Perennial to acquire Capitol project after S$528m buy-out

Singapore

PERENNIAL Real Estate Holdings is set to walk away as the sole owner of the iconic Capitol Singapore project, after a business kerfuffle held up the development of the heritage site.

Mainboard-listed Perennial will buy out its co-owner, Pontiac Land Group affiliate Chesham Properties, to the tune of roughly S$528 million.

The move was welcomed by industry watchers, who expect that the development - which includes a stalled hotel component - will be better placed to operate after consolidation.

The deal, announced on Monday, comes in the wake of a January settlement agreement where either party had the option to purchase all of the other's shares in the property.

The price tag includes S$129.6 million in cash for the shares, funded by internal resources and borrowings. Perennial will also discharge Chesham's shareholder loans - to the tune of S$368.6 million, not counting interest - and pay S$3 million to Pontiac-linked Patina Hotels & Resorts.

The consideration for the shares was based on a property price of about S$1.03 billion, or 2.6 per cent more than a valuation in 2017.

"We believe the assets are fully valued at the agreed price," a spokesman for Chesham told The Business Times.

And stock watchers seemed to agree - despite the premium that Perennial is forking out.

DBS analyst Derek Tan said over the phone that, "while people may say they have overpaid, I think there is an opportunity for them".

"It is a good deal in view of the high prices paid for land in recent commercial land transactions," he remarked. "Pontiac probably sees it as an exit from a very good investment."

CGS-CIMB analyst Lock Mun Yee estimated in a note that the Capitol's completed, non-residential gross floor area could be valued at S$1,767 per sq ft. Both she and Mr Tan separately argued that this appears to be below replacement cost.

It compares favourably, they said, with what GuocoLand and Guoco Group previously paid for a Beach Road commercial site and what IOI Properties coughed up for the prime white site along Central Boulevard.

The analysts are also banking on the opening of the luxury hotel at the Capitol. Although a mall and the Capitol Theatre opened in 2015, the 157-room hotel - which was to have been managed by Patina - has been shuttered amid the owners' dispute.

DBS's Mr Tan and CGS-CIMB's Ms Lock agreed that the property's retail component appears to be under-performing, with Mr Tan suggesting that attracting a new hotel operator could boost tenant sales and drive up rents.

He added: "Having the project under one holder will be more efficient and Perennial will have a free hand to drive operations and execute any potential repositioning."

Ms Lock said that once the Capitol project is fully operational, it could yield between S$40 million and S$50 million of recurrent income a year.

"We anticipate potential earnings upside when the property is fully ramped up in the medium term," she wrote.

She slashed FY2018's earnings forecast by 95 per cent, on acquisition interest costs and a lag in turning performance around, but raised the FY2020 forecast by 18 per cent.

Perennial and Chesham picked up the landmark Capitol site in 2010, along with a third party that later left the joint venture. The relationship soured, as disagreements began cropping up by 2013.

Perennial went to court to seek the winding-up of the project's associated companies, but it lost the case, with its subsequent appeal dismissed last November.

Ms Lock on Monday held to an "add" rating on the counter and bumped up its target price by S$0.06, to S$1.18. Perennial closed up by half a Singapore cent, or 0.59 per cent, at S$0.86, after the news.

Company representatives declined to comment ahead of the share sale's May deadline for completion.