During a briefing on Aug 12, City Developments’ (CDL) management pointed out that its book NAV based on historical cost accounting stood at $9.22 as at June 30, 2021. If NAV were to include fair value gains on investment properties, it would be $14.22. If NAV were to include fair value gains on investment property and revaluation surplus on the hotel portfolio, it would rise to $17.
Hence based on current prices of $7, CDL is trading at 0.25 times book NAV, 0.49 times P/NAV including fair value gains, and 59% discount to revalued NAV (RNAV).
Now what if the freehold Fuji Xerox Towers, built in 1987, - which can be assumed to be held at cost of say below $100 million - were to be redeveloped with a GFA uplift, and in the ratio announced on Aug 12?
Understandably, redevelopment is only likely to start next year, and be completed in 2025. Future construction costs are an unknown, given the bottlenecks in materials, and rising labour costs.
See also: City Developments’ future RNAV gets boost as redevelopment takes shape
Still, assuming construction costs at say, $450 psf for residential, $650 for serviced residences and $500 psf for commercial, and selling price of residential and valuation of commercial at $2,400 psf, the gross development value (GDV) could be at $1.2 billion to $1.3 billion -give or take.
Higher selling prices for the residential portion would of course lead to a higher GDV. For instance if average selling price is boosted to $2,600 psf, GDV works out at above $1.3 billion.
The development charge is also an unknown, because CDL’s management did not reveal much during its recent results briefing.
Nonetheless - and there are many assumptions - assuming a development charge of around $35 million based on current GFA as the site’s development baseline, and up to $280 million using various development baselines, Fuji Xerox Towers could add as much as $1 to CDL’s RNAV. That would buoy RNAV to $18. A higher future ASP would shift RNAV to $18.05. The boost to RNAV could be as low as 73 cents which would still be significant.
Of course construction costs could shoot through the roof, and the development ceiling could be used as development charge. Then, the addition to RNAV would fall to around 50 cents, but it would still be an uplift.
A known unknown is the valuation of other buildings in the surrounding area. Much depends on how the collective sale of the leasehold International Plaza goes ahead. A buyer for the latter would spur interest in Fuji Xerox Tower’s potential GDV.
For more stories about where the money flows, click here for our Capital section
During a results briefing, CDL's group CEO Sherman Kwek mulled whether CDL could bring in one or more financial partners for parts of Fuji Xerox Towers during its redevelopment.
If the development charge is low, and construction costs are contained, CDL could redevelop Fuji Xeros Towers on its own, given its current gearing ratio and balance sheet. A partnership could depend on whether CDL could divest the Seoul Hilton. The selling price could be as high as $1 billion.
If so, CDL would be very comfortable. However, some hotels in Seoul are being redeveloped into other uses. If CDL chooses this route, it could find a South Korean partner to redevelop the Seoul Hilton.
Whatever the case, its current share price has already started to reflect the revaluation of Fuji Xerox Tower which won’t complete till 2025. As at Aug 16, 2021 CDL’s share price is up 40 cents or 6% following its 1H2021 results as investors started to estimate the uplift from redevelopments of its Singapore portfolio - largely carried at cost less depreciation.
