City Developments and UOL good proxies to Singapore residential property markets
Foreign investors who may want a pie of Singapore’s increasingly costly residential property should look no further than (CDL) and Both are traditional developers with a strong presence in residential development, supplemented by cash flows from mainly Singapore-based commercial property and hotels.
CDL’s property development sector and Singapore account for 42% and 50% of its assets respectively. In FY2022, property development remained CDL’s biggest revenue contributor, accounting for 42% or $1.38 billion of the year’s revenue. Three key Singapore projects — Amber Park, Haus on Handy and Irwell Hill Residences — collectively made up 74% of property development revenue.
According to JP Morgan, CDL reported an adjusted ebitda for property development in 2HFY2022 ended December 2022 rose 11% y-o-y, excluding the impact of a $62 million allowance for foreseeable losses in a UK residential project, most likely Teddington.
JP Morgan says: “Looking ahead, CDL should benefit from the upcoming launch of Tembusu Grand (638 units) and Newport Residences (246 units) in 1H2023 and The Myst (408 units) in 2H2023, as well as an earnings contribution from Piermont Grand EC (revenue recognition on completion) in 2023.”
Over at UOL, revenue from property development rose 26% y-o-y to $1.98 billion. Patmi in FY2022 rose 60% y-o-y to $491.9 million, underpinned by property development and hotel operations.
Liam Wee Sin, group CEO of UOL, says the developer’s land banking strategy is to look for sites with “good attributes”. This includes being near good schools and transport nodes.
City Developments UOL Group. Moving from OCR to RCR
“We have moved to Ang Mo Kio and Canberra and now we’ve moved back to the locale of Pine Grove, Watten Estate and Meyer Park,” Liam says. “The luxury end has legs to go and we are moving towards a higher, more refined product. Good schools feature very strongly,” he adds. The Meyer Park site was confirmed four days before Singapore’s 2023 Budget when an increase in buyer’s stamp duties (BSD) was announced.
“It’s an 80:20 joint venture with Singapore Land Group and we are tilted towards bigger formats (of units). The redevelopment will comprise 200 units, and will be near good schools,” Liam adds.
In 2021, UOL acquired Watten Estate Condominium in a collective sale. “Watten Estate is a product in an enclave with very good schools. None of them got moved to Tengah,” Liam jokes referring to ACS Primary School. UOL plans a five-storey low-rise development.
Pinetree Hill, which is in District 21, was acquired in a land tender. “It’s in an established address in the Pine Grove area. We are launching it in 1H2023. It has similar attributes of being near good schools such as Henry Park Primary School,” Liam says. Singaporean parents like to stay within 1km–2km of good primary schools so their children have a higher chance of being admitted into those schools.
Liam is cognisant that costs have risen. While he declines to provide a clear profit margin for the group’s residential developments, he indicates that land and construction prices are rising. “But in our group, we’ve been able to de-risk our construction cost with established contractors, [as have] our minimum hurdle rates. We must move the product, sell, then replenish,” he says.
“For residential margins, it’s not about land price. It’s more about what can the market fetch when we launch and increasingly it’s a market where you have to control construction cost and efficiency. For example, at Meyer Park, we see a high rise with front and back unblocked. For AMO in Ang Mo Kio, the front is Bishan Park while the back is landed. We like this kind of a site,” Liam continues.
In his view, the new higher BSD will slow down the collective sale market. “Expectations will be wide and curtail freehold supply which is why we got Meyer Park quickly.”
Watten Estate was acquired at $1,786 psf ppr. Construction and marketing costs are likely to now be in the region of $500 psf–$600 psf which would give UOL sufficient margin should it decide to launch the new development at a shade under $3,000 psf. Similarly, Meyer Park’s pricing is at $1,668 psf ppr leaving some margin depending on the pricing when it launches.
UOL’s conservative balance sheet
Clearly, UOL has one of the most conservative balance sheets among the developers. Its interest cover ratio in FY2022, including interest capitalised, is 9x, which is very robust for an asset-heavy entity. It is lower than FY2021’s 12x. UOL’s gearing – defined as net debt to equity – is just 0.26, unchanged y-o-y. UOL has unutilised credit facilities of $3.1 billion and cash of $1.47 billion.
On the other hand, UOL has been very careful about its overseas expansion. It has one development in London, The Sky Residences, which is 39% sold. Liam says the management team is looking at the best use of its current portfolio. For instance, the old Faber House in the heart of Orchard Road is being redeveloped as a hotel.
Singapore Land Tower is being refurbished to turn it into a green, environmentally-friendly building. Clifford Centre is being redeveloped completely. Both properties are held under SingLand and will cost in the region of $500 million to $800 million.
Elsewhere, UOL has received in-principle approval to enlarge Odeon Towers from a site which was acquired for $79.3 million in December 2019. The new standalone seven-storey building — opposite Raffles Hotel — will cost around $35 million to develop.
As far as investment opportunities are concerned, UOL can afford to wait. Liam says, “We are looking at offices in key gateway cities. We have offices in London [110 High Holborn and 120 Holborn Island] and Australia [72 Christie Street, Sydney] and we would want to deepen our presence in those markets. We have seen cap rates expanding. Australia seems slower than London. In Australia, cap rates are expanding for secondary assets with short WALE and high vacancy. We are keeping our ears close to the ground.”
CDL’s overseas challenges
Perhaps, it is prudent for UOL not to rush into the overseas market. In FY2021, CDL announced an impairment of $1.78 billion for its $1.9 billion investment in Sincere Property, a Chinese developer. Subsequently, CDL divested Sincere for just $1. In FY2022, it made a further impairment of $82 million for Sincere.
Sherman Kwek, CDL’s CEO, explains: “It’s just out of prudence that we decided to write off the remaining part of it. Back in 2021, we did the write-down but it wasn’t 100%. This is the remaining $81 million. As you all can imagine, 2022 would be a great year to put the write-off through because of our record results.”
In 2015, CDL invested GBP158 million (about $334.96 million based on the then exchange rate of GBP1 to $2.12) in the freehold Stag Brewery land site in Mortlake, Richmond upon Thames. That same year, CDL also invested GBP85 million ($180.2 million then) in the Teddington Studios land site, which is in Richmond too. The latter was formerly the home of Pinewood Studios.
When asked why CDL recorded a $62 million impairment for the UK, group CFO Yiong Yim Ming says the impairment is largely for one of the projects, which remained unnamed but is likely the Teddington site.
“The progress of the project is a little bit delayed. The financing costs capitalised in the projects have increased the cost of the project, so it’s really a time return that was compromised. And, of course, we do have a big project, which is the Mortlake project. That project is still in the stages of getting planning approval. And that is very challenging in an environment today. There is, of course, a constant struggle for us to discuss with the relevant authorities. We feel it was timely to do an impairment for this project,” Yiong explains.
Whatever its past experiences, to grow its portfolio, CDL continues to look at more acquisitions overseas. This includes the potential acquisition of St Katharine Docks, a mixeduse development in London. Earlier this year, CDL was reported to be in talks to buy the development from Blackstone for around GBP400 million ($647 million).
“This acquisition as it’s been widely reported is circa GBP400 million. Our two UK office assets added together are valued at about GBP600 million and too small to do an IPO or a fund, especially if you want to attract strong institutional investors. This new acquisition brings our assets under management to around GBP1 billion. We’re well poised then to re-evaluate to get what we want to do, be it a public format like a REIT IPO or private format like a private equity fund,” Kwek elaborates.
CDL’s changing focus
Over the past year, CDL has steadily built its “living sector” portfolio, which includes private rented sector (PRS) and purpose-built student accommodation (PBSA) assets. In FY2022, it acquired six PBSA assets in the UK, two PRS sites in Australia, and another three PRS projects in Japan.
CDL’s UK living sector portfolio currently comprises around 2,400 PBSA beds and a pipeline of over 1,300 PRS units, inclusive of a 352unit project in Manchester under
CDL Hospitality Trusts (CDLHT). The portfolio has a combined AUM value of about $1 billion, based on the current gross development value.
In Japan, CDL has eight PRS assets across Yokohama and Osaka which account for 512 beds with a total AUM of $164 million. Meanwhile, the two PRS sites in Australia, located in Melbourne and Brisbane, will yield 490 units upon completion by 2026.
Break-up value
CDL may have the advantage to realise and monetise its assets. In 2022, CDL de-consolidated CDLHT by giving its shareholders 144.3 million stapled securities in CDLHT as a dividend-in-specie. This represented around 11.72% of CDLHT’s stapled securities in issue, leaving CDL with 27% of CDLHT.
The deconsolidation lowered CDL’s gearing ratio and provides the opportunity for CDL to feed its hotels of the REIT. This was confirmed by group COO Kwek Eik Sheng.
“On the M&C side, we always mentioned this multi-prong strategy. Of course, we are looking at divestments, and that could be either to third parties or to the REIT. I think in the past, we’ve said that we want to be a more active sponsor to the REIT. So there are some opportunities where we’ll try to push on those as well going forward,” Kwek says.
Elsewhere, CDL is redeveloping Fuji Xerox Towers into Newport Plaza comprising a 45-storey freehold development with 246 residences, serviced residences, offices and retail units. Therefore, part of the asset will be monetised when the residences are sold.
CDL is also planning to monetise Central Mall and Central Square. The combined site will be redeveloped into an enlarged mixed-use integrated development comprising office, retail, hotel and residential components. The residential component, with some 300 units, is expected to launch in 2H2024.
CDL’s monetisation of its commercial properties has more than offset the impairment loss and its investment in Sincere Properties. No surprise then that CDL has been the better performer over a one-year period, up 9% compared to UOL’s 3%.
Going forward though, UOL is rising on a price-to-book basis while below its mean while CDL’s priceto-book ratio is falling towards its mean.