Paragon REIT gives a miss on ROFR asset Seletar Mall?
- News reports disclose that Allgreen properties is in exclusive due diligence to buy Seletar Mall
- Rumoured acquisition price of S$520m implies a deal cap rate of c.3.9% – 4.3% on our estimates, supporting our thesis that retail valuations are resilient.
- Paragon REIT can debt fund the asset in full but at the expense of a leap in gearing to c.39%; preference to keep balance sheet flexible for now
- Recent tight retail transactions in the market at c.4% cap (below valuer cap of 4.5%) shines a favourable light on NEX mall deal if executed by FCT at an estimated c.4.8
What’s new?
- It was reported in the news that Allgreen properties is in exclusive due diligence to buy The Seletar Mall.
- The Seletar Mall is a 188k sqft four-storey suburban retail mall with direct mrt connectivity to Fernvale LRT station.
- Transaction price is rumoured to be approximately S$520 million, and above the FY21 valuation figure of the mall of S$480m that is publicly available.
- The mall has an existing ROFR (first right of refusal) to Paragon REIT.
- Current negotiation proceedings seems to suggest that Paragon REIT will be giving a miss on the right to acquire the Seletar mall.
Our thoughts
Paragon REIT – keeping it’s balance sheet flexible. The pricing achieved [y Seletar mall came as a positive surprise to us, reiterating the tight supply landscape for retail assets within Singapore and buyer pool potentially returning back into the scene, catalysed by the softening interest rate environment in recent months. Based on our rental estimates for the asset in the range of S$13 to S$14 psf pm, we estimate that at the rumoured price of S$520m, this will imply a transaction cap rate of 3.9% to 4.3% for the deal, which continues to be tighter than valuers implied cap rate for Singapore retail assets. Our rental estimates takes into account potentially larger percentage of anchor retail spaces at The Seletar Mall given its smaller size, and a rental discount to dominant malls such as NEX which would receive much higher transient traffic given its connectivity to an MRT interchange. The pricing will not bode well for Paragon REIT to match Allgreen’s pricing of S$520m, given the limited accretion potential. While a fully debt funded acquisition is a viable option for Paragon REIT given it’s low gearing of c.30% but we note that gearing will stretch to c.39% should it happen, which is a level that we believe that management and investors could potentially frown on any leveraging up of its balance sheet in the still high-interest rate environment.
In addition, in our previous comments, DBS Research Insights Direct – Is Paragon giving Seletar Mall a miss?, we believe that Seletar Mall overall metrics have limited scope for upside to returns given competing nearby malls (Seng Kang Grand) and the potential rejuvenation of NEX mall with Frasers Property Limited (“FPL”) looking to play a more active asset management role after taking a combined 50% stake.
Bodes well for Frasers Centrepoint Trust, Maintain BUY at S$2.60 as top sector pick. Seletar malls deal shines a favourable light on FCT’s acquisition of NEX last year, which was executed at a favourable cap rate of c.4.8%. We believe that sponsor will continue to lend support to FCT’s acquisition targets to unwind additional stakes in NEX this year, and inject additional NEX stakes at a flat cap rate of 4.8%. notwithstanding potential valuations gains on the asset last year. While this will help FCT reach an intermittent goal of 50%, the end goal will still be to fully unwind NEX into the portfolio and attain tax transparency, to fulfil the full potential of DPU accretion from the asset, which we see as a catalyst for the coming years.
| Comparison of selected FCT malls | |||||
| Comparable malls | NEX | Waterway Point | Northpoint City (North Wing) | Changi City Point | The Seletar Mall |
| Valuation (S$m) | 2,078 | 1,313 | 778 | 325 | 520 (rumoured) |
| NLA (sqft) | 634,631 | 389,444 | 229,870 | 208,453 | 188,000 |
| Valuation/sqft | 3,274 | 3,370 | 3,385 | 1,559 | 2,765 |
| Net property income (S$m) | 142 | 59.9 | 40.9 | 14.57 | n.a. |
| (2022/2021, estimated) | (includes Yishun 10) | ||||
| NPI yield (%) | 4.8% (estimated) | 4.60% | 5.30% | 4.48% | 3.9% – 4.3% |
| Location and accessibility | Serangoon MRT Interchange | Punggol LRT Interchange | Yishun MRT | Expo MRT | Seng Kang LRT |
| Remaining lease tenure (yrs) | 85 | 87 | 66 | 46 | 87 |
| Est passing rent (S$ psf pm) | 19 | 18 | 21 | 10 | 13-14 (DBS est) |
| Valuation adjustment for a fresh 99y leasehold basis (S$/sqft) | 3383 | 3456 | 3887 | 2067 | 2,857 |
| Adjusted NPI yield (99y LH basis) | 4.6% | 4.7% | 4.2% | 3.6% | 4.1% – 4.4% |
| Source: Companies, DBS Bank |