We met up with Hiap Hoe (HIAP SP) recently following its interim results. The following are our takeaways: 1) Occupancy for its 2 hotels Days Hotel and Ramada Singapore at Zhongshan Park has steadily ramped up to 80-90% in the last few months. The group has been able to build up a broad corporate and leisure clientele, capitalizing on its location to tap into niche segments such as medical tourists, sporting events and aircrew businesses. Meanwhile, occupancy for its retail and office components are close to 100%; 2) On the residential front, the group has sold 92% and 75% of Skyline 360° and Waterscape at Cavenagh, respectively. The proposed bulk sale of Treasure@Balmoral at SGD1850 psf has received interest from several bidders with negotiations still on-going; 3) The industrial project at Kallang Pudding has been launched with selling prices at 1,100-1,200 psf, with 7 out of 55 units sold so far; 4) The group recently launched its maiden overseas project, Marina Tower, in Melbourne. Marina Tower comprises of 461 residential apartments and a 269-room hotel to be managed by Sheraton under the Four Points brand, The group has sold 70% of the residential units and targets to complete selling the remaining units by year-end. The launch of its second Melbourne property, 380 Lonsdale Street, is slated for next year, while 206 Bourke Street (Melbourne) and Sterling Street, Perth will be kept for recurring income, having secured these at attractive cap rates of 8.5-9%. Hiap Hoe intends to build on its hospitality business, building on its success in Singapore. Following the successful takeover of Superbowl at a 40% discount to valuation and after imputing lower ASPs for its Singapore residential projects, we have revised our TP to SGD1.03, based on a 40% discount to its RNAV. Buy maintained.
"The developer could be under pressure to sell the project as the government’s Qualifying Certificate requires that listed developers have to sell all the units in a project within two years of obtain ing a Temporary Occupation Permit (TOP), failing which they have to pay an extension pre mium. As Treasure on Balmoral’s TOP was in November 2012, Hiap Hoe will be subjected to an extension fee for unsold units from this November."
Hiap Hoe will be hit by an 8% extension fee this november. Unless it is successful in the bulk sale of all the units.
I think Hiap Hoe’s latest move signals that it is more willing to pay the 15% stamp duty incurred in transferring the remainder units to its subsidiaries than to pay the developer penalty (which recurs every year as long as the units are not sold).
I think it makes sense based on the following calculations (for Skyline):
The remainder 5 units consist of 4 lower PHs of 3,929 sf and 1 super PH of 6,523, Total: 22,239 sf.
Transfer price: $35m, or $1,574 psf.
Stamp duty: 15% X $35m = $5.25m, Total cost: $40.25m.
Total cost to subsidiary (in psf) = $1,810 psf. (However, there is also a seller’s stamp duty. Assuming Hiap Hoe is able to sell these units only in year 4 or 5, then the amount is not substantial. Govt may also remove some measures (including seller’s stamp duty) in future.)
These 5 PHs have fantastic 360 degree views, including those of the city and Marina Bay. I think Hiap Hoe feels that it’s better to take its time to sell, as asking Orchard land prices alone are already $1,500-1,800 psf ppr, vs the cost price of $1,810psf of these completed Skyline units.
Hiap Hoe’s move, I believe, is the start of a trend by developers to do the same, especially if the remainder units sit on freehold prime land, which will get more scarce and harder to replace at reasonable prices.
I am neutral on Hiap Hoe’s latest move but I hope it finds a buyer at a reasonable price for its Treasure at Balmoral.