Assistance required for Financial Risk and Sensitivity Analysis for report

Anonymous
timer Asked: Apr 9th, 2017

Question Description

Hello!
I am currently working on a real estate report, but am currently stuck at the financial sections of it as mentioned above; particularly financial risk and sensitivity analysis. As I am not good with numbers, I am struggling to understand the concepts behind financial calculations and the rationale behind the derivations, and therefore require help on that.

I have attached an example report on how it should be done as well as some links for context of the project, hopefully it will help you in getting a clearer picture of what I mean! Please do not hesitate to contact me if you have any doubts! Thank you in advance!!

PROJECT BRIEF The Setting For the purposes of GP2016, assume that your team has been specifically appointed by the CEO (chief executive officer) of a major Singapore listed property company as a Special Projects Team. Your Team comprises key personnel from within the company covering a wide spectrum of real estate talents. The CEO has tasked the team to fulfill the following two missions: Part 1: Strategic Focus and Corporate Restructuring Your CEO is concerned that the overall operating environment for commerce in general and or the real estate development business in particular, have experienced important structural changes. Given the government’s imperative to review and reposition Singapore’s economy for the future, the Special Projects Team must evaluate what all this means for the firm. It is within this context that the Team must conduct a thorough reexamination of the firm’s mission and strategic focus. It has been given carte blanche to scrutinize its current practices and organizational framework as well as to prescribe change where necessary. The CEO actively encourages the team to think “out-of-the-box”. The main questions to be addressed include but are not necessarily limited to the following: ▪ ▪ ▪ ▪ ▪ ▪ ▪ How has the firm sought to strategically generate its returns? Review its track record achieved in real estate (property) investment and development activities, and possibly other activities, over the recent five years, and be careful to distinguish between speculative plays and bread-and-butter activities. How successful have the past and existing strategies been adopted by the firm? How viable is it for the firm to continue in its current form based on its present modus operandi ? What are the firm’s key strengths and weaknesses? What can the firm leverage on ? What is its position with respect to its sectoral and international exposure? How should it reposition itself? Briefly audit the firm’s financial position and land-banking portfolio and provide an assessment as to what needs to be done or undone. (I suggest that you look at the usual ratios, namely, the Price-Earnings ratio, the Earnings Yield – the reciprocal of the price-earnings ratio, the Price-to-Book ratio and the Dividend Yield. Also, look at their historical trends for several years, say for at least 4 years, and then across its main competitors in the most recent year.) What are the implications for the firm arising from your team’s deliberations and proposals? The team should feel free to raise issues that have not been brought up by the CEO but which are important for charting the future course of the business. Part 2: A Specific Site or Project Study Following from your firm-wide study in Part 1, your Team has been tasked with an additional mission. It must identify ONE key project for the firm that can be instrumental in delivering the firm’s corporate objectives and which the company must activate soon. Depending on the company, the project can but need not necessarily be a fresh development scheme. The project required may be the redevelopment of a specific site, the activation of an idle parcel in the firm’s land bank for which the “time” has come or even a major repositioning of an important existing development. If your Team believes that the firm should actively pursue a new development scheme and does not have the land for doing so, source for an appropriate potential development site. Also suggest a procurement strategy and the appropriate pricing for it. In any case, your Team must provide a justification for its choice. DH /Page 1 of 2 Your Team should conduct a full formal feasibility and (re)development study. Provide a recommended game plan for the selected site or project. Your analysis should include suggestions as to how the venture should be structured and financed. Identify the risks involved in the proposal and offer appropriate ways to manage them. Finally, prepare a strategic action plan for timing the various phases, including the marketing and management issues for the proposed project. You may make any relevant assumptions to support your analysis, provided they are reasonable and stated clearly. Each team must select an international real estate developer/investor, who is active in the real estate (property) business. Submission Two separate reports, 30 pages maximum for each report, including an executive summary but excluding the appendices, should be prepared for the two parts of GP2015. The Part 1 and Part 2 reports must be submitted to the Department of Real Estate’s General Office by 5.00 pm on Friday, 14 April 2017. Please be concise and use Times Roman font size 12 or Arial font size 10 at a minimum (or equivalent). Marks will be deducted for late submission or for lengthy reports that do not advance the purpose of IP2015. Please acknowledge the sources of information in your reports. DH /Page 2 of 2
“ Chairman’s Statement On behalf of the Board of Directors, I am pleased to report that City Developments Limited Group achieved our highest-ever full year revenue of $3.8 billion despite persisting headwinds in the domestic market. The Group has demonstrated our ability to be nimble and innovative. In 2014, we deliberately focused on our diversification strategy by building on our capabilities, expanding geographically, diversifying our products and creating our own opportunities both locally and abroad, to create greater value for shareholders. Kwek Leng Beng Executive Chairman Table of Content EXECUTIVE SUMMARY 1 CHAPTER 1: CITY DEVELOPMENT LIMITED CORPORATE PROFILE 3 CHAPTER 2: BUSINESS MODEL 4 2.1 Property Development 4 2.2 Rental Properties 4 2.3 Hotel Operations 5 2.4 Others 5 CHAPTER 3: PERFORMANCE SUMMARY 3.1 Overview of 5-years Strategy Trend 6 6 3.1.1 Property Development Strategy 7 3.1.2 Property Investment – Hotel Operations 8 3.1.3 Property Investment – Rental Properties 9 CHAPTER 4: SWOT ANALYSIS 4.1 Strengths 10 10 4.1.1 Excellent Reputation 10 4.1.2 Vast Corporate Network 10 4.1.3 Strong Hotel Network 10 4.1.4 Cost Advantage 10 4.1.5 Sectoral and Business Diversification 10 4.2 Weaknesses 11 4.2.1 Uncompetitive Debt-Equity (D/E) Ratio 11 4.2.2 Concentration Risk on Property Development 11 4.3 Opportunities 4.3.1 Positive Outlook for Tourism Market 11 Table of Content 4.3.2 Rising Middle Class in China 4.4 Threats 11 12 4.4.1 Challenging Singapore Residential Market 12 4.4.2 Uncertainty in Interest Rate Environment 12 4.4.3 Potential Erosion of Market Share in Hotel Industry 12 CHAPTER 5: SECTORAL & INTERNATIONAL EXPOSURE 5.1 Sectoral Exposure 13 13 5.1.1 Property Development 13 5.1.2 Property Investment 14 5.2 International Exposure 5.2.1 Long Term Normal Portfolio Composition 5.3 Recommend Asian Growth Investment Strategy 5.3.1 CDL’s Hotel Operation Portfolio Performance Attribution 16 17 19 20 5.3.1.1 Asset Allocation Skill 21 5.3.1.2 Asset Selection Skill 21 5.3.1.3 Interaction between Skills 22 5.3.1.4 Conclusion 22 CHAPTER 6: FINANCIAL POSITION 6.1 Profitability 6.1.1 Return on Equity (ROE) 6.2 Growth Performance 23 23 23 24 6.2.1 Sustainable Growth Rate (SGR) and Actual Growth Rate (AGR) 24 6.2.2 Dividend Yield 25 6.3 Valuation 26 6.3.1 Price-Earning (P/E) Ration and Earning Yield 26 6.3.2 Price-Book (P/B) Ratio 27 Table of Content CHAPTER 7: LAND-BANKING PORTFOLIO 28 CHAPTER 8: DELIBERATIONS AND RECOMMENDATIONS 29 8.1 Proposed Corporate Finance Strategies 29 8.2 Proposed Sectoral Strategies 29 8.2.1 Property Development 29 8.2.2 Property Investment 30 8.3 Proposed Geographical Strategy BIBLIOGRAPHY APPENDIX 30 Executive Summary Project Team: Tan Pang An Leonard Chia Liu Ee Darius Felix Otto Hannah Charlotte Giebelen Hong Kay Yeong Daniel Merilyn Milyarti Wantasen Rebecca Lau Tuck Wai Tan Si Ying Page. 1 Executive Summary Company’s Overview (Corporate Profile Business Profile Business Model and Business Strategy) City Development Limited (CDL) is one of Singapore’s most well-known real estate developer with an international portfolio of real estate assets and a global hospitality business. CDL’s core business operations comprises of property development and investment, hotel operations and facilities management. CDL attained a record high revenue of $1,678 million in 2014, with a higher percentage of revenue generated from property investments indicating CDL’s inclination towards bread-and-butter activities, rather than speculative development activities. Through its listed hotel subsidiary, Millennium & Copthorne Hotels PLC (M&C), CDL has significantly expanded its global market exposure especially in the hospitality industry. Au contraire, CDL’s property investment and property development activities are comparatively more localized. Evaluation on Company’s business (SWOT Analysis) As one of Singapore’s renowned real estate conglomerates with more than 300 subsidiaries and associated companies worldwide, CDL enjoys a competitive edge over other industry competitors through leveraging on its excellent reputation, vast corporate and hotel network, cost advantage as well as sectoral and business diversification. However, given its uncompetitive capital structure and the high exposure to concentration risk on its property development, CDL has been placed at a disadvantage in an increasingly competitive business environment. Furthermore, CDL may also be susceptible to the uncertain interest rate environment, unfavorable local residential market and the emerging trend of unconventional accommodation alternatives. Amidst the challenging global economic environment, CDL would still be able to uncover lucrative opportunity in the tourism and hospitality sector as well as in the China property market. Sectoral and International Exposure Over the last 5 years, CDL has pared down its exposure in the industrial development sector while simultaneously concentrating its efforts towards residential, commercial and hotel development. For property investment, given its strong competency and successful performance in the hospitality industry, more stakes are transferred from the office and industrial investments into hotel investments. As part of the group’s expansion and diversification strategy amidst the changing business landscapes and global trends, CDL has been continuously venturing into more overseas project while scaling down its presence in the local market. Based on the AHP-SAA Model, CDL is considerably far from reaching the SAA portfolio composition and its hotel investments risk-return profile is currently not running on the Markowitz Efficiency Frontier. Considering the state of CDL, their meticulous and cautious attitude towards divesting leads us to develop a portfolio that incorporates a defensive strategic investment alternative in the proposed Markowitz Quadratic Programming Tactical Asset Allocation (TAA) for the next 12 months. According to the proposed TAA portfolio composition, CDL should reposition its hotel operation more towards Tokyo while reducing its stake in Singapore, Seoul and Bangkok to practice this defensive strategy. Page. 2 The success of CDL’s ability to allocate funds in its hotel investment portfolio is assessed through the Portfolio Attribution Analysis Model. The negative value added owing to the asset selection skill, asset allocation skill and interaction suggest that CDL has an inferior asset selection and allocation skills compared to the industry benchmark. Financial and Land Banking Position Comparing CDL’s financial performance with four other major players in the real estate industry, Keppel Land, UOL, UIC and CapitaLand, the group has achieved superior position in terms of the company’s profitability and company’s growth rate. The group has also garnered strong investors sentiments as a result of the group’s credible reputation in strategically harnessing its business’s strengths to achieve future growth. The company’s growth performance in terms of dividend yield is lower as compared to the industry competitors. Moving on to CDL’s land-banking portfolio, the fact that China constitutes the largest proportion of the total land-banking portfolio reveals the group’s opportunistic behavior in land acquisitions. The bullish behavior has exposed CDL in a high development and political risk environment, thus prompting it to scale down its land acquisition in the Chinese market. While Singapore’s land market is increasingly competitive, CDL would still be actively pursuing land acquisitions in the local market so as to maintain its domination in the market. Furthermore, in seeking strong growth opportunities, CDL has ventured abroad and has acquired significant land banks in overseas market, particularly in UK, Japan and Malaysia. Deliberations and Recommendations In view of the poor corporate growth rate performance, high financial leverage risk as well as poor dividend and earnings yield, CDL should retain more earnings so as to further increase the company’s growth rate through property development and property investment. While capital resources should be allocated in residential development to generate fast cash, joint venture alternatives should be considered to reduce capital outlays and its exposure to development risk. CDL should also continue to allocate capital into the development of more hotel assets as it is in a unique position to benefit from the full value chain of hotel real estate development and operation. Advanced divestment strategies should also be adopted with regards to property investment as this would help to improve the company’s gearing ratio and promote long-term sustainability. Diversification into less capital-intensive business is also an alternative to intensify the growth of the company without jeopardizing the company’s sustainability and capital structure. Finally, based on the Strategic Asset Allocation (SAA) strategy and Tactical Asset Allocation (TAA) strategy assessment on CDL’s hotel portfolio, there is a need to rebalance the company’s portfolio by reallocating a proportion of hotel stakes from Singapore, Seoul, Bangkok and Taiwan to Beijing, Manila, Kuala Lumpur, Jakarta, Hong Kong and Tokyo in order to achieve highest return with lowest risk. Corporate Structure Page. 3 1. City Developments Limited Corporate Profile City Development Limited (CDL) has been established as one of Singapore’s leading Real Estate Company since 1963. It has been the property arm of Hong Leong Group since 1972. CDL is an international real estate and hotel conglomerate which involves in property development and investment, hotel ownership and management, facilities management as well as the provision of hospitality solutions. The group presently owns and manages an extensive portfolio of real estates comprising residential, investment properties, as well as hotels. Its network incorporates over 400 subsidiaries and associated companies, spanning across 25 countries in Asia, Europe, Middle East, North America and Australia/New Zealand. CDL has developed more