Mixed views on potential MBFC Tower 3 deal

20140129-bt-mixed-views-potential-mbfc-tower-3-deal THE potential divestment of Prudential Tower - previously flagged by various research houses as a possible sale target for Keppel Reit (K-Reit) - has drawn differing views from analysts.

This follows the Reit management's acknowledging market speculation that Marina Bay Financial Centre (MBFC) Tower 3 is on its radar. At the Reit's results briefing last week, chief executive officer Ng Hsueh Ling, while stressing that it was "too early to comment", added that the Reit might consider the possibility of divesting one of its older assets to partially fund the Tower Three acquisition should there be such a transaction.

Earlier this week, Bloomberg, citing sources, reported that the Reit had put a $531 million price tag ($2,400 psf) on its 30-storey Prudential Tower in Cecil Street. This is 8.3 per cent higher than its valuation of $490 million as at end-2013.

CIMB analyst Pang Ti Wee said: "This deal may be interesting, given that Prudential Tower is already at an optimal stage with 100 per cent occupancy. We believe that without a substantial asset enhancement initiative, K-Reit may have difficulty raising the yield or valuation of this property further."

"On the other hand, when compared with MBFC Tower 3, which is a very new building, currently with an occupancy rate north of 90 per cent, we believe there is still room for growth in terms of both occupancy and valuation, particularly on the back of an office rental market recovery."

According to Sigrid Zialcita, managing director, research, Asia Pacific, at Cushman and Wakefield, Prudential Tower's pricing appears to be "fairly valued".

"With average Grade A rents expected to increase around 10 per cent over the next two years from the average of about $9.00 currently, the $2,400 price tag implies a net yield of around 4 per cent, indicative of current pricing levels," she said.

So whether the sale of Prudential Tower and the purchase of MBFC Tower 3 is yield and distribution per unit (DPU) accretive will depend on the price point at which Keppel Land decides to sell MBFC Tower 3.

Mr Pang said: "In terms of financing MBFC Tower 3 (taking into account Prudential Tower's) asking price of $531 million, K-Reit is still looking at $620 million. Whether this acquisition is yield accretive or not will depend on the price and structure of the acquisition." The assumption is that a Tower 3 acquisition will be priced at about $1.15 billion.

Based on a price tag of $1.24 billion and the assumption that K-Reit divests Prudential Tower for $490 million, the acquisition would be DPU-neutral, said Standard Chartered's analyst Yip Kai in a research report issued last week.

"K-Reit currently has $736 million of unutilised loan facilities, and we expect the trust to be able to obtain further loan facilities secured against Ocean Financial Centre. While this funding mix would raise K-Reit's leverage to about 47.6 per cent, we estimate that the 3.1 per cent organic NPI acquisition yield of MBFC Tower 3 would be DPU-neutral, given K-Reit's 2.15 per cent cost of debt," he said.

Religare analyst Tata Goeyardi holds a more bearish view: "Even if K-Reit sells Prudential and buys MBFC Tower 3, FY15 DPU is still likely to fall by 8-9 per cent as per our calculation (assuming MBFC is bought at 4 per cent cap rate) and, furthermore, gearing would rise to about 44-45 per cent."

A Keppel Reit Management spokesman, when contacted yesterday, said: "Keppel Reit does from time to time receive interest to acquire our properties. We will consider all potential divestments and acquisitions, and will make an announcement if and when any such deals materialise."

Source: Business Times, 29 Jan 2014