CapitaMall Trust
June 6 close: $1.95
OCBC Investment Research, June 6

Tender award: CapitaMall Trust (CMT) has been successfully awarded the Jurong Gateway site, located at Boon Lay Way by URA on May 30 at a tender price of $969 million (S$1,1012 psf ppr). This was a joint tender with CapitaMalls Asia and CapitaLand, of which CMT has a 30 per cent stake in the joint venture. The total development costs are expected to be about $1.5 billion ($1,566 psf ppr).

The land parcel has a prime location next to both Jurong East MRT station and Jurong East bus interchange. Jurong is slated to be the largest regional centre in Singapore for commercial developments outside the city centre (under URA's Jurong Lake District Masterplan). Jurong Gateway is about 2.5 times the size of Tampines Regional Centre.

'3-in-1' Mega Mall in Jurong: CMT will be building a 25-storey retail cum office property at the new site, adjacent to another upcoming Lend Lease office/retail building, scheduled for completion in 2014. With two other CMT malls in the vicinity (IMM and JCube), CMT's selling proposition is to create a '3-in-1' mega mall in Jurong, offering one million sq ft of retail net lettable area (NLA) within three minutes' drive from each other in Singapore's soon-to-be largest regional hub. CMT intends to finance the development by internal funds and debt.

Downgrade to HOLD on valuation grounds: We have factored in contributions from both the retail mall and office building into our valuation, commencing on December 2013 and June 2014 respectively. Out total development costs for CMT works out to about $469 million, which accounts for 5.8 per cent of CMT's total assets as of March 31 (within the property fund guideline of 10 per cent development cap).

CMT has guided that it is targeting rentals of $16-18 psf per month and $7-8 psf pm for the retail and office segments respectively, with an initial yield-on-cost of 6 per cent. According to our model, these targets are fairly tight and require somewhat vigorous occupancy rates in the first year to attain the desired 6 per cent yield. In addition, unlike the Tampines Regional Centre, which is hailed as the 'financial hub in the east', the Jurong precinct does not have a strong financial institution catchment base.

We therefore remain wary of (1) the office take-up in that area, with the nearby International Business Park, JTC Summit and iHub buildings offering cheaper alternatives and (2) 'retail tenants' fatigue' among the four malls within a 500 million radius from the MRT station. Moreover, CMT's share price has appreciated 6.5 per cent since our last report dated on April 21. Downgrade to HOLD on valuation grounds with an increased fair value of $2.05 (previously $2.02). We will turn buyers at $1.93. 
HOLD