than 36,000 quality housings and possesses approximately 7.2 million sq ft of lettable area encompassing office, industrial, retail, residential and hotel space. It holds one of the largest land bank portfolio totalling 2.7 million sq ft among Singapore’s private developer, which potentially amounts to more than 7.6 million sq ft of gross floor area. This impressive portfolio makes CDL the second largest property developer in Southeast Asia. The international presence of CDL is further propelled through 61% stake on its London-listed subsidiary, Millennium & Copthorne Hotels plc (M&C). M&C is accredited as Singapore’s biggest international hotel group which ranked 40th among the world’s chart. It involves in owning and operating more than 120 hotels spread across 19 countries. The chart below displays the organisational structure of CDL. City Development Limited Asia New Zealand/ Australia Europe/ Middle East/ North America Republic Hotels & Resorts Limited Grand Plaza Hotel Corporation Millennium & Copthorne Hotels PLC CDL Hospitality Trust City E-Solutions Limited Millennium & Copthorne Hotels New Zealand Limited CDL Hotels Holdings New Zealand Limited Other Subsidaries Figure 1: Corporate Structure of CDL Moreover, CDL has been numerously awarded and acknowledged as a socially responsible corporation with great commitment towards environmental sustainability in carving Singapore’s built environment. This spirit is fueled by its vision, “conserve while construct”. CDL has envisioned to uphold industry leadership in innovation, product quality, service standards, profitability and corporate social responsibility. In the long run, it aims to attain business excellence through a balanced financial, environment and social performance. BUSINESS MODEL Page. 4 2. Business Model City Development Limited Property Development Office Rental Properties Retail Hotel Operations Industrial Others Fund Management Profit Participation Securities (PPS) Real Estate Investment Trust (REITS) Figure 2: Business Model of CDL 2.1 Property Development CDL’s property development business arm mainly generates revenue through the development of land into residential units that are sold. CDL conducts its property development activities mainly in Singapore but has expanded into China, Japan and the United Kingdom. Several key residential properties developed by CDL include Echelon and Commonwealth Towers in Singapore, Eling Residences in Chongqing and HongQiao Royal Lake in Shanghai. 2.2 Rental Properties CDL owns a diversified portfolio of investment properties that generate rental income for the company. The property rental business unit is comprised of offices, retail malls and industrial properties. Some of CDL’s prominent office properties include Republic Plaza in the downtown core and 7 & 9 Tampines Grande in Tampines Regional Hub. Its retail developments include Quayside Isle @ Sentosa Cove and City Square Mall, while the industrial properties include Cideco Industrial Complex and Tangore 23. In addition, CDL has a fund management sector that contributes to the total revenue accounted under rental properties. CDL has established a Page. 5 joint investment platform known as Profit Participation Securities (PPS) with various fund management companies, which are structured similarly to private equity investments. The fund management division also includes CDL Hospitality Trusts (CDLHT) which consists of CDL Hospitality Real Estate Investment Trust (H-REIT) and CDL Hospitality Business Trust (HBT). 2.3 Hotel Operations CDL’s hotel operation derives a majority of its revenue through its listed subsidiary, M&C. M&C is Singapore’s largest hotel group that incorporates over 100 hotels across the globe. It has hotel developments mainly in London, New York, Paris, Auckland, Dubai, Beijing and Singapore. Other luxury hotel assets owned by CDL include Millennium Hilton Bangkok, The St. Regis Singapore and W Singapore - Sentosa Cove. Hotel operations contribute substantially to CDL’s overall revenue. 2.4 Others Other sources of revenue that are produced by CDL derives from building maintenance contracts, project management, club operations and dividend income. CBM is a subsidiary of CDL that offers facility management services to a wide portfolio encompassing office, commercial, residential, industrial, government and hospitality industries. Furthermore, CDL provides business clubs that offer business elites a private setting to meet, network and entertain. Performance Summary Quality is the Best Business Plan Page. 6 3. Performance Summary 3.1 Overview of 5-years Strategy Trend Over the 5 years period, the proportion of activities, classified as property development, property investment and other activities has remained fairly consistent. “Property Investment” is referred to both hotel operations as well as rental properties. As illustrated in the graph below, majority of CDL’s activity lies on property investment, followed by property development and others. The ratio of property development to property investment over the course of 5 years ranged between approximately 45:55 and 40:60. It can be inferred that CDL is slightly more inclined towards bread-and-butter activities, generating steady flows of income than speculative activities. There has been no significant strategic change adopted by CDL in terms of its activities. Minor fluctuations in revenue by activities were caused merely by changing market environment in each activity. Recently, overall revenue for the company has increased by $551 million (FY2013) to $3,763 million (FY 2014). Revenue / Operating Income (FY 31st Dec 2014) Revenue from Activities SGD$3,764 million Profit from Activities SGD$1,039 million Rental Properties Analysis of Operating Revenue 4,000 120 69 $'000,000 3,000 2,000 332 1,577 92 99 281 304 1,563 1,536 107 385 Others $385 mil 10% 379 $120 mil 3% Revenue from Activities 1,678 1,529 $3,763 million 1,000 1,125 1,344 2010 2011 1,415 1,198 Hotel Operations - Others Hotel operations FY ended 31st Dec 2014 1,581 2012 2013 2014 Rental properties Property development $1678 mil 45% Figure 3: Revenue Structure of CDL Property Development $1581 mil 42% Activities Summary A Business and Lifestyle Solution Partner City Development Limited’s 3 MAIN ACTIVITIES Property Development Upscale Residential Units Rental Properties Retail and Office Hotel Operations Millennium & Copthorne Hotels plc Page. 7 3.1.1 Property Development Strategy CDL’s revenue from property development has been steadily increasing over the 5 years period, except for year 2013 when it experienced a period of adversity. From 2010 to 2014, the revenue has rose by $456 million to $1,581 million. However, revenue fell approximately 15.3% from $1,415 million in 2012 to $1,198 million in 2013. The lower revenue mainly resulted from the slow divestment of the warehouse situated at Tagore Avenue as well as the modest receipts from sales of residential developments such as Volari, NV Residences, Hundred Trees, Cube 8 and Tree House. Nonetheless, CDL made a bounce back by generating record-high revenue in 2014. From 2013 to 2014, revenue increased by approximately 32% to $1,581 million. This groundbreaking achievement was attributed to the complete recognition of Blossom Residences, an executive condominium (EC). Accounting standards in Singapore recognise the full revenue and profit of EC developments upon Temporary Occupation Permit. In addition, the positive sales of Jewel@Buangkok, D’Nest, H2O Residences as well as The Palette augmented the revenue results for year 2014. Revenue / Operating Income (FY 31st Dec 2014) Revenue from Development SGD$1,581 million Profit from Development SGD$512 Analysis of Development Revenue 1,800 1,581 1,600 1,344 1,400 $'000,000 1,200 1,415 1,198 1,125 1,000 800 600 400 200 2010 2011 2012 2013 2014 Figure 4: Development Revenue million Being a property developer with established local presence and proven track records for over 50 years, CDL is able to stay ahead of the market by enjoying comparative advantages over most other developers in Singapore. It holds direct access to local market information as well as a more refined knowledge of local buyers and preferences. However CDL seems to be lacking in other global market exposure with regards to its development activities, leading to its over-reliance on Singapore property development markets. To reduce its concentration risk, CDL can grow its development activities in London considering its prior experiences while striving to explore new growth areas such as Japan. The residential property price index for condominiums in Japan as of 2014 has escalated by 17.5% over the last 2 years. Page. 8 3.1.2 Property Investment - Hotel Operations Most of CDL’s hotel assets are owned and run through Millennium & Copthorne Hotel Plc (M&C). Leveraging on M&C’s operational efficiency, CDL has a competitive edge in generating revenue through hotel operations. Despite the mediocre performance in revenue of hotel operations from 2010 to 2013, CDL has successfully clinched record-high revenue in 2014. The revenue for hotel operations has escalated by $149 million to $1,678 million in the recent year. The soar in revenue is primarily due to strategic acquisitions in cities such as Tokyo and New York. With M&C’s excellent reputation in hotel management as well as CDL’s shrewd acumen in sourcing for opportunistic acquisitions, CDL would be able to successfully sustain its current majority revenue stream from hotel operation. Revenue / Operating Income (FY 31st Dec 2014) Revenue from Hotel Ops SGD$1,678 million Profit from Hotel Ops SGD$342 million Analysis of Hotel Operation Revenue 1,800 1,600 1,400 $'000,000 1,200 1,000 87 104 97 77 80 318 349 364 343 298 301 313 320 397 378 355 355 461 439 426 431 483 2010 2011 2012 2013 2014 800 600 379 320 409 400 200 0 United States Rest of Asia Europe New Zealand Singapore Figure 5: Hotel Operation’s Revenue CDL should take advantage and leverage on synergistic platforms such as ownership of an established hotel operation to substantiate its revenue structure. CDL’s ability to source an opportunistic environment and develop a reputable hotel management is able to spearhead the success of the company. Page. 9 3.1.3 Property Investment - Rental Properties Rental properties owned by CDL are either acquired through an outright purchase, redevelopment or development project. Profits from rental properties are mainly derived from recurring rental income, revaluation gains due to divestment of rental properties as well as from fund management activities of investment properties. For the past 5 years, CDL has generally maintained a relatively stable yield on rental properties. However, a slight deterioration in performance may be observed in 2011 and 2012, when rental yield dropped to 4.33% and 4.54% respectively. This could be due to the sale of office assets such as GB Building, The Office Chamber, Chinatown Point in 2011. Additionally, divestments of industrial strata units in Citimac Industrial Complex, Pantech Business Hub as well as Elite Industrial Building 1 and 2 may have further led to an overall compression in yields of CDL’s overall rental properties portfolio. Revenue / Operating Income (FY 31st Dec 2014) Yield from Rental Properties Profit from Development CDL’s revenue from rental properties has shown consistent growth from 2011 to 2014. Even though the profit before income tax and gross profit margin of rental operations seem to exhibit declining trends, this could be due to the exceptional results from CDL’s divestment activities in 2010 and 2011. With CDL evolving its divestment strategy from direct sale to securitization through fund management platforms, it is expected that CDL will continue to execute active capital recycling strategies on its rental properties. This would boost revenue, profit before income tax and profit margins of its rental operations in the future. 5.17% SGD$181 million Analysis on Rental Properties 6.00% 5.35% 5.00% 4.33% 4.54% 2011 2012 5.28% 5.17% 2013 2014 4.00% 3.00% 2.00% 1.00% 0.00% 2010 Figure 6: Yield of Rental Properties $500,000,000.00 140% 127% $400,000,000.00 120% 116% 100% $300,000,000.00 80% 75% 60% 59% $200,000,000.00 38%40% $100,000,000.00 20% $- 0% 2010 Revenue 2011 2012 2013 2014 Profit Before Income Tax Gross Profit Margin Figure 7: Gross Profit of Rental Properties Real Value in a Changing World SWOT Analysis Page. 10 4. SWOT Analysis 4.1 Strengths 4.1.1 Excellent Reputation CDL has established itself as a reputable real estate developer in Singapore through the numerous quality developments which it has built over the years. The company is renowned for being one of Singapore’s largest real estate companies with huge global property portfolio of over 18 million square feet of floor area in office, industrial, retail, residential and hotel space. Furthermore, CDL’s expertise has been recognised through the attainment of various prestigious awards including the Top Property Developer in Asia, Top Singapore Corporation and Top 10 Sustainable Companies in Asia. These accolades further place CDL on a leading position in the real estate industry, helping to capture larger customer base and subsequently improving the overall performance for the group. 4.1.2 Vast Corporate Network CDL has a massive network of more than 300 subsidiaries and associated companies. This allows the company to have a more diversified revenue stream and risk profile as the existence of a separate legal structure isolates the risks involved in a particular area. The benefits of having this separation is that any losses of a subsidiary would not directly impact on the parent company. Furthermore, being an extensive corporation, CDL is able to have a larger established customer base and stronger brand recognition. This assists CDL in generating higher sales and profits through stimulated recurring business from its wide customer base. 4.1.3 Strong Hotel Network CDL incorporates an internationally-acclaimed hotel management arm known as M&C, which operates on four main brands including, Grand Millennium, Millennium, Copthorne and Kingsgate. Its wellestablished network of 120 hotels in 79 business and leisure destinations such as Asia, Australia, Europe, the Middle East and North America enhances CDL’s brand equity and provides new growth opportunities for the company in the future. The hotel operation from this subsidiary has contributed to approximately 24% of the company’s EBITDA, with further growth expected in the future. 4.1.4 Cost Advantage CDL enjoys economies of scale from its dominant size as a developer. Being in the industry for over 5 decades, the company has expanded its business network, allowing for cost-effective productions through the procurement of the best possible alternative. In addition, CDL has a priority option to finance its operation at a more competitive rate due to its relationship with the parent company, Hong Leong Group. Hong Leong Group is one of Asia’s most successful conglomerates, whose core business includes the provision of financial services. CDL’s possibility to develop real estate properties at a lower rate bestowed upon it greater comparative advantage among many other firms in the real estate industry. 4.1.5 Sectoral and Business Diversifications CDL adopts deliberate strategies in venturing into a diversified range of business operations to remain competitive on Singapore and overseas markets. These business operations include property development, property investment and hotel operations. The diversified business operations allow CDL Page. 11 to uncover lucrative opportunities, while achieving risk protection against vulnerable markets involving uncertainties. CDL also introduces new services and products through diversification, allowing the company to expand its customer base and increase its market share in the real estate industry. This creates additional financial advantages and growth opportunities for the company. 