Will Sam Goi-led consortium do bulk sale of GSH Plaza?

THE refurbishment of GSH Plaza - formerly known as Equity Plaza and sitting right next to Republic Plaza in the traditional Raffles Place financial district - has been completed.

However, based on caveats data, strata sales by the owner, a GSH Corporation-led consortium named Plaza Ventures, have been pretty slow.

The question many observers are pondering is whether the consortium will speed things up and do a bulk sale.

In December, GSH Corporation - controlled by "Popiah King" Sam Goi - responded to a query by the Singapore Exchange on the unusual price and volume movements in the company's shares, saying it was in "preliminary discussions in relation to a potential disposal transaction".

"No definitive legal documentation has been signed on the same matter," it added. The company did not specify which asset it was in talks to dispose of.

Not surprisingly, market talk centres on a potential bulk sale of the remaining units in GSH Plaza. If so, this is likely to be done through the sale of shares in Plaza Ventures. A potential buyer, a Chinese company, is said to be already doing due diligence.

Does it make sense to do a bulk sale for the consortium?

Besides GSH Corporation, which has a 51 per cent interest in Plaza Ventures, the other shareholders are Vibrant DB2 (a joint venture between listed Vibrant Group and niche property developer DB2 Properties), which has a 35 per cent stake, and Mr Goi's private investment vehicle TYJ Group holding the balance 14 per cent.

The parties teamed up in 2014 to buy Equity Plaza from Keppel Land and Alpha Investment Partners for S$550 million.

They then renamed the building GSH Plaza, chased out its tenants (it was about 97 per cent occupied when the building was purchased) and embarked on a major spruce-up, estimated to have cost S$118 million, with the view to doing strata sales.

In all, GSH Plaza has 259 strata offfice units on Levels 3 to 28 (adding up to 283,349 sq ft) and 21 retail units (12,260 sq ft) spanning Levels 1 and 2. Based on earlier reports, the owners were expected to retain the retail space.

Plaza Ventures began strata sales of the offices in April 2015. After the initial sales momentum, the going proved to be tougher than the owners had expected. Strata commercial property sales on the whole have fizzled out following the introduction of the total debt servicing ratio framework in June 2013.

Another factor that has dissuaded some potential investors from buying CBD strata offices is softening office rentals due to a combination of weak demand and a surge in new office completions from 2016 to 2018.

Plaza Ventures has not made public the sales levels at GSH Plaza. However, going by caveats data captured in URA Realis, office units with a total of just 48,018 sq ft strata space have been sold for a total price of S$146.4 million.

This includes the entire top floor (9,709 sq ft) of the 28-storey building which GSH bought in the fourth quarter of last year for its new corporate headquarters.

The average price of all the office space sold thus far is S$3,048 psf (transacted prices range from S$2,833 psf to S$3,503 psf). There may well have been other transactions for which caveats have not been lodged yet.

A back-of-the-envelope calculation shows that the consortium's blended breakeven cost (including the retail space) would be around S$2,413 psf on the total strata area of 295,609 sq ft.If a bulk deal is being negotiated, the buyer would seek a discount.

A recent price reference for a bulk office sale is the S$2,600 psf at which a Lian Beng Group-led consortium is selling 17 office units at the nearby Prudential Tower. The units are spread throughout the 30-storey office block, which is on a site with 78 years' balance lease term.

In comparison, GSH Plaza is a newly-refurbished building and closer to the Raffles Place MRT Station than Prudential Tower. On the other hand, GSH Plaza has an odd, quandrant-shaped floor plate, and is on a site with a shorter balance lease tenure (72 years).

Assuming the rest of the offices at GSH Plaza are priced at a 10 cent discount to the S$3,048 psf average price posted so far in the building based on caveats information, the price would work out to S$2,743 psf - still S$330 psf above our breakeven cost estimate. The resulting gross profit to the consortium members would be S$77.7 milion (S$330 psf multiplied by the 235,331 sq ft remaining strata office space).

If the buyer succeeds in negotiating for a bigger discount of 15 per cent discount off the average transacted office price in the building, this would result in a S$2,591 psf sale price, yielding nearly S$42 million gross profit.

That's just for the remaining office space available for sale at GSH Plaza.

Retail property is worth more than offices. Assuming GSH Plaza's 12,260 sq ft of shop and F&B space fetches S$4,500 psf, the gross profit for this component works out to S$25.6 million.

On top of this, Plaza Ventures stands to book a profit of about S$30 million from the office units already sold (based on caveats data). However, a new investor in the company may be entitled to part of the sales proceeds (which have not been collected yet from buyers) on the office units sold earlier - depending on the terms of a deal.

GSH has two options now: stick it out doggedly for a few more years and press on with the sale of individual strata units at GSH Plaza; or do an opportunistic bulk sale and walk away with a decent profit. Given the market conditions, the second option might be a smarter move.

Source: Business Times, 2 Feb 2017