100% stake) is sizeable at S$1.01bil which consists of land cost of S$538mil and additional capital commitment of S$476mil is expected to stretch the balance sheet of IOIProp.
“The upcoming launch of Marina View Residences in Singapore is expected to drive property sales beyond FY25. Meanwhile, potential listing of IOIProp’s investment properties will unlock value of its investment properties.
“Nevertheless, upside is limited and hence we maintain our ‘neutral’ call on IOIProp,” it added.
However, Hong Leong Investment Bank Research has maintained its “buy” recommendation with an unchanged target price of RM3.30 as IOIProp is now at the cusp of unleashing the value from its jewel assets in Singapore namely IOI Central Boulevard and Marina View Residences.
The research house said the proposal will likely require shareholders’ approval given that it is a related-party transaction; and the percentage ratio exceeds the threshold of 5% as required by Bursa Malaysia.