4.2 Weaknesses 4.2.1 Uncompetitive Debt-Equity (D/E) Ratio CDL’s D/E ratio was discovered to perform relatively worse among its key competitors, which comprise of the top developers in Singapore with similar market reputation. These include Keppel Land (D/E = 0.52), Capitaland (D/E = 0.69), United Overseas Land (UOL) (D/E = 0.37) and United Industrial Corporation (UIC) (D/E = 0.26). The D/E ratio of CDL reached 0.62 in 2014, the second highest among its other competitors. This leads to CDL’s lack of competitiveness in being able to invest in opportunistic market, complicating future investment decisions. In addition, CDL would also be more susceptible to changes in the interest rate environment due to its high leverage proportion. 4.2.2 Concentration Risk on Property Development Despite CDL’s substantial sectoral diversification, the company remains very concentrated geographically with most of its property development projects based locally in Singapore. Being highly dependent on the local property development market, CDL might be faced with major revenue instabilities whenever there are changes in the Singapore real estate development market. 4.3 Opportunities 4.3.1 Positive Outlook for Tourism Market According to the World Travel & Tourism Council (WT&TC), the hotel industry is expected to grow and contribute to the world’s GDP by 4.2% per annum for the next 10 years. The current positive outlook for the tourism market is forecasted to boost the world economy from USD$6.99 trillion in 2013 to USD$10.97 trillion in 2024 due to the expected increase in spending by international tourists (visitor exports). CDL, whose major source of income is generated from its hospitality arm, will be benefiting from the positive growth potential of the hotel industry. 4.3.2 Rising Middle Class in China According to Business Insider Australia (2015), China’s middle class population is forecasted to escalate from only approximately a quarter to 93% of the urban population by 2030, adding up to a total of 854 million people. In addition, the research has shown that the surge in middle class population will boost the consumption share of GDP from 36% in 2014 to approximately 50% in 2030. The growth in household wealth would stimulate the consumption across different sectors, including real estate. As such, CDL China, the wholly owned subsidiary of CDL, would be able to benefit from this increasingly affluent market. Page. 12 4.4 Threats 4.4.1 Challenging Singapore Residential Market Due to the various property cooling measures imposed by Singapore government, CDL had to face a challenging operating environment in 2014. As reported in the company’s annual report, prices of private residences are following a negative trend for almost five quarters. While prices decreased by 1.1% in 2013, the value of private residences plunged by almost 4% in 2014. CDL’s property development operation will be greatly affected as this trend is expected to be ongoing. In addition, Urban Renewal Authority (URA) has reported that developers only sold a total of 7,440 private residential units in 2015, which is approximately 50% less than the 14,948 units sold in 2013. Vacancy rate of private residential units is also expected to continue rising since 2013, potentially reducing the demand in private residential market. The deteriorating residential market environment would negatively impact on CDL’s profit and growth, considering its core expertise in residential property development aside from hotel development and operations. 4.4.2 Uncertainty in Interest Rate Environment The global insecurity and economic slowdown due to several major events such as China economic reform, falling commodity prices, political risks in the United States and the referendum of Brexit have substantially increased the uncertainty in global interest rate environment. The Federal Reserve began hiking up the benchmark interest rate by 25 basis point in December 2015. It has then delayed its plan in further increasing the benchmark rate in early start of 2016 due to concerns about the global economic health. Nevertheless with the economy proven to be remarkably resilient in the first quarter of 2016, there remains a high possibility that the Federal Reserve would raise the benchmark rate in the near future. This poses uncertainties in the CDL’s operating environment, where higher cost of borrowing discourages investments and reduces business confidence. In addition, an increase in the benchmark interest rate would further lower the demand in Singapore private residential market due to rising mortgages. 4.4.3 Potential Erosion of Market Share in Hotel Industry The hotel industry is experiencing increasing competition from technology firms such as AirBnB, which has created disruptive technologies that compete directly with traditional hoteliers. AirBnB is able to provide cheap and flexible accommodation alternatives to modern travellers, hence potentially reducing the demand for traditional hotel lodging. Taking account of this emerging trend, CDL’s hospitality arm (M&C) may face increasing stiff competition if the growth of AirBnB is not restrained through government policies and regulations. Moreover, the hotel industry is also seeing major consolidations among the hospitality giants. Marriott has launched its bid to acquire Starwood Hotels while Accor has announced its intention to acquire FRHI Holdings. In this case, M&C which belongs to the smaller hotel group, would be jeopardised by being forced out of its business. Reaching Wide Sectoral & International Exposure Page. 13 5. Sectoral & International Exposure Sectoral 5.1 Sectoral Exposure 5.1.1 Property Development As shown from figure 8, there has been a deepening in the sectoral diversification of CDL into only residential and commercial & hotel developments over the past 5 years. This has been executed through the gradual elimination of industrial development activities. This is evident when the development of industrial space steadily decreased from an initial level of 13.0% in 2010 to complete inexistence in 2013. The rationales behind the group’s decision to immobilise its industrial development activities include its unfamiliarity towards the market, muted rents in light of oversupply of industrial space and changing Singapore’s business trend with regards to industrial space (The Business Times, 2015). 13% 11% Within the 5-years timeframe, CDL has held a relatively constant development proportion of residential and commercial & hotel sectors in its portfolio. It has consistently allocated the bulk of its development capital towards residential developments, while diversifying a small portion of it to commercial & hotel developments. 9% 21% 76% 5% 21% 18% 16% 80% 79% 2012 2013 82% 70% CDL’s approach to terminate its industrial development activities provides the opportunity to increase profitability as well as gear capital up for other potential growth markets. CDL’s obscure knowledge of industrial space development could also put the group in a position of not being able to enjoy a competitive edge. Established industrial developers such as Ascendas, Mapletree, Soilbuild and Jurong Town Council would erode CDL’s ability to produce commendable profits and increase its risk of operating leverage. Therefore, CDL is encouraged to continue focusing on its core strengths such as residential and hotel development, leveraging on its competitive advantages in these sectors. 2010 2011 Residential 2014 Commercial & Hotel Industrial Figure 8: Sectoral Development Activities Page.14 13 Page. 5.1.2 Property Investment Category “Others” shown in figure 9 includes car park, serviced apartment and hotels. It is illustrated in figure 9 that CDL has conducted some portfolio rebalancing in year 2011. The rebalancing involves the reduction in investment ownerships of office space, reallocating them to retail space and “others”. From year 2010 to 2011, the investment portfolio of office space significantly dropped by 11%, while retail space and “others” intensified by 6% and 4% respectively. The strategy to rebalance the group’s portfolio was intended to deal with its poor stocks market performance (Property Guru, 2011). In the attempt to boost market sentiments, CDL had decided to divest its stakes of aged office properties such as Chinatown Point and The Corporate Building for increased reportable profits in its balance sheet (Pang, 2011). On the other hand, CDL reconfigured its investments to the retail sector through acquisitions of Millennium Mall and Jungceylon Shopping Mall in Bangkok for its diversification strategy and expansion plans. In addition, growing investments in “Others” was largely attributed to the successful performance of M&C, which guided CDL’s decision to deploy more stakes into hotel spaces. It is executed through intensifying asset management on strategic hotel sites such as Millennium UN Plaza, Millennium Seoul Hilton, Millennium Mayfair and Grand Hyatt Taipei. A strategic acquisition of a hotel development site in Ginza, considering the low interest rate environment and good market transparency for hotel geographical expansion, further contributed to the increased “Others” investment. 17% 21% 23% 26% 26% 5% 14% 4% 20% 4% 21% 4% 4% 23% 23% 11% From 2011 onwards, the office sector had not displayed drastic change in investments despite the declining trend, resulting in an indecisive outcome as to whether CDL attempted to squeeze its office investments. Similarly, it can be observed that retail and “Others” investments continue to show increasing trend with insignificant changes. The inconclusive outcomes are further exacerbated with the indifference in sectoral investment portfolio for year 2013 and 2014. Nevertheless, a more conclusive outcome for CDL’s exit attempt can be derived from the declining trend of industrial investments. This considers the similar timing at which the reduction of industrial investment and complete elimination of industrial activities occurred in 2013. The proportion of industrial investments fell by almost 30% to a level of 8% in 2013. Over the course of 5 years, CDL had 54% 12% 11% 8% 8% 2013 2014 43% 41% 40% 39% 2010 2011 2012 Office Industrial Residential Others Retail Figure 9: Sectoral Investment Activities Page. 15 not implemented any notable modifications with regards to its modest proportion of residential investments. CDL’s attempt to expand in the retail market by increasing the stakes of its retail investment portfolio in 2011 may have compromised its present profitability. Poor physical retail sales due to the growing market of e-commerce has made retailers cautious over business expansion in Thailand. This may have led to the reduced rental performance of retail spaces. CDL is thus urged to reposition its stakes of retail property investments to other potentially viable sectors to ameliorate operation, before the threat of e-commerce completely dominating the retail market ensued. Repositioning or divesting office investments can also be seen as an effective gateway to focus on CDL’s core strengths, considering its specialty in hotel operations and residential developments. The decision to reduce its proportion of Singapore office investments in 2011 was quite commendable. Singapore was going through a rough patch in the office property market at the time. Thus, maintaining larger proportion of office investments during the period could be thought as a poor allocation of capital. Page. 16 5.2 International Exposure CDL has maintained a fairly consistent proportion of assets in United States and United Kingdom from year 2010 to 2013. Nevertheless, a simultaneous redistribution of interests in Singapore and “Other countries” markets can be observed from year 2013 to 2014. During this period, a 6% drop of geographical stakes in Singapore from 64% to 58% was discovered. Conversely, a 5% increase in interests of “Other countries” from 21% to 26% was spotted. This occurrence was attributable to the appointments of new senior managements who injected fresh perspectives for CDL’s business strategies. Mr Sherman Kwek and Mr Kwek Eik Sheng, were commissioned as the Chief Investment Officer and Chief Strategy Officer respectively in April 2014. Together, they have focused on expanding the groups’ investment portfolio as well as pursuing business developments overseas. Due to their ability to keep abreast of the changing business landscapes and global trends, a whole new level of dynamism were brought into the table. Their prowess to critically analyse and capture rare opportunities were evident in the group’s strategic acquisition for a site in Shirokane area, Japan. This was deemed to be a daring venture considering that it involved CDL’s first step towards Japan’s residential market. Moreover, Mr Sherman Kwek is concurrently the Chief Executive Officer of CDL China Limited. His prior knowledge of the China market has spearheaded the company to place more stakes there. This was demonstrated when CDL China acquired Shanghai Jingwen Zhaoxiang Real Estate Limited for RMB 799 million in December 2014. 