What are the implications of City Development’s full acquisition of Nouvel 18?

Remaining units need to sell out before November.

City Developments (CDL) acquired the remaining 50% stake in Nouvel 18 from its JV partner Wing Tai Land Pte. Ltd. for an aggregate consideration of SGD411m. By acquiring its joint venture partner’s stake, CDL has assumed full ownership of this project.

Nouvel 18 located at 18 Anderson road is a 156-unit freehold site and is within walking distance to Orchard road shopping belt. The site was acquired in 2007 for SGD477.7m (SGD1,650 psf ppr) and was completed in Nov 2014. No units has been sold till date.

RHB Securities analyst Vijay Natarajan estimates that the acquisition price translates to SGD2,619psf based on estimated net sellable area of 313,874sqft.

“We believe the acquisition is fair considering the nearby new launches Ardmore 3 is selling at effective price range of SGD2,600-3,200psf. The acquisition is also 17% above our breakeven assumptions of SGD2,240psf, said Vijay Natarajan, analyst at RHB Securities.

Derrick Heng, analyst at MayBank KimEng, believes that with the streamlining of its shareholding structure, he expects CDL to aggressively market this project as a bulk sale or build a structured product with it to avoid incurring significant Qualifying Certificate (QC) charges.

In March 2007, CityDev and Wing Tai set up a 50-50 joint venture, which acquired Anderson 18 for SGD517.8m (including development charge of SGD40.1m) or SGD1,650psf per plot ratio. It has since been developed into Nouvel 18. Despite completing in Nov 2014, it has not been launched due to the soft sentiment in the high-end property market in recent years.

Fast approaching its project deadline As an enbloc site, this project is subject to the QC rules, which stipulate a deadline for the sale of units. QC charges will be imposed at a rate of 8%/16%/24% for the first/second/third and subsequent years on the land cost after its project deadline. The charges are pro-rated based on the number of unsold units at the various deadlines

“We cut our ASP assumption to SGD2,500 psf from SGD3,000 psf and assume the sale of all units by its QC deadline in Nov 2016. Our TP for CityDev is raised to SGD9.17 from SGD8.92 to reflect our higher RNAV from the lack of QC penalties. Proceeds from the sale will improve Wing Tai’s balance sheet and we project almost no gearing after this transaction,” said Heng.

CDL has until Nov 2016 to sell the units in the project after which it will start incurring QC charges on unsold units. RHB’s Natarajan estimates that assuming no units being sold, the extension charges for the first year works out to about SGD38.2m.

Natarajan believes that CDL, with its strong balance sheet strength (net gearing of 0.26x) and access to private equity partners, is better positioned to unlock the value of the project via bulk sale or a capital market transaction.