Why GuocoLand could be well on its way to establishing a REIT platform

To recap, GuocoLand through a joint venture (JV) with its parent company, Guoco Group, put in the top bid of $1.622 billion for the 99-year leasehold commercial site at the former Beach Road Police Station.

The JV’s bid beat that of Kingsford Hurray Development, which put in a $1.57 billion bid; Anise Link, which put in a bid of $1.45 billion; Japura Development which put in a $1.40 billion bid; and Far East Organization which entered the lowest bid of $1.29 billion.

An earlier analysis by Maybank suggests that a developer would be able to achieve about $2.4 billion worth of gross development value (GDV) at the Beach Road site.

“At $1,706 psf ppr, [the GuocoLand-Guoco Group JV’s] bid is above consultants’ expectations and fairly aggressive, in our view. Nonetheless, this project should still be profitable and we estimate a surplus of 6 cents for GuocoLand’s 70% stake in the project,” comments analyst Derrick Heng in a Friday report.

He also views it as a timely incorporation of a residential component for the group, given the impending rebound in Singapore’s residential market and a less restrictive development timeline.

Heng does not see a need for equity fund raising as he believes this could lift the group’s net gearing to 1 times by FY18E – which, according to the analyst, remains comfortably below its historical average of 1.6 times over FY11-15.

Additionally, he reckons the new project has further strengthened the research house’s case to establish a REIT platform, which could provide GuocoLand with an avenue to recycle capital in new commercial developments.

“We keep our estimates unchanged pending award of the tender… Risk is a sharp fall in property prices,” concludes Heng.

As at 3:08pm, shares in GuocoLand are trading 1 cent higher at $2.28 or 0.69 times FY18 book value.