19% 20% 21% 21% 26% 7% 9% 7% 8% 7% 8% 7% 7% 7% 9% 65% 65% 64% 64% 2010 2011 2012 2013 58% 2014 Singapore United States United Kingdom Other countries* Figure 10: Assets Proportion in Various Countries *Other countries include Japan, South Korea, China, Taiwan, Malaysia, Indonesia, Philippines and Thailand. Page. 17 5.2.1 Long Term Normal Portfolio Composition To evaluate the success behind CDL’s geographical diversification strategy, a thorough analysis of each associated countries’ key indicator was conducted. It should be noticed that the examination only involves Asian countries since the task specifies the need to focus on the regional prospects for real estate development. Therefore, the percentages of total assets currently held by CDL in its international portfolio are recalibrated into regional context. Presently, CDL’s hotel assets are among the most internationally exposed, compared to its other asset classes such as office, residential and retail. Therefore, the assessment for the success of its geographical diversification strategy is executed within the boundary of its hotel assets. The key indicators investigated for the relevant Asian countries include transparency index, real GDP per capita and hotel vacancy rate. Malaysia Thailand Indonesia South Korea Philippines Taiwan Source: Economic Research Service 2014 Singapore China - Tier1 Source: JLL Global Real Estate Transparency Index 2014 Japan South Korea Figure 12: Geographical Transparency Index Figure 11: Real GDP per capita (US) Hotel Vacancy Rate Indonesia CDL's Regional Assets CDL's Regional Assets 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Philippines 0.0 Thailand 0.5 Philippines Indonesia Thailand China - Tier1 Malaysia Taiwan South Korea Japan $- Singapore $10,000.00 1.0 China - Tier1 $20,000.00 1.5 Taiwan $30,000.00 2.0 Malaysia $40,000.00 2.5 Japan $50,000.00 3.0 Singapore Transparency Index $60,000.00 CDL's Regional Assets Figure 13: Average Hotel Vacancy Rate from 2010 to 2014 Source: JLL, M&G Investment, Colliers, Savills & CBRE Page. 18 Ho (2014) have initiated a 3-factor analytic hierarchy process to compute Strategic Asset Allocation (SAA). Likewise, we have estimated our ex-ante strategic weights of hotel operations portfolio, which involves factor evaluation and weights, to provide an objective view on CDL’s progress of its optimal portfolio diversification in a long term investment horizon. The pie charts below illustrate CDL’s current hotel portfolio composition and AHP-Based Strategic Asset Allocation (SAA) for year 2024. Taiwan, 7.5% Tokyo, 5.2% Beijing, 4.2% Kuala Lumpur, 11.5% Manila (Makati), 4.2% Jakarta, 3.8% Figure 14: CDL Current Hotel Portfolio Composition Taiwan, 6.86% Beijing, 6.32% HongKong, 3.99% HongKong, 2.7% Singapore, 11.6% Seoul, 26.7% Bangkok, 22.7% Tokyo, 13.67% Singapore, 7.11% Seoul, 24.21% Kuala Lumpur, 7.56% Jakarta, 4.50% Bangkok, 18.34% Manila (Makati), 7.44% Figure 15: CDL AHP-Based Strategic Asset Allocation According to the analysis, CDL’s strategy to lower hotel stakes in Singapore while increasing its interests in Japan from 2013 to 2014 could be regarded as a step to gradually synchronise its current real estate portfolio with its SAA portfolio composition. As shown in figure 14 and 15, the weight for CDL’s hotel investments in Tokyo and Singapore for year 2014 were 8.5% lower and 4.5% higher than its SAA portfolio composition respectively. Therefore, CDL could be deemed to have reallocated its assets to the suitable region as proposed by its SSA portfolio composition, mitigating the disequilibria. Moving forward, CDL should aim to heighten its interests in Beijing, Manila, Kuala Lumpur, Jakarta, Hong Kong while shrinking its stakes in Singapore, Seoul, Bangkok and Taiwan. Page. 19 5.3 Recommended Asian Growth Investment Strategy Although the AHP-Based SAA is the ideal form of hotel operation compositions in the geographical areas in the next 10 years, it is impossible for CDL to fully invest in the desired positions within a short time frame. In addition, it is not possible for CDL to divest its current stakes to meet the composition without incurring significant cost. To mitigate this problem, the Markowitz Quadratic Programming Tactical Asset Allocation (TAA) portfolio optimization is adopted for the next 12 months. This model shall incorporate ex post and ex ante direct real estate returns from the regional Asian countries which CDL has vested interest in. The TAA proposed shall be constrained by certain bandwidths around the AHP-Based SAA. The bandwidths are set to be larger around small SAA weights so as to meet the market fundamentals which suggest opportunistic cyclical sectors. Bandwidths set around the SAA is annex in Appendix II. In light of CDL’s current cautious and disciplined approach towards diversifying their stakes in hotel operations (CDL Annual Report 2014) as well as the post-bubble state of the Singapore property market, we have recommended a defensive strategic investment alternative for the proposed TAA. The figures below show how CDL should reposition its hotel portfolio for the next 12 months. Taiwan, 7.5% Tokyo, 5.2% Tokyo, 16.2% Beijing, 4.2% Taiwan, 7.5% Beijing, 4.2% HongKong, 2.7% Seoul, 26.7% HongKong, 2.7% Singapore, 11.6% Seoul, 24.0% Singapore, 10.0% Kuala Lumpur, 11.5% Bangkok, 22.7% Manila (Makati), 4.2% Figure 16: CDL’s Current Portfolio Jakarta, 3.8% Kuala Lumpur, 11.5% Bangkok, 16.0% Manila (Makati), 4.2% Jakarta, 3.8% Figure 17: Proposed Tactical Asset Allocation for 2014 (Defensive Strategy) The table of Multi-Dimensional Real Estate Investment Strategic Alternatives (Styles) & Portfolio Allocation is found in Appendix I The proposed TAA is found on the Markowitz efficiency frontier via the Sharpe Maximising portfolio as seen in figure 18. Figure 16 and 17 shows an immediate solution for CDL to optimise its portfolio. Based on its portfolio as of 2014, CDL must invest a substantial amount of hotels in Tokyo while reducing their Bangkok stakes in order to execute this defensive strategy. The defensive real estate portfolio in the Asia region has an expected return 15.2% with a low standard deviation of 5.2% over an investment period of 2 years. Expected Portfolio Return (%) in hedged US$ Page. 20 17.0% 16.0% Proposed TAA 15.0% 14.0% CDL's Current Portfolio 13.0% 12.0% 11.0% 10.0% 4.0% 6.0% 8.0% 10.0% Portfolio Standard Deviation (%) Figure 18: Markowitz Efficiency Frontier 5.3.1 CDL’s Hotel Operation Portfolio Performance Attribution Similar to Ho (2007) methodology, a performance attribution evaluation tool is used to analyse the success of the past and existing strategy with regards to the management of funds in CDL. This analysis shall provide a better comprehension of the consequential effects of the investment decisions made by managers with regards to asset allocation skills, asset selection skills and the interaction effect of the two former skills in their portfolio relative to the benchmarked proposed TAA mentioned above. A successful fund management strategy in CDL should aim to select geographical segments that perform better than the corresponding segment. In addition, the fund management strategy should overweigh segments that has positive performance relative to the corresponding benchmarks. -1.34% 0.42% 1.03% 0.14% 0.52% -0.71% 0.01% 0.11% 0.39% -0.61% -0.04% Tokyo Seoul Bangkok Manila (Makati) Jakarta Kuala Lumpur Singapore Hong Kong Beijing Taiwan -2.23% Total Value Added to Benchmark Portfolio Figure 19: Asset Allocation of Hotel Operation 0.03% -0.70% 0.05% -0.01% -0.20% 0.06% -0.27% -0.05% -0.29% -0.85% Tokyo Seoul Bangkok Manila (Makati) Jakarta Kuala Lumpur Singapore Hong Kong Beijing Taiwan Total Value Added to Benchmark Portfolio Figure 20: Asset Selection of Hotel Operation Page. 21 -0.02% -0.08% 0.03% -0.01% -0.18% -0.03% -0.04% -0.03% -0.13% 0.40% -0.09% Tokyo -1.33% Seoul -0.36% Bangkok Manila (Makati) Jakarta Kuala Lumpur -0.68% Singapore -0.30% Hong Kong Beijing -0.03% Taiwan -1.06% Total -2.36% Value Added to Benchmark Portfolio Figure 21: Asset Allocation and Selection Interaction 1.11% 0.12% 0.14% 0.03% Tokyo Seoul Bangkok Manila (Makati) Jakarta Kuala Lumpur Singapore Hong Kong Beijing Taiwan Total Value Added to Benchmark Portfolio Figure 22: Total Differential between CDL and Benchmark Weighted Return A summary of the performance attribution for 2014 is given in the figures above. The comprehensive table for performance attribution is annex in Appendix III. Overall, the total differential of the 3 components of the portfolio in CDL have underperformed the benchmark by 236 basis points as seen in figure 22. Three components will be further evaluated separately to distinguish clearly the repercussions resulting from the investment strategy employed by the senior investment executives and senior management. These components include asset allocation, asset selection and interaction. 5.3.1.1 Asset Allocation Based on figure 19, the value added for under weighting and over weighting the hotel operations in various countries is -0.04%. The allocation skill of CDL is slightly inferior to the benchmark of the industry allocation portfolio weight given by CDL’s fund manager. Looking deeper into the value added for each country, Tokyo, Taiwan and Kuala Lumpur have contributed largely to the fund manager’s inferior allocation skill. CDL’s has fail to allocate more funds to add to the weightage of their hotel operations in these countries. 5.3.1.2 Asset Selection Based on figure 20, the value added for selecting hotel operations in various geographical sector of the portfolio is -2.23%. In this case, selection skill of CDL’s fund manager is inferior to benchmark of the industry selection. With the exception of Tokyo, Bangkok and Kuala Lumpur, CDL’s has displayed poor expertise in sourcing for opportunistic investment in hotel operations in the Asia region. Page. 22 5.3.1.3 Interactions Based on figure 21, the total value added for CDL as a result of the combined asset allocation and asset selection strategy is -0.09%. In this case, CDL has suffered from negative interaction effects as a result of poor selection and allocation decisions. 5.3.1.4 Conclusion When it comes to the management of funds and capital, CDL has shown poor dexterity in selecting and weighing their hotel operations geographically. At face value, the strategies utilized by CDL may suggest that they are actively sourcing for good opportunities and weighing their assets in the right amounts. However, the negative value added to all three components relative to the benchmark TAA may suggest that CDL has not critically evaluate their geographical selection and weights for their hotel operations. Moving forward, CDL should aim to exploit its expertise selecting opportunistic hotel operations such as Tokyo, Bangkok and Kuala Lumpur as well as increasing the weightage of their hotel assets in cities like Tokyo, Kuala Lumpur and Taiwan. Fresh Perspective Financial Position 2014 Page. 23 6. Financial Position 6.1 Profitability 6.1.1 Return on Equity (ROE) 12.52% 11.70% Returon on Equity Return on Equity (ROE) measures the efficiency of a company in generating profits through its equity. As seen in figure 23, CDL’s ROE has been declining since 2010 and only managed to buck the trend in 2014. This may imply that its operations are becoming less efficient in producing returns for shareholders. This might be because the rise in shareholders’ equity has outpaced the increase in net profit attributable to owners of the company. In attempts to strive for a higher ROE, CDL should consider undertaking more residential real estate development projects which generate higher profit margins as well as faster cash flows. CDL could also seek to realise the revaluation gains of its investment properties portfolio through strategic divestments. Lastly, CDL might want to diversify into new businesses such as real estate private equity fund management, which is less capital intensive but produces strong recurring income. 10.31% 9.29% 8.88% 2010 2011 2012 Return on Equity 2013 9.15% 2014 Average Return on Equity Figure 23: ROE of CDL CDL generated a high ROE of 9.15%, second to Keppel Land’s ROE of 9.83% in 2014. Keppel Land and CDL are able to achieve superior levels of ROE compared to their competitors due to active capital recycling strategy. Keppel Land managed to unlock significant value through their divestments of Equity Plaza and MBFC Tower 3. On the other hand, CDL successfully monetise The Quayside Collection at Sentosa Cove through its profit participation securities (PPS) fund management platform. Keppel Land 9.83% CDL 9.15% UOL 8.98% UIC 6.99% CapitaLand 6.93% Return on Equity Figure 24: ROE between Major Competitors Page. 24 6.2 Growth Performance 6.2.1 Sustainable Growth Rate (SGR) and Actual Growth Rate (AGR) A comparison between SGR and AGR is made to discern the sustainability of CDL’s growth in the long run. SGR is the maximum growth rate that a firm can achieve without financial leverage. Growth Rate According to figure 25, CDL’s SGR has been generally decreasing from 11.15% to 6.84% for the past 5 years. A different pattern is observed in CDL’s AGR, where it fluctuates during the 5-years timeframe. AGR dropped from 9.01% in 2011 to 5.86% in 2013, before its significant rise to 8.78% in 2014. The 5-years averages of CDL’s SGR and AGR are 8.28% as well as 7.71% respectively. CDL’s AGR has been consistently below its SGR until 2013. AGR remained within close range with SGR 11.15% from the period of 2011 to 2013, indicating a nearly sustainable growth although still lacking 9.11% 8.78% in the efficient use of its resources reflected in the slightly lower AGR. However, AGR 8.28% 7.49% superseded and diverted away from its SGR in 2014. This signifies a less sustainable growth 7.71% 6.83% for CDL in 2014. 9.01% 7.91% 6.98% The significant climb in AGR in 2014 might 6.84% arise due to the increase in the total amount of 5.86% debt borrowed by CDL. The increase in debt most likely helped CDL in achieving higher AGR than SGR. The decline in CDL’s SGR from 2010 to 2013 could mainly be attributed to 2010 2011 2012 2013 2014 dividends paid out to shareholders remaining fairly stable regardless of decreasing return on SGR AGR equity (ROE). In efforts to narrow the Average SGR Average AGR imbalance between AGR and SGR, it would be more strategic for CDL to increase its SGR Figure 26: SGR & AGR of CDL instead of decreasing its AGR. This would allow CDL to simultaneously reinforce its growth in UIC 14.25% terms of magnitude and sustainability. It is therefore encouraged for CDL to consider UOL reducing their dividend payouts, ensuring a 13.06% higher earnings retention ratio (ERR) in this challenging market condition. This would Keppel Land 9.53% improve the performance of SGR despite the weaker ROE. Although curtailing dividend CDL 8.78% payouts might affect investors’ confidence for CDL negatively, this implication is minimised CapitaLand 4.03% with CDL’s comparatively strong industry Actual Growth Rate reputation on the stock market. Figure 25: Average AGR Benchmarks Page. 25 In addition, CDL’s most recent AGR for year 2014 is benchmarked against those of notable developers in the real estate development industry. CDL’s growth rate of 8.78% is lower compared to most developers in Singapore during the year 2014. This may imply that CDL have expanded to a near optimal size, resulting in it being unable to enjoy the high actual growth rates that the relatively smaller developers reap. This observation could be a side effect of large blue chip stocks, as CapitaLand, Singapore’s biggest real estate developer had the lowest AGR of 4.03% in 2014. 6.2.2 Dividend Yield In 2014, CDL’s dividend yield was ranked second lowest at 1.96%. This suggest the possibility of investors disregarding CDL as an investment asset due to its inferior dividend returns. Nonetheless, CDL poor dividend yield may serve as a signal that it is attempting to improve cash reserves for future growth prospect. Therefore, CDL is encouraged to make an effort for announcing its objective behind distributing relatively low dividends, boosting investors’ confidence. 1.96% 1.74% 1.50% Dividend Yield Based on figure 27, the dividend yield for CDL has increased from 0.73% in 2010 to 1.96% in 2014. CDL has issued increasing dividend yields in majority of the period except for 2012, when dividend yield deteriorated to 1.16% from 1.74%. The decline in dividend yield was due to the simultaneous increase in stock price of CDL and decrease in dividends issued to shareholders. Most recently, CDL’s dividend yield of 1.96% remained higher than its 5-year average. Although this may entices investors to consider CDL as an investment asset, it might need to be cautious of distributing high dividend yields. This is because CDL could suffer from lower retained earnings, which may jeopardise its future growth prospect. 1.42% 1.16% 0.73% 2010 2011 2012 Dividend Yield 2013 2014 Average Dividend Yield Figure 27: Dividend Yield of CDL 4.09% Keppel Land 2.81% CapitaLand 2.17% UOL 1.96% CDL UIC 0.88% Dividend Yield Figure 28: Dividend Yield Benchmarks Page. 26 6.3 Valuation 6.3.1 Price-Earning (P/E) Ratio and Earning Yield The P/E ratio of CDL is analysed and compared against the industry to better grasp the market’s optimism on the performance of CDL. P/E ratio is a metric used in firm valuation. 