Receives Proposal to Jointly Develop Shenton House in Singapore

The Board of Directors of IOI Properties Group Berhad (IOIPG) received a proposal from CEO and major shareholder Mr. Lee Yeow Seng (LYS) for IOIPG to participate in the joint development of "Shenton House," a commercial property located at 3 Shenton Way, Singapore.

To recap, LYS through his private company, Shenton 101 Pte Ltd (Shenton 101), has successfully tendered for the collective purchase of Shenton House for SGD538mn on 1 Nov 2023, and will oversee its redevelopment starting at the end of 2025. LYS disclosed a potential conflict of interest due to his dual roles and proposed that IOIPG acquire shares in Shenton 101 to align interests. LYS assured that Shenton 101 is prepared to proceed with the development of Shenton House under the tender terms and is securing funding for the redevelopment.

More About Shenton House Development

Shenton House is located in Singapore’s central business district (CBD), spans 3,377 square meters, and is zoned for commercial use with a gross plot ratio (GPR) of 11.2, according to Singapore's Master Plan 2019. The land lease has approximately 44 years remaining, with the possibility of extending to a fresh 99-year leasehold. Under Singapore’s central business district incentive scheme, Shenton House is eligible for a 25% bonus gross floor area, allowing for redevelopment into a mixed-use commercial and residential development or a hotel at a GPR of 14. The plan is to redevelop Shenton House into a new 99-year leasehold commercial property. The additional capital commitment (excluding development costs) is SGD476mn, covering land betterment premium, lease top-up premium, and transaction expenses. After redevelopment, Shenton 101 intends to retain the property as an investment.

Fair Valuation for Shenton 101 Shares, Ensures No Personal Profit

LYS proposes that the purchase price for the shares in Shenton 101 should reflect the actual investment costs he and Shenton 101 have incurred up to the acquisition date. This includes the initial equity investment, costs for acquiring Shenton House, as well as any upfront costs like consultant fees, tender costs, application and approval expenses, and financing costs. LYS emphasises that his intention is not to profit personally from this proposal. The proposal is valid for four months and can be extended by two months if mutually agreed upon. If no agreement is reached, the proposal will be null and void.

Our View

It was reported that LYS pursued the bid in his personal capacity rather than through IOIPG due to the acquisition's size and the tight timeline set by the collective sales committee. As a result, we are not surprised by the proposal, as we believe the property will eventually be injected into the IOIPG.

Given the limited supply of new Grade A offices in the core of the CBD and the limited availability of luxury rental housing, the future prospects of Shenton House appear promising. According to Huttons Asia, Singapore saw a surge in rents for large luxury homes in 1Q24 despite a general market decline. 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 SGD17,467 per month. This increase reflects a growing preference for renting following the 2023 hike in the Additional Buyer's Stamp Duty, which doubled from 30% to 60% on April 27, 2023, discouraging foreign property purchases.

If IOIPG accepts the proposal, the group’s already high net gearing level of 0.73x is expected to increase further. Assuming IOIPG acquires a 100% stake in Shenton 101 at an acquisition cost of RM3.5bn (total effective cost of SGD1.014bn at an exchange rate of RM3.46), which is an unlikely scenario, the net gearing of IOIPG would substantially rise to 0.88x, assuming the acquisition is financed entirely through debt.

In this context, we believe IOIPG is poised to establish a Real Estate Investment Trust (REIT), given its increasingly mature investment properties portfolio. While specific timelines and details regarding the REIT's IPO are not available, the carrying value of IOIPG's investment properties stands at RM18bn, according to the FY23 annual report. By creating a REIT, IOIPG 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.

Despite Shenton House's promising prospects, we are neutral on the development due to concerns that the acquisition will further elevate IOIPG's already high net gearing level. Meanwhile, establishing a REIT for further de-gearing may be a lengthy process, involving regulatory approvals, asset valuation, and market conditions for the IPO.

Forecast

Maintain earnings forecasts pending formal acceptance of the proposal.

Valuation

We maintain Buy on IOIPG with an unchanged target price of RM3.00/share, based on CY25 P/Bk multiple of 0.7x.

Source: TA Research - 26 Jun 2024