Ho Bee should inject its investment properties into a Reit

SOME market watchers are predicting that London's office towers will hollow out, as more people work remotely and Brexit pushes companies to leave the United Kingdom. But property group Ho Bee Land is betting those fears are overblown.

Ho Bee recently purchased The Scalpel, a Grade A office tower at 52 Lime Street in London, for £718 million (S$1.3 billion), thereby bringing its total investment in London to over £2 billion.

The Scalpel sits on a freehold site in the heart of London's insurance district. The building's transport connectivity will be enhanced when the Crossrail is scheduled to open at Liverpool Street later this year. The Scalpel has secure 10-year income with a yield of 4 per cent.

Kudos to Ho Bee for continuing to grow its recurrent income. Ho Bee posted a 141 per cent year-on-year (yoy) surge in net profit to S$330.5 million in 2021. Rental income grew 4.1 per cent yoy to S$223.7 million in 2021, due to positive rental reversions for the group's London properties.

Ho Bee's net asset value (NAV) has risen steadily from S$4.39 as at end-2016 to S$5.92 as at end-2021 - a compounded annual growth rate of 6.2 per cent. Dividend per share of 10 Singapore cents for 2021 was unchanged from that of a year ago.

Will Ho Bee's latest London investment add to that performance, or weigh on it?

Wrong vehicle

Unfortunately, even if The Scalpel contributes positively to Ho Bee's bottom line, shareholders may not have all that much cause for cheer.

Ho Bee traded at a discount to end-2021 NAV of around 51 per cent as at Mar 22. This means investors are marking down the value of Ho Bee's assets, including its investment properties, by more than half.

Ho Bee has paid full fair market value for The Scalpel but the market prices such an asset held on Ho Bee's balance sheet at a big discount.

The sad state of the market is such that a company with S$100 million in cash is better off returning the S$100 million to its shareholders instead of using this cash plus debt to buy an investment property.

Ho Bee is not alone among Singapore-listed property groups in trading at a huge discount to book value. As at Mar 22, City Developments (CDL) traded at a discount of around 20 per cent to its end-2021 NAV and 53 per cent to its revalued NAV.

Strategic actions

Two strategic actions that CDL is taking may be applicable to property groups such as Ho Bee. First, CDL is distributing some units of CDL Hospitality Trusts (CDLHT) to its shareholders via a dividend-in-specie. This move should be welcomed by CDL's shareholders, although some might wonder why the company is not distributing all its CDLHT units.

Second, CDL may list a real estate investment trust (Reit) in Singapore focused on UK commercial assets. CDL's London properties such as 125 Old Broad Street and Aldgate House may be injected into the Reit.

A Reit appears to be a superior vehicle versus a listed company for holding investment properties. Some Singapore Reits can trade at or above book value.

Perhaps Ho Bee, too, could inject its investment properties into a Reit and distribute units in the said Reit to its shareholders via a dividend-in-specie.

With a gearing ratio of around 0.6 as at end-2021, the group may not need to raise capital from a Reit listing exercise. But in listing a Reit, Ho Bee would also be able to grow a new business line in real estate fund management. And all shareholders would get to own the investment properties via a more efficient listed vehicle.

Undertaking such a project could help Nicholas Chua make his mark as chief executive.

Nicholas Chua succeeded his father Chua Thian Poh, Ho Bee's founder, as CEO this year. Chua Thian Poh has been redesignated as executive chairman.

What hopefully will not unfold with Ho Bee is the type of "low-ball" privatisation offers we have seen too much of in the local bourse. With higher volatility in the equities market, the chances of opportunistically priced privatisation offers succeeding may be higher.

Chua Thian Poh's deemed interest in Ho Bee is around 75.6 per cent. It is entirely plausible that the Chua family succeeds in privatising Ho Bee at, say, a 20 per cent discount to NAV, which is a premium of around 64 per cent to the share price as at Mar 22. Snaring prized assets such as The Scalpel at a discount of 20 per cent would be quite a steal.

Perhaps talk of the demise of office towers and of London will be proven wrong, and Ho Bee is right to bank on prime London offices. Shareholders would hope the group does its best to ensure that prized assets are held in optimal vehicles and that all shareholders can benefit from management executing well strategically and operationally.

• The writer holds shares in Ho Bee Land.