9.7% 14.81 13.60 12.97 12.34 10.30 2010 2011 P/E Ratio 2012 2013 2014 Earning Yield P/E Ratio 17.58 7.7% 8.1% 7.6% 6.8% 2010 5.7% 2011 2012 2013 2014 Earning Yield Average Earning Yield Average P/E Ratio Figure 29: Price to Earning and Earning Yield of CDL Based on figure 29, the P/E ratio of CDL has decreased from 14.81 in 2010 to 12.34 in 2014. As expected from an inverse relationship, CDL’s earning yield shows an increase from 6.8% in 2010 to 8.1% in 2014. CDL’s P/E ratios experienced declines over a majority of the period observed, increasing only in 2012. The opposite is observed for earning yield. The trends could be attributed to the decreasing share price of CDL, coupled with its increased earnings per share. With its most recent P/E ratio of 12.34 performing below the 5-years average of 13.60, CDL should consider implementing corporate strategies that would boost investors’ confidence and raise its P/E ratio. Nevertheless, CDL might still pose as an attractive investment asset for fund managers and investors with its most recent earning yield exceeding its 5-years average. CDL 12.34 Keppel Land 14.2% CapitaLand 12.12 UOL 12.6% UIC 11.72 UIC UOL Keppel Land 7.91 7.03 P/E Ratio 8.5% CapitaLand 8.3% CDL 8.1% Earnings Yield Figure 30: Price to Earning and Earning Yield Benchmarks Page. 27 In the most recent year, CDL has the highest P/E ratio of 12.34 and the lowest earning yield of 8.1% among the real estate development firms listed above. This suggests that the market has high levels of confidence in CDL’s growth prospect compared to the other real estate firms. One reason could be due to several diversification strategies that CDL employed in 2014. CDL has been geographically diversifying into China, UK and Japan while pursuing business diversification through new fund management platforms to ensure sustainable growth for the future. 6.3.2 Price-Book (P/B) Ratio P/B ratio is investigated to determine whether a company is being undervalued or overvalued relative to its book asset value. This ratio is fruitful when it is used to study capitalintensive businesses with plenty of assets on the books, including real estate firms. As shown in figure 31, CDL’s Price-Book ratio has reduced from a premium of 1.43 in 2010 to a discount of 0.87 in 2014. CDL’s shares traded at a premium in 2010 and 2012, but traded at a discount in 2011, 2013 and 2014. Even though the 5-years average Price-Book ratio of 1.07 indicates a premium, the persistent undervaluation of CDL’s shares by the market in 2013 and 2014 suggests that investors are quite unsettled about its future growth prospects. From a corporate perspective, CDL must aim to raise its Price-Book ratio in order to create value for its shareholders. CDL should consider pursuing more activities that could potentially narrow the discount. This includes adopting a more aggressive asset-light strategy, unlocking value through the securitisation of its real estate assets. Based on figure 20, CDL attained the highest Price-Book Ratio of 0.87 when compared to its other competitors. This shows that CDL’s shares was already trading at a comparatively narrow discount, implying that the market prefers CDL compared to other real estate developers per book asset value. Nevertheless, it can also be observed that all the real estate companies listed above are being valued at a discount in 2014. This could be due to the weak market sentiments on the current real estate industry. Moreover, the market often has a tendency to undervalue and misprice real estate assets held on the balance sheets of real estate firms. As a result, an undervaluation in terms of P/B ratio might be something intrinsic to the real estate industry. 1.43 1.26 0.93 2010 2011 2012 0.85 1.07 0.87 2013 2014 Price-Book Ratio Average Price-Book Ratio Figure 31: Price-Book Ratio of CDL 0.87 CDL 0.72 UIC 0.67 UOL 0.65 Keppel Land CapitaLand 0.38 Price-Book Ratio Figure 32: Price-Book Ratio Benchmarks Enduring through Generations Land-Banking Portfolio Financial Position 2014 Page.28 28 Page. 7. Land-banking Portfolio Land-banking is a mechanism referring to acts of legal advance acquisition of land, prior to developing and storing it for future supply (Evans, 2004). Due to the rapid shrinking of land supply for developments in urban areas, property developers have resorted to land banking in order to secure land for future developments. Nevertheless due to the risks involved in land-banking, it is imperative for firms to strategically manage their land-banking portfolio to balance risk and return performance. The total proposed GFA for CDL’s land bank in 2014 is approximately 7.69 million square feet, with China constituting 51% of its total. The large amount of land acquisitions in China indicates CDL’s opportunistic behaviour in tapping into the fast-growing property market since year 2000. Taking into account the cooling property market and tightening of anti-speculative measures which were gradually imposed by the Chinese government in recent years, CDL has been faced with an inevitable substantial amount of risk. CDL has also acknowledged the instability in the Chinese property market as a result of the regulative limitation imposed by the government with regards to land-banking. One constraint to land-banking imposed in China includes the possibility for retrieval of approved land if no promised development is initiated within 2 years. Therefore, a more conservative approach on China land banking is likely to be taken by CDL, keeping its scale under control. By avoiding speculative land banking activities in China, CDL could attain more sustainable growth through strategically undertaking property development at a reasonable pace. 51% 38% 11% Singapore Overseas (UK, Japan, Malaysia) Figure 33: Land Bank Geographical Distribution As compared to the huge land-banking scale in China, only 38% of the CDL’s total land-banking is located in Singapore. This suggests the likelihood of depleting land banks in the city as a result of highly competitive land market, which posed an upward pressure on Government Land Sales (GLS) tender prices. Amidst the challenging operating environment, CDL is believed to maintain its discipline in acquiring land and remain dominant as one of the largest landowners in Singapore. CDL’s overseas land bank is mainly situated in UK and Japan, with minor proportion in Malaysia. Although comprising only 11% of the total land-banking portfolio, these geographies (in particular UK and Japan) provide CDL with strong growth opportunities due to supportive investment climates. UK is proven to yield strong capital growth for CDL across all real estate sectors during the whole year of 2014. Similarly, favorable monetary and foreign investment policies as well as climbing rental growth in Japan continued to drive its real estate market in 2015. In response to the encouraging market conditions, CDL has acquired a freehold land site in Tokyo Minato Ward for future development plans into luxury housings in 2014. With the positive outlooks in UK and Japan real estate market, CDL should consider realigning its land-banking portfolio to include more sites located in these countries. Navigating the Future Deliberations & Proposal Financial Position 2014 Commemorating Kwek Leng Joo Page. 29 8. Deliberations and Recommendations This section will highlight the implications arising from our team’s deliberation as well as list down the possible corporate finance, sectoral and geographical strategies. These strategies aim to mitigate the problems that currently faced by CDL and optimise its current portfolio. 8.1 Proposed Corporate Finance Strategies The radar chart in figure 34 summarises the ranking for CDL’s financial indicators relative to top local developers such as Capitaland, Keppel Land, United Overseas Land (UOL) and United Industrial Corporation (UIC). As of 2014, it can be observed that CDL suffered from poor corporate growth rate performance, high financial leverage risk as well as poor dividend and earnings yield relative to its competitors. Dividend Yield 5 4 P/B Ratio 3 P/E Ratio 2 1 0 Earnings D/E Ratio According to our evaluation, CDL should Yield not aim to increase its dividend yield despite its low returns. Instead, CDL can consider garnering their shareholders’ support and confidence by announcing its ROE AGR key and featured new business ventures as well as developments. Additionally, CDL Figure 34: Ranking Matrix of CDL’s Financial Position is required to retain more earnings for the company to progress its business competitively in the future. CDL should also improve its AGR and earnings yield while paring down its debt. These corporate objectives can be further achieved through the implementation of sectoral and geographical strategies stated below. 8.2 Proposed Sectoral Strategies 8.2.1 Property Development CDL should continue to leverage on its expertise and embark on more residential development projects to exercise fast asset turnover on its balance sheet. This is crucial in increasing ROE, shareholders’ equity and improving the capital management of the company. In addition, joint venture alternatives should be considered to reduce capital outlay required as well as to minimise the risk and debt involved in a project. CDL should also allocate more capital resources into the property development of hotel assets. With access to hotel development and management expertise through its Millennium & Copthorne platform, CDL is recommended to draw on its capabilities and synergies in the hotel business to develop more hotel assets. This would boost CDL’s earnings yield and shareholders’ equities as it would be able to benefit from the whole value chain of hotel real estate development. Page. 30 8.2.2 Property Investment CDL should also allocate more capital resources into the property development of hotel assets. With access to hotel development and management expertise through its Millennium & Copthorne platform, CDL is recommended to draw on its capabilities and synergies in the hotel business to develop more hotel assets. This would boost CDL’s earnings yield and shareholders’ equities as it would be able to benefit from the whole value chain of hotel real estate development. As it continues to observe a declining trend in its portfolio of office property investments, CDL should consider more advanced divestment strategies such as spinning off an office REIT through IPO. The listing of an office REIT would help CDL to improve its gearing ratio, narrow the net asset valuation discount and prolong the company’s sustainability. Furthermore, in addition to realising the revaluation gains of its office properties, a sponsor REIT model would allow CDL to retain some exposure to office properties and enjoy stable recurring income. Possible stabilised office assets that could be included in the initial REIT portfolio are Republic Plaza and Fuji Xerox Towers, with potential acquisition assets such as South Beach office in the pipeline. CDL has augmented its fund management capabilities in recent years and should consider diversifying into less capital-intensive business such as real estate private equity fund management. The real estate fund management business would enable CDL to reap recurring fee income by actively handling a portfolio of assets under management. As a result, it will intensify the growth of the company without compromising on its sustainability and gearing ratio. More importantly, a real estate private equity business unit would allow CDL to actively reposition its property investment portfolio through strategic acquisition or divestments in its various funds. 8.3 Proposed Geographical Strategies Based on the SAA portfolio composition, it would be in the best interest for CDL to rebalance portfolio through the reallocation of hotel stakes from Singapore, Seoul, Bangkok and Taiwan to Beijing, Manila, Kuala Lumpur, Jakarta, Hong Kong and Tokyo in the long run. However, given CDL’s limited capital resources and its corporate objective to maximise returns while reducing risk, an annual interim assessment must be conducted to identify the best possible geographical diversification for this coming year. A 12 month strategy of rebalancing CDL portfolio will be proposed with the aim to reach closer towards the AHP-Based SAA composition. Present state of CDL’s risk-return performance of its portfolio of hotels is not in the efficiency frontier estimated from using Markowitz Quadratic Programming. In tandem to CDL’s cautious attitude towards geographical expansion, we propose a defensive strategy for CDL to rebalance its portfolio. This involves increase its stakes in Tokyo while reducing hotel operations in Bangkok. In addition, based on the performance attribution analysis done above, CDL’s ability to manage funds and capital is seen to be favorable when sourcing for opportunistic hotel operations in Tokyo. However, their ability to allocate an accurate amount of funds remains uncertain as they have allocated too little weightage in Tokyo for their hotel investments. Therefore, we propose that CDL should venture and increase its hotel investments in Tokyo, Japan. Bibliography Ho, D. K. (2007). International real estate: Asia's potential from a research perspective. Singapore: NUS Press. Ho, D. K. & Shun, CKL (2014) Direct & Indirect Investment Analysis – An Asian Real Estate Perspective. McGraw-Hill Education (Asia), Chaps 4 & 5. Meixian, L. (2016). Competition for land still strong despite tepid market. The Business Times. Available at: http://www.businesstimes.com.sg/real-estate/competition-for-land-still-strongdespite-tepid-market. Propertyguru. (2016). Fierce competition among developers for sites. Available at: http://www.propertyguru.com.sg/property-management-news/2011/3/29994/fiercecompetition-among-developers-for-sites. Reuters. (2016). Singapore developers build overseas as foreign firms splash out on land. Available at: http://www.reuters.com/article/singapore-property-idUSL4N0JL1FV20131222 USA Today. (2016). A boom in foreign tourism boosts Japan's economy. Available at: http://www.usatoday.com/story/news/world/2015/07/12/japan-foreign-tourismeconomy/29662135/ APPENDIX Appendix I: Multi-Dimensional Real Estate Investment Strategic Alternatives (Styles) & Portfolio Allocation Defensive Low Growth Balanced Growth High Growth 7.5% 4.2% 2.7% 10.0% 11.5% 3.8% 4.2% 16.0% 24.0% 16.2% 7.5% 6.3% 5.0% 10.0% 4.0% 3.8% 4.2% 20.0% 24.0% 15.2% 7.5% 6.3% 5.0% 8.0% 5.0% 6.0% 12.0% 20.0% 20.0% 10.0% 6.9% 4.2% 6.0% 6.0% 6.0% 6.0% 15.0% 20.0% 20.0% 10.0% 6.9% 4.2% 6.0% 6.0% 3.0% 8.0% 16.0% 22.0% 18.0% 10.0% Hotel Sector Taiwan Beijing Hong Kong Singapore Kuala Lumpur Jakarta Manila (Makati) Bangkok Seoul Tokyo Total Allocation Minimum Investment Term Expected TR Over Term Expected SD Over Term 100% 100% 100% 100% 100% 2 years 15.2% 6.2% 3 years 16.3% 5.3% 5 years 18.2% 4.8% 7 years 19.1% 4.2% 10 years 20.4% 3.5% Expected %Loss (-) or worse every 6 years (1 SD) 9.0% 11.0% 13.4% 14.9% 16.9% Expected %Loss (-) or worse every 44 years (2 SD) 2.8% 5.7% 8.6% 10.7% 13.4% High High Moderate Not Appropriate Moderate Moderate High Low Low Moderate Not Approp Very Low Low Not Approp Not Approp Not Approp Low Moderate High Very High Investor Objectives & Suitability : Secure Short-Term Income Capital Stability Steady Growth Wealth Accumulation Appendix II: TAA and AHP-Based SAA Comparison AHP-Based Strategic Asset Allocation (SAA) as the Benchmark Portfolio Proposed Tactical Asset Allocation (TAA) for 2014 based on Markowitz Optimiser, Tactical bands & Sharpe Maximising Ratio Market Taiwan Beijing HongKong Singapore Kuala Lumpur Jakarta Manila (Makati) Bangkok Seoul Tokyo 6.9% 6.3% 4.0% 7.1% 7.6% 4.5% 7.4% 18.3% 24.2% 13.7% 7.5% 4.2% 2.7% 11.6% 11.5% 3.8% 4.2% 14.0% 26.7% 13.9% Total 100.0% 100.0% Position at Proposed TAA for 2014 with respect to the SAA TAA Bands formulated around the SAA & Market Fundamentals Lower 4% 4% 2% 3% 3% 2% 5% 12% 20% 10% Neutral Slight Underweight Slight Underweight Slight overweight Slight overweight Neutral Slight Underweight Slight Underweight Slight overweight Neutral Upper 8% 8% 6% 10% 10% 6% 10% 24% 30% 18% Appendix III: Performance Attribution Analytical Model Table Benchmark Benchmark Portfolio Portfolio Return Weight Return Weight Allocation Selection Taiwan 17.30% 7.50% 6.00% 4.00% -0.61% -0.85% 0.40% -1.06% Beijing 21.50% 4.20% 14.50% 6.00% 0.39% -0.29% -0.13% -0.03% Asset Asset Interaction Total Differential Hotel Sector Hong Kong 8.30% 2.70% 6.30% 4.00% 0.11% -0.05% -0.03% 0.03% Singapore 0.70% 10.00% -2.00% 11.60% 0.01% -0.27% -0.04% -0.30% Kuala Lumpur 10.90% 11.50% 11.40% 5.00% -0.71% 0.06% -0.03% -0.68% Jakarta 16.00% 3.80% 10.70% 7.00% 0.52% -0.20% -0.18% 0.14% 7.50% 4.20% 7.20% 6.00% 0.14% -0.01% -0.01% 0.12% Bangkok 12.90% 16.00% 13.20% 24.00% 1.03% 0.05% 0.03% 1.11% Seoul 15.20% 24.00% 12.30% 26.70% 0.42% -0.70% -0.08% -0.36% Tokyo 12.20% 16.20% 12.40% 5.20% -1.34% 0.03% -0.02% -1.33% Total 12.50% 100.00% 10.00% 100.00% -0.04% -2.23% -0.09% -2.36% Manila (Makati) City Development Limited
TABLE OF CONTENT EXECUTIVE SUMMARY 1 CHAPTER 1: INTRODUCTION 3 CHAPTER2: RATIONALE FOR HOSPITALITY VENTURE TO JAPAN 3 CHAPTER 3: JAPAN MARKET ANALYSIS 3.1 Real Gross Domestic Product (GDP) per Capita and Growth Rates 3.2 Demographics 3.3 Interest Rates 3.4 Currency Trend 3.5 Unemployment Rates 3.6 Construction Cost 4 4 4 5 5 6 6 CHAPTER 4: HOTEL MARKET ANALYSIS 4.1 Supply Analysis 4.1.1 Supply Pipelines of Tokyo Hotels 4.1.2 Government Policy on Home Sharing Properties 4.2 Demand Analysis 4.2.1 International Visitor Arrivals 4.2.2 International Sporting Events 4.2.3 Occupancy, Average Daily Rate (ADR) and Revenue per Available Room (RevPAR) 4.3 Capitalisation Rate and Investment Transactions 4.4 Market Outlook 7 7 7 7 7 7 8 CHAPTER 5: SELECTION OF SITE LOCALITY 5.1 Rationale for Chuo-ku Ward 5.2 Rationale for Yaesu District 10 10 10 CHAPTER 6: SITE & LOCATIONAL ANALYSIS 6.1 Site Description 6.2 Existing Development On-site (Yaesu Mitsui Building) 6.2.1 Obsolescence 6.2.1.1 Physical Obsolescence 6.2.1.2 Functional Obsolescence 6.2.1.3 Economic Obsolescence 6.2.2 Under-utilized Floor to Area Ratio 6.3 Imposed Development Regulations 6.3.1 Earthquake Resistant Construction 6.3.2 Building Certificates and Inspections 6.4 Locational Analysis 6.5 SWOT Analysis 11 11 12 12 12 12 12 13 13 13 13 13 14 CHAPTER 7: JOINT VENTURE WITH MITSUI FUDOSAN 7.1 Rationale for Joint Venture 7.1.1 Site Procurement Strategy 7.1.2 Financial Position 7.1.3 Default Risk 7.1.4 Foreign Political Risk 15 15 15 15 15 15 8 9 9 TABLE OF CONTENT 7.1.5 Joint Expertise 7.1.6 Long-term Association 7.2 Proposed Joint Venture Structure 16 16 16 CHAPTER 8: REDEVELOPMENT PROPOSAL 8.1 Design and Architect Management 8.2 Site Plan 8.2.1 Podium 8.2.2 Sheltered Plaza 8.2.3 Hotel Tower 8.3 Development Phase 18 18 18 18 19 19 19 CHAPTER 9: MARKETING STRATEGIES 9.1 Marketing Targeting 9.1.1 Business Travel Market 9.1.2 Luxury Leisure Market 9.2 Market Positioning 9.3 Marketing Mix 9.3.1 Product Strategies 9.3.1.1 Physical Aesthetics and Interior Furnishings 9.3.1.2 Product Branding 9.3.1.3 Unique Features 9.3.2 Pricing Strategies 9.3.2.1 Premium Pricing 9.3.2.2 Time-based Pricing 9.3.3 Place (Distribution) Strategies 9.3.4 Promotion Strategies 9.3.4.1 Advertising 9.3.4.2 Public Relations 20 20 20 20 21 22 22 22 22 22 22 22 23 23 23 23 23 CHAPTER 10: FINANCIAL ANALYSIS 10.1 Key Assumptions 10.2 Determining Weighted Average Cost of Capital (WACC) 10.3 Open Market Valuation (OMV) 10.4 Holding Period of the Project 10.5 Investment Analysis and Monte Carlo Simulation 10.5.1 Optimal Capital Structure & Equity Returns 10.5.1.1 80% Loan-to-Value (LTV) 10.6 Exit Strategy 24 24 24 25 25 26 26 26 27 CHAPTER 11: SENSITIVITY AND RISK ANALYSIS 11.1 Sensitivity and Correlation Analysis 11.2 Identification of Risk 11.2.1 Development Phase Risks 11.2.1.1 Construction Cost Risk 11.2.1.2 Time Risk 11.2.1.3 Approval and Regulatory Risk 11.2.2 Post-Development Phase 11.2.2.1 Vacancy Risk 11.2.2.2 Revenue Volatility Risk 28 28 28 28 28 28 29 29 29 29 TABLE OF CONTENT 11.2.2.3 Earthquake Risk 11.3 Risk Mitigation Strategies 11.3.1 Employ Construction and Project Management Expertise 11.3.2 Advance Co-pitching of Redevelopment Proposal 11.3.3 Combined Corporate Synergies 11.3.4 Flexible Room Configuration and Rental Leases BIBLIOGRAPHY APPENDIX 29 29 29 30 30 30 Executive Summary Project Team: Tan Pang An Leonard Chia Liu Ee Darius Felix Otto Hannah Charlotte Giebelen Hong Kay Yeong Daniel Merilyn Milyarti Wantasen Rebecca Lau Tuck Wai Tan Si Ying Page. 1 Executive Summary Why Hotel and Why Japan Based on the evaluation and assessment conducted on City Development Limited’s (CDL) overall business operation, organizational framework and corporate structure in Part 1, the company should continue to develop on its key strengths and stay focused on its competencies as the pioneer in local and international hospitality industry. As suggested by Analytical Hierarchy Process Based Strategic Asset Allocation (SAA) and the defensive investment strategic alternative proposed in Markowitz Quadratic Programming Tactical Asset Allocation (TAA), CDL should venture more into the Japanese hospitality market given its transparent and efficient business environment, recovering economic condition as well as the effective corporate governance. This is further supported by the performance attribution analysis model, which suggest that CDL has the expertise and competency in selecting opportunistic investments in Tokyo. However, the performance attribution analysis has also revealed that CDL has placed too little weightage on their hospitality portfolio in Tokyo relative to the proposed TAA mentioned. Japan’s Economic Condition and REMA for Hotel Amidst the slowdown in economic condition and the contraction in GDP growth rate, the market sentiments towards future economic outlook still remain optimistic with the unemployment rate remains low and stable. While the Japan’s population is expected to suffer a sizeable shrinkage in the years ahead, Tokyo’s population is anticipated to decline at a slower rate. The low interest rate environment, coupled with the weakening yen in recent years has been successful in stimulating the economy and boosting foreign consumer spending. Furthermore, in the recent years, construction market in Japan have been experiencing increasing high construction cost, thus it has prompted the government to loosen its tight control on the construction labor market. Looking at the supply side of Tokyo’s hospitality sector, reputable international hoteliers are increasingly enthusiastic in entering the Japan hospitality sector, leading to a large supply pipeline which is expected to hit the market by 2018. The large supply will be well-absorbed by the rising hotel demand due to the increasing international visitor arrivals, the possible enactment of regulations that illegalize home sharing properties and the fact that Tokyo is hosting several major international sporting events in the near future. Since 2011, Tokyo’s hotel market has been achieving high occupancy rate, Average Daily Rate (ADR) and Revenue per Available Room (RevPar). Selection of Site and Site Assessment The subject site that is located in Yaesu district of Chuo-ku Ward in Tokyo was chosen due to its locational advantage, comprehensive transportation network and proximity to several major business districts as well as Tokyo’s most popular luxury shopping district. As the existing office building on the chosen site has suffered from physical, functional and economic obsolescence, it is economically attractive to redevelop the office building into a hotel development so that the highest and best use for the land can be achieved. Page. 2 Executive Summary Joint Venture with Mitsui Fudosan The proposed development plan is a collaborative joint venture project undertaken together with Mitsui Fudosan, with an equity distribution of 40:60 between CDL and Mitsui Fudosan. Through a joint venture partnership with a reputable local property developer that has a strong financial position and an established long-term association through TID Pte Ltd, CDL could streamline and simplify the land acquisition process, reduce its foreign political risk and default risk, as well as leverage on the partner’s critical knowledge and industry experiences in Japan’s property market. Proposed Development and Marketing Mix The proposed development is a 30-storey hotel tower, which is positioned as a 5-star luxury hotel targeting at the business traveller market and the luxury leisure market. Kohn Pederson Fox Associates (KPF) will be appointed as the design and architect manager for the redevelopment project given its superiority in the knowledge and experience in the relevant sector. The development phase is categorized into 5 basic phases, Concept phase, PreDevelopment phase, Construction phase, Marketing and Sales Launch phase, as well as Completion and Handover phase. The whole redevelopment is estimated to be completed in 3 years, with marketing plans which include product strategy, pricing strategy, place strategy and promotion strategy being executed at the Marketing and Sales Launch phase. Financial Analysis A comprehensive financial study was conducted to ascertain the economic and financial viability of the redevelopment project. The acquisition cost for the subject site was determined by employing a standard discounted cash flow (DCF) model, at ¥ 71,500,000,000. The weighted average cost of capital (WACC) for different Loan-To-Value (LTV) was also computed. Based on the DCF analysis run on Monte Carlo Simulation, an 80% LTV would generate the highest IRR and the highest NPV of 13.98% and ¥ 54,744,000,000 respectively. By obtaining an 80% debt financing, an initial equity outlay of ¥ 5,405,440,000 and total development cost of ¥ 55,042,600,000 can be expected. By comparing the marginal rate of return for each year against the hurdle rate, the optimal holding period of 10 years was derived. An exit strategy through CDL’s existing fund management platform, CDLHT, is proposed to retain indirect stakes of the operations to maintain its footprint in the Japan hospitality market. In addition, CDL will enjoy capital recycling by exiting through this fund management platform. 80% LTV 13.98% BTIRR ¥ 54,744,000,000 NPV Sensitivity and Risk Analysis, Risk Mitigation Strategies Based on the sensitivity and correlation analysis, the NPV is most sensitive to Average Daily Rate (ADR), occupancy rate and growth rate of ADR, suggesting that attention must be provided to these areas to reduce uncertainties in the profit. Following the identification of development risks which include development phase risks and post-development phase risks, several risk mitigation strategies would be employed to better manage, eliminate or reduce risks to an acceptable level. Seeking New Ground Introduction & Rationale Page. 3 1. Introduction Following the examination of City Development Limited’s (CDL) overall business operations, current practices and organizational framework in Part 1, we propose that it continues to concentrate and develop on its key strengths. As one of the pioneers in foraying into the hospitality markets locally and globally, CDL’s long-established achievements and expertise have given rise to its competitive edge in generating profits from this industry. Based on AHPBased Strategic Asset Allocation (SAA) and Markowitz Quadratic Programming Tactical Asset Allocation (TAA) portfolio compositions, the assessments suggest the need for CDL to rebalance its existing portfolio by reallocating its hotel stakes from Singapore to the other markets such as Tokyo, Japan. Thus looking ahead, our proposal for the new development aims to enable CDL to continue benefiting the value chain of hotel real estate development as well as to heighten the earning yield and shareholders’ equity. The proposed development plan is a collaborative joint venture project, which is to be undertaken together with an experienced Japanese property developer, Mitsui Fudosan. The new development is a redevelopment project which aims to reposition Mitsui Fudosan’s current commercial office asset located in Tokyo into a hotel asset known as, Mitsui Grand Millennium Hotel Yaesu. In light of the upcoming 2020 Olympic Games, the new hotel development will inject 402 hotel rooms into the supply pipeline and capture a considerable amount of international visitors entering Japan. This feasibility proposal presents an in-depth analysis concerning the prospects of the project as well as a recommended game plan which CDL should assume in order to meet its corporate objective sustainably. 2. Rationale for Hospitality Venture to Japan As part of its diversification and expansion strategy, CDL has effectively strengthened its market presence in overseas hospitality markets such as London and China through its global hospitality arm, M&C. While continuing to seek for key growth drivers with high and stable revenue, CDL has recently aimed to actively pursue attractive acquisition and redevelopment opportunities in mature markets including US, Japan and Australia. The capital market frameworks in these countries are deemed to be comparable to Singapore’s in terms of transparency, efficiency and effective corporate governance. This would give CDL greater confidence in moving swiftly when securing projects and opportunities. As the local economies in these markets experiencing recovery stage, it is also believed that CDL would be able to reap substantial benefits from entering at an optimal timing as part of its value-added investment strategy. Moreover, as of 2014, CDL’s hotel operation portfolio in Tokyo is found to be highly insufficient at only approximately 5.2%, compared to 13.7% and 16.2% as suggested by SAA and TAA respectively. Taking into account the outcomes from SAA and TAA, CDL should increase its asset holdings in Japan by a considerable amount to meet its core objective of maximising return with minimal risk. Land of Rising Investment Japan Market Analysis Page. 4 3. Japan Market Analysis 3.1 Real Gross Domestic Product (GDP) per Capita and Growth Rates The GDP growth rate in Japan has contracted by 0.3% $48,000 $47,335 1.50% on the last quarter of 2015. $46,606 $47,000 $46,147 This is due to the private $45,717 $46,000 $44,942 1.00% consumption and capital 1.43% 1.56% $45,000 $44,455 investment of businesses 1.00% 1.72% $44,000 0.94% 0.50% remaining sluggish. China’s 0.01% 1.10% $43,000 slowdown in economic $42,000 0.00% growth also continues to 2014 2015 2016 2017 2018 2019 2020 dampen Japanese firms’ Real GDP Per Capita (U.S. dollars) investment appetite and Real GDP Per Capita Growth Rate (%) Japan’s overall export, contributing to the Figure 1: Real GDP Growth and GDP Per Capita contraction in GDP growth rate. Despite the bearish outlook in 2015, the Japanese government remains optimistic and is expecting a 1.7% GDP growth in April 2016 (The Japan Times, 2016). This is because Japan has been experiencing a sharp increase in inbound tourism. The economy is also expecting fueled consumptions before the increased consumption tax scheduled in April 2017. Moreover, GDP per Capita is expected to escalate from 2014 to 2020 as the government intends to raise the minimum wages by 3% a year, from $6.50/hour in 2015 to $8.15/hour in 2020 (The Guardian, 2015). Rising real wages promote heightened consumer demand and confidence. Increased tourisms and private spendings would boost the weak current consumer spending in Japan, resulting in a major ripple effect across the country. $49,000 $48,011 2.00% 3.2 Demographics Japan is an island country in East Asia with 1.00% approximately 128 million inhabitants. In contrast to 0.00% other Asian countries, 2020 2025 2030 2035 2040 -1.00% 2010 2015 -0.26% population in Japan has -1.14% -1.03% decreased over several -1.69% -2.27% -2.00% years. From 2010 to 2015, -1.97% -2.80% -3.00% the population in Japan has -2.77% declined by 1.14%. It is -3.35% -4.00% -3.85% projected to drop further by -4.32% -5.00% 4.32%, from year 2035 to % Change in Tokyo Population 2040, due to Japan’s ageing % Change in Japan Population population and low birth rates. Figure 2: Japan vs. Tokyo Population Forecast 2.00% 1.44% Source: National Institute of Population and Social Security Research Tokyo accounts for 10% of Japan’s population. The population in Tokyo has climbed by 1.5% from 2010 to 2015, showing a reverse trend than that of Japan’s population. Additionally, the percentage change in Tokyo’s population is decreasing at a slower rate compared to the whole of Japan, possibly due to its positive net migration from 3 adjacent prefectures including Saitama, Chiba, and Kanagawa. Page. 5 3.3 Interest Rates As illustrated in figure 3, Japan has recently adopted negative interest rates, shifting from zero interest rates which lasted over 5 years. This was implemented to counteract the effects of falling oil prices as well as the slowing down of emerging economies. As of January 2016, the Bank of Figure 3: Japan’s Interest Rates Japan has practiced a negative rate of 0.1% to encourage business lendings, which aid in spurring investments. Negative interest rates also prompt savers to spend and force investors to shift their cash into higher-yielding assets. 3.4 Currency Trend 3 An aggressive monetary easing policy administered by the Bank of Japan has resulted in the consecutive weakening of Yen against the Dollar (USD) since 2012. While the weakening of Yen has resulted in higher costs of imports, it has also culminated a quiet boom in the high-end private real estate. Foreign investors from the rest of Asia have been increasing their purchases of high-end Figure 4: Japan’s Currency Trend real estates in Tokyo (Tokyu Land, 2013). The Yen’s decline has also boosted Japan’s tourism industry by attracting more foreign visitors to sightsee in various Japanese cities. Page. 6 3.5 Unemployment Rates 3.61% 3.62% 3.60% 3.58% 3.58% 3.56% 3.54% 3.54% 3.52% 3.51% 3.52% 3.53% 3.53% 2019 2020 3.50% 3.48% 3.46% 2014 2015 2016 2017 Figure 5: Japan’s Unemployment Rates 2018 Based on figure 5, unemployment rate in Japan is forecasted to stabilise within 3.5% - 3.6% from 2016 to 2020. One of Abe government’s key political and corporate agenda in 2015 was to advocate as well as enlarge the proportion of women in leadership positions, reaching at least 30% by 2020. Despite the bearish economic outlook in Japan, its unemployment rate remains low as short handed employers explored the alternative of hiring more temporary workers to avoid increasing base wages. 3.6 Construction Cost Construction cost in Japan has continued to rise since year 2011. In the Tokyo region, it has soared by 11% due to the demand-supply gap for skilled construction workers. The shortage of skilled workers has driven up labor cost, increasing construction cost. Furthermore, ongoing key projects such as the postearthquake and tsunami reconstructions, 2020 Olympic Games infrastructures and ageing facilities have given rise to demand for constructions and inflated costs of building materials. In view of relieving stress on the construction labor market, the Japanese government had loosened its practical training visa rules in 2015. This has enabled more foreign nationals with construction skills to work in Japan for a maximum of 3 years after their training period. Figure 6: Japan’s Construction Cost Trend Strength in Unity Hotel Market Analysis Page. 7 4. Hotel Market Analysis 4.1 Supply Analysis 4.1.1 Supply Pipelines of Tokyo Hotels Many international hoteliers are planning for new openings in Tokyo to capture the strong 4677 5000 growth in the hotel industry. Reputable brands such as Andaz by Hyatt Hotels and Aman by 4000 3209 Aman Resorts, have recently entered the 3000 Tokyo hotel market to tap onto the growing 2000 1371 demand in its hospitality sector. The total 1000 1000 number of hotels in Tokyo currently stands at 675. This translates to 98,644 rooms, with 0 approximately 4,000 of the rooms contributing 2015 2016 2017 2018 to the luxury segment as of March 2015. 2015 2016 2017 2018 According to Savills and Jones Lang Lasalle (JLL), a total of 10,257 new additional rooms Figure 7: Pipeline of Hotel Rooms in Tokyo are expected to hit the market by 2018, reflecting an approximate compounded annual growth rate of 3.4%. It is anticipated that the pipeline of hotel supply will be well-absorbed by the rapidly increasing number of tourists travelling to Japan (Savills and JLL). Pipeline of Hotel Rooms in Tokyo 4.1.2 Government Policy on Home Sharing Properties Prime Minister Shinzo Abe’s government has recently announced proposals and guidelines, which would illegalize most Airbnb home sharing properties. Under these regulations, home sharing rentals are obliged to impose a minimum lease duration of 7 days on guests who wish to stay in the unit. Nevertheless, the decision for the enactment of these regulations lies within the jurisdiction of local municipalities. It can be foreseen that the supply of home sharing properties in Tokyo will decline substantially when a majority of municipalities adopt these guidelines. This potentially reduces the threat of home sharing platforms while increasing the occupancy of traditional hotels in Tokyo. 4.2 Demand Analysis 4.2.1 International Visitor Arrivals International Visitor Arrivals 25000000 20000000 34% 27% 47% 24% 15000000 10000000 29% 60% 40% 19,737,400 20% -28% 5000000 0% -20% 0 -40% 2010 2011 2012 2013 2014 2015 International Visitor Arrivals Percentage Change Figure 8: International Visitor Arrivals International visitor arrivals have been steadily increasing since 2012. It experienced an exponential growth of 47% in 2015 to reach 19,737,400 visitors, almost hitting the Japanese government’s 2020 target of 20,000,000 visitors (Cushman and Wakefield). As a result, Goldman Sachs has given a revised estimate that visitor arrivals will hit 35,000,000 by 2020. The significant review in the forecast of international visitor arrivals bodes well for hoteliers, as the demand for accommodation and hotel rooms are expected to rise further. Page. 8 4.2.2 International Sporting Events Since its success on the bids to host the 2019 Rugby World Cup and 2020 Olympics, the Japanese government has been growing its efforts in improving infrastructure and accessibility to facilitate the anticipated boost in tourism as well as visitor arrival numbers. The government has also set up plans to leverage on its cultural assets, encouraging tourists to visit several regions in Japan. The synergy arising from major international events and strong government initiatives lead to an expected rise in number of visitor arrivals as well as demand for hotels and accommodations. 4.2.3 Occupancy, Average Daily Rate (ADR) and Revenue per Available Room (RevPAR) Average Tokyo Hotel 87% 25000 20000 15000 10000 5000 0 17640 2010 2011 2012 2013 2014 100% 80% 60% 40% 20% 0% 1H 2015 Average Daily Rate (ADR) Tokyo’s hotel performance has been steadily growing since the decline in 2011. Average Daily Rate (ADR) and occupancy have been increasing due to the rising number of visitor arrivals. In 1H 2015, ADR has climbed to reach JPY 17,640 while occupancy rates were steadily held at 86.5%. (Savills, Cushman & Wakefield) Revenue Per Available Room (RevPAR) Occupancy Rate Figure 9: ADR, RevPAR and Occupancy Rate of Average Tokyo Hotel Luxury Tokyo Hotel 86% 60000 52000 44720 40000 90% 85% 80% 75% 20000 70% 0 65% 2012 2013 2014 2015 Average Daily Rate (ADR) Revenue Per Available Room (RevPAR) Occupancy Rate Figure 10: ADR, RevPAR and Occupancy Rate of Average Tokyo Hotel According to HVS, Tokyo luxury hotels have also shown strong performance with registered ADRs and occupancy rates of JPY 52,000 and 86% respectively in 1H 2015. These cumulate to a RevPAR of JPY 44,720. Even though occupancy growth is predicted to stabilise from 2015 onwards, hoteliers are anticipated to tap on the high levels of occupancy by maximising ADRs. Page. 9 4.3 Capitalisation Rate and Investment Transactions Capitalisation Rates Capitalisation Rates 1H 2016 2H 2015 1H 2015 2H 2014 1H 2014 2H 2013 1H 2013 2H 2012 1H 2012 2H 2011 1H 2011 2H 2010 1H 2010 8.00% 7.00% 6.00% 5.00% 4.00% Capitalisation rates or expected net operating income yield survey conducted by CBRE shows a steady compression from 2010 to 2016. With the generally low global interest rate environment and recent announcement to implement negative interest rates, it can be anticipated that capitalisation rates will continue shrinking. The declining capitalisation rate suggests the ability to yield higher values from the exit prices of hotel developments. Figure 11: Capitalisation Rate In addition, the investment market for hotels remained extremely active in 2015 despite compressed capitalisation rate. Most of the transactions continued to be aggressively driven by J-REITs and their sponsors. Some of the notable transactions are listed in the table 1. Hotel Price (JPY) Purchaser 10,000,000,000 Hulic APA Hotel Yokohama-Kannai 8,400,000,000 Invincible Investment the b Ikebukuro 6,520,000,000 Japan Hotel REIT the b Akasaka 6,250,000,000 Japan Hotel REIT the b Hachioji 2,610,000,000 Japan Hotel REIT the b Ochanomizu 2,320,000,000 Japan Hotel REIT Sotetsu Fresa Inn Ginza . Table 1: Hotel Transactions 4.4 Market Outlook With healthy demand and supply fundamentals arising from the influx of tourists as well as a low compounded annual growth rate of approximately 3.4% in hotel supply, the Tokyo luxury hotel market is primed to enjoy strong levels and growth in ADR, occupancy and RevPAR in coming years. Moreover, investment sentiments among investors remain positive and the capital values of hotels are expected to grow steadily, as investors continue to seek asset classes with relatively strong yields. . Tokyo, always on the move Selection of Site Locality Page. 10 5. Selection of Site Locality 5.1 Rationale for Chuo-ku Ward Chuo-ku ward is one of the main commercial centres in Tokyo, which houses numerous large multinational corporations and corporate headquarters. In comparison to other emerging business districts such as Shinjuku ward, Shinagawa ward, Minato ward and Chiyoda ward, Chuo-ku ward has the comparative advantage for establishing luxury hotel operations due to it also being the location of Ginza. It is internationally recognised that Ginza is Tokyo’s most popular and prestigious shopping district. Positive spillovers Figure 12: Map of Tokyo, Japan arising from the bustling economic and commercial activities in the ward generate strong demand for accommodations from business travelers and upscale visitors. This would enable the future hotel development, Mitsui Grand Millennium Hotel Yaesu, to achieve high and stable occupancies both on weekends and weekdays. Additionally, with increased accessibility and connectivity, it takes only approximately 15 minutes to travel from Chuo-ku ward to Shinkansen high speed train station via the Tokyo expressway. The Shinkansen high speed train station connects Tokyo to most of Japan’s other major cities including Honshu, Kyushu, Nagoya, Osaka and Hokkaido. Therefore, this would enhance the attractiveness of Chuo-ku ward as business and leisure travellers often view convenience as the top selection criteria for a hotel (Clarabridge, 2012). 5.2 Rationale for Yaesu District Figure 13: Map of Yaesu District Yaesu district is situated in the central area of Chuo-ku ward. It is one of the major business districts in Tokyo. Towards the north of the Yaesu district is the Nihombashi district, which serves as the financial centre of Tokyo where the computerised Tokyo Stock Exchange and headquarters of major financial corporations are located at. Towards the south of Yaesu district is Ginza district, Tokyo’s most luxurious and upscale shopping area comprising a multitude of department stores, international brand-name boutiques and exclusive restaurants. Being strategically located near major bustling commercial and retail hubs, Yaesu district serves as a centripetal convergence point that appeals to a large spectrum of guests in the various surrounding districts. Furthermore, through the positioning of the future hotel development in Yaesu district, CDL could potentially enhance its market share in the vicinity. The new addition would complement CDL’s existing hotel development under the M&C brand, which situates in the neighbouring Ginza district. By clustering its hotel developments within close vicinity, CDL could advantage from agglomeration of economies and achieve a large improvement in its hotel management as well as economic performance. This is particularly pertinent to luxury, upscale and chainmanaged hotels as the effects of agglomeration are believed to be stronger and more beneficial relative to independent competitors (Signes, Ona and Pastor, 2014). Centre of World Economy Site & Locational Analysis Page. 11 6. Site & Locational Analysis 6.1 Site Description Figure 14: Yaesu Mitsui Building Site Address 2-7-2, Yaesu, Chuo-ku Existing Property Name Yaesu Mitsui Building Property Owner/ Developer Mitsui Fudosan Site Area 29,450.30 sq ft Gross Floor Area 353,404.00 sq ft Average Net Floor Area (NFA) Per Floor 15,457.69 sq ft Plot Ratio 12.0 Zone Commercial Page. 12 6.2 Existing Development On-site (Yaesu Mitsui Building) 6.2.1 Obsolescence Figure 15: Yaesu Mitsui Building Figure 16: Yaesu Mitsui Building’s Entrance 6.2.1.1 Physical Obsolescence Built in 1965, the 51-year-old office building might have been suffering from a substantial rise in maintenance cost and decreasing property value over the years. As a result of general usage and the passing of time, the interior finishings as well as the building components are believed to have exceeded their utilities. In addition, considering the age of Yaesu Mitsui building, the current physical aesthetics of the building is regarded to be outdated and incompatible with the urban design of the city. Being located in one of the central business districts and surrounded by relatively new and contemporary commercial buildings, it is likely that Yaesu Mitsui building has lost its competitiveness and ability to generate favorable returns within the office sector. 6.2.1.2 Functional Obsolescence Although Yaesu Mitsui building’s function as an office tower has been quite consistent over the 51 years, it might have been faced with several challenges in providing efficient office spaces for its users. Compared to the other surrounding office buildings, the inefficient layouts for Yaesu Mitsui building such as inadequate floor to ceiling heights, close-spaced structural columns and relatively small floor plates have impaired the functionality of the building. These shortcomings are mostly unrectifiable and thus, have shortened the functional life of the office building. Furthermore, the inability to incorporate new information technologies and green features due to its current inflexible layout have resulted in functional inefficiency and uncompetitiveness. 6.2.1.3 Economic Obsolescence The returns of the office sector in Tokyo remain positive amidst the cloudy global economic outlook as a result of falling commodity prices and economic slowdown in emerging giants. However, a potential oversupply of office spaces in Tokyo is expected after taking into account the large expansion of incoming office supply and the declining working age population (Jones Lang Lasalle, 2015). Meanwhile, Tokyo’s hospitality industry is presenting a more desirable prospect due to the booming tourism industry, which has successfully stimulated Japan’s economy in recent years. Therefore, it would be economically attractive to redevelop the existing office building into a hotel development, unlocking its development potential as well as highest and best use. Page. 13 6.2.2 Under-utilized Floor to Area Ratio The current floor to area ratio (FAR) of Yaesu Mitsui building amounts to 1200%, considerably lower than the stated FAR of 1300% for the site. This provides an adaptive reuse opportunity through the recycling of under-utilized site, which subsequently promotes community revitalisation and economic development. 6.3 Imposed Development Regulations 6.3.1 Earthquake Resistant Construction According to the Building Standards Act of Japan which was first introduced in 1924, all buildings are required to install earthquake-resistant structures. This act has been subsequently revised and strictly reviewed after Japan experienced several severe earthquakes. The revised Earthquake Resistant Building Standard Amendment states that a building should only suffer a slight amount of cracks during a mid-size earthquake which ranges from a magnitude of 5 to 7, and the building should not collapse during large earthquake with a magnitude of 7 or higher. The proposed buildings which failed to comply to the earthquake-proof standard will not be granted approval for the building construction. 6.3.2 Building Certificates and Inspections Amendments on building certificates and inspections were made to be stricter in 2007. According to Japan Property Central (n.d), buildings with heights exceeding 13 metres are required to be stringently inspected by authorities, regarding their conformities towards the Building Standards Act during their construction stages. Furthermore, it is also necessary for buildings to have 10-year warranties against defects to ensure the safety of occupiers. 6.4 Locational Analysis The subject site is located in Chuo-ku ward, which is one of Tokyo’s Central 5 Wards business district. It is situated more specifically, in the Yaesu 2 Chome Central district which lies within the National Strategic Special Zone. This zone is designated to boost Japan’s economy through the agglomeration of office buildings owned by large multinational corporations. Towards the East and West, the site faces Kyobashi Edogrand and Nittobo. While towards the North and North-East, the site fronts Pacific Century Place Marunochi and GranTokyo South Tower. Major real estate developers such as Mitsui Fudosan Figure 17: Location of Yaesu Mitsui Building on map and Tokyo Tatemono have announced redevelopment plans valued at 5 billion USD in Yaesu East and Yaesu North districts recently. The redevelopment plans will strategically shift the buildings in Yaesu district from single-use to mixed-use developments to maximise space efficiency. Page. 14 Aside from office developments, hotels and retail malls can be found within Yaesu and in the surrounding districts. One prominent development that could be a potential competitor to our proposed development is the Four Season Hotel Tokyo at Marunouchi. It is a 5-star luxury hotel development that sits directly opposite of the subject site. Other hotel developments in the vicinity include Shangri-La Hotel Tokyo, Tokyo Station Hotel, Hotel Metropolitan Marunouchi, Hotel Ryumeikan Tokyo and Courtyard Tokyo Station. These hotels range from 3-stars to 5-stars rating, catering to travellers with different profiles and needs. The vitality of the area could also be attributed to the various malls situated in the region, such as Daimaru Tokyo, Shopping Mall KITTE, Marunouchi Building, Printemps Ginza and Melsa Ginza 2. Being located just a stone’s throw away from 4 different train stations, the site is served with a total of 25 lines leading to / from various parts of Tokyo. The subject site also offers a convenient direct access by automobiles via the Yaesu Line Expressway. Moreover, from the site, it only takes approximately 17 minutes and 50 minutes of travelling times to reach Haneda Airport and Narita Airport respectively. 6.5 SWOT Analysis A SWOT analysis is conducted to examine the feasibility of the development. - - Strengths 1. Comprehensive transportation network 2. National Strategic Special Zone 3. Close proximity to Tokyo Summer Olympic site Weaknesses 1. Surrounding hotel developments 2. Imposed development regulations Opportunities 1. Future redevelopments in the vicinity boost hotel businesses 2. Relaxed zoning regulations 3. Financial incentives to build greenery 4. Positive outlook for tourism 5. Japan’s adoption of negative interest ratese to revive economy Threats 1. Prone to natural disasters such as earthquakes 2.Volatile global financial market Expand Beyond Limit Joint Venture with Mitsui Fudosan Page. 15 7. Joint Venture with Mitsui Fudosan 7.1 Rationale for Joint Venture 7.1.1 Site Procurement Strategy The key rationale for the proposed joint venture revolves around CDL’s site procurement strategy. The site proposed is currently owned by Mitsui Fudosan. However, a direct acquisition strategy might be unrealistic considering that Mitsui Fudosan is also a real estate developer, whose core business involves property developments and investments. Due to the site’s strategic location as well as land scarcity in the area, it is highly unlikely that Mitsui Fudosan would agree to completely dispose its interests in the site. Therefore, a strategic partnership might instead be the best alternative for CDL to acquire interest on the site. In addition, a joint venture partnership will also allow CDL to streamline and simplify its acquisition process in a foreign market. 7.1.2 Financial Position The strong financial position of Mitsui Fudosan is one of the criteria which draws CDL to enter into a joint venture with the company. According to the company’s consolidated financial summary from 2011 to 2015, net assets have increased substantially over the 5 years, indicating the company’s good financial health as well as strong ability to generate high income through strategic investment and development. Over the years, the debt-to-equity (D/E) ratio has also decreased significantly from 1.71 to 1.06, while the return on equity (ROE) has been increasing. The relatively greater D/E ratio as compared to similar foreign industrial players is due to the extremely low interest rate environment in Japan, which could potentially create a higher positive leverage effect on debt financing. The rapid increase in net assets and ROE, accompanied by decreasing D/E ratio suggests the company’s large improvement in its financial performance, which is achieved by the strategic planning and financing of the projects and its efficiency in securing excellent business opportunities over the year. Moreover, its business target to achieve a debt-to-equity ratio of 1.3 in 2017 implies the company’s optimistic view towards the current investment environment and high confidence in covering debts with stable stream of fixed-income generating from the projects on-hand. 7.1.3 Default Risk The joint venture allows CDL to reduce the risk of bankruptcy, which is associated with projects that involve high total development cost. Default risk is maximised when the total development cost for a project is larger than the firm’s market capitalisation or shareholder’s equity. The collaboration lowers the risk by spreading the amount of equity contributed towards the project, thereby reducing the total development cost of the project for CDL. Thus, entering a joint venture will cushion the negative impacts which would befall upon CDL in the event whereby the project fails. 7.1.4 Foreign Political Risk Foreign political risks concerning tariff barriers, unstable tax regimes, license denials and unfavorable government policies targeting foreign businesses would be mitigated through a joint venture with a local business partner such as Mitsui Fudosan. These risks are particularly crucial because in 2014, CDL’s and M&C’s Chairman, Kwek Leng Beng, considered Japan as a country that is relatively difficult for foreign investment. The partnership allows CDL to protect itself against expropriation risk and explore development initiatives in a safer way. Page. 16 7.1.5 Joint Expertise By forming a joint venture with Mitsui Fudosan, CDL could leverage on its critical knowledge and industrial experiences in Japan’s property market. Mitsui Fudosan is an active and experienced player in both Japan and foreign real estate markets across ranging sectors, from office to hospitality industries. A highly-experienced joint venture partner would contribute to better decision-making and project implementation. The partnership would also enable CDL to extend its market reach internationally while gaining access to a whole new network of contacts and other valuable resources. This would help CDL in its process of improving its operations in a foreign property market. Moreover, the partner’s credible reputation as well as strong corporate brand would efficiently aid in the marketing process of the project and substantially enhance the probability of success for the redevelopment project. 7.1.6 Long-term Association Through its multitude of collaborations with TID Pte Ltd, CDL has established an abiding relationship with Mitsui Fudosan. TID Pte Ltd is a joint venture between Hong Leong Holdings and Mitsui Fudosan. Hong Leong Holdings and Mitsui Fudosan have been undertaking collaborative residential projects as well as hotel operations through this joint venture for more than 40 years. Recently, they have successfully collaborated in developing distinguished projects such as The Oceanfront at Sentosa Cove, St Regis Hotel and Residences. Together, they have also ventured effectively to the Singaporean Executive Condominium market, signified by their active participation. Some of the Executive Condominiums jointly developed by CDL and TID Pte Ltd include The Rainforest and The Brownstone. In addition, CDL is known to have 76% effective interest in Millennium Mitsui Garden Hotel, which involves a collaboration with Mitsui Fudosan. The hotel represents the first flagship hotel by M&C, the hospitality arm of CDL, in Japan. This joint venture has managed to attain excellent financial performance within its short period of operation. CDL and Mitsui Fudosan would be able to form a partnership which increases productivity as well as minimises conflicts by capitalising on previous positive joint collaborations experience in addition to their long-term relationship. 7.2 Proposed Joint Venture Structure A more realistic ownership structure with an equity distribution of 40:60 between CDL and Mitsui Fudosan is proposed due to the land procurement constraint. A higher equity stake is critical to persuade Mitsui Fudosan into pursuing the new 40% development project together with CDL. It 60% also allows Mitsui Fudosan to retain larger control over the project execution while spreading out risks. In addition to a higher stake, this joint project would remain CDL Mitsui Fudosan attractive for Mitsui Fudosan as it could Figure 18: Ownership Structure of Joint Venture capitalise on CDL’s hotel development and management expertise. Moreover, the luxury branding that arises from M&C (a subsidiary of CDL) being its hotel management company would further enhance the prospect of the proposed hotel. It is evident from the hotel portfolios of both companies that M&C has greater international recognition in upscale and luxury hotel markets as compared to Mitsui Fudosan, which is more specialised in budget and Ownership Structure Page. 17 mid-scale hotels. CDL could also contribute effectively to the project by supplying new stream of hotel customers from Europe and United States, where M&C has remarkable operations as well as experience. This would complement with the influence of Mitsui Fudosan in Asian markets. Therefore, this project may be regarded as an initiative to build on the success of the previous partnership between CDL and Mitsui Fudosan in Millennium Mitsui Garden Hotel, Tokyo. On the other hand, CDL seems to be compelled into compromising through a lower equity stake. Nevertheless, the proposed structure can be justified with CDL’s relative inexperience in the Japanese market since it would be CDL’s second project in the Japan hospitality market, after Millennium Mitsui Garden Hotel in Tokyo. Therefore, CDL might consider approaching the project less aggressively through lower exposure. Even though the outcome of its strategic portfolio allocation shows that CDL needs to increase its Japan assets quite substantially, it is also against CDL’s corporate strategy of diversification to put all of its eggs into one investment opportunity basket. Furthermore, CDL should also accommodate to its relatively high gearing ratio, which need to be curtailed. According to the proposed joint venture structure, CDL would only be obliged to contribute 40% towards the total development expenses, including the land cost negotiated with Mitsui Fudosan. This would impose a lower financial burden on CDL, in contrast to a higher interest in the project. Dust of Foreign Streets, Familiarity of Home Redevelopment Proposal Page. 18 8. Redevelopment Proposal 8.1 Design and Architect Management We would like to recommend commissioning Kohn Pederson Fox (KPF) to create the development design for Mitsui Grand Millennium Hotel Yaesu. KPF is an international architecture practice that specialises in high-rise office buildings as well as luxury residential and hotel projects. Its extensive portfolio also includes civic and cultural spaces, as well as master plans for cities across the world. The success of KPF’s designs are very much attributed to the result of the collaboration of diverse talents within the organisation. This allows KPF to create innovative and sustainable architectural designs that are both ecological as well as environmentally responsible. KPF has recently launched a mixed-use project in Tokyo called R which is the headquarters for Nomura Securities (Office) and the 5-star Aman Hotel (Hospitality). The development is situated between the Imperial Palace Park and Tokyo Station, which is in close proximity to our proposed redevelopment site. We believe that KPF has done substantial research of the region prior to the mixed-use project, hence is relatively familiar with the social as well as cultural context of the city. KPF’s significant knowledge and experience would be an asset to the materialisation of the proposed luxury hotel development. 8.2 Site Plan The proposed development will comprise of a 4-storey podium, a sheltered plaza and a 30storey hotel tower. Figure 19: Site Layout Figure 20: Design of Proposed Development 8.2.1 Podium A 4-storey podium will be constructed adjacent to the hotel tower, which houses various activity-generating uses such as food and beverages spaces as well as other amenities. The 1st and 2nd storey hotel podium will consist of mainly restaurants, lounges, bars and fitness centre as well as spa. The 3rd and 4th storey will be dedicated to functional facilities such as ballroom and meeting rooms. The podium offers hotel occupiers easy access to various amenities, located right below their hotel rooms. Page. 19 8.2.2 Sheltered Plaza A sheltered plaza will be built in front of the hotel tower, which aims to provide hotel users with a spacious environment to rest and interact while slow-pacing the hectic lives amidst the busy city. Furthermore, the proposed development of sheltered plaza shows the strong commitment of incorporating open spaces and greenery, which aligns with the sustainable philosophy of both CDL and the designer. 8.2.3 Hotel Tower The proposed development is a 5-star luxury hotel project which encompasses 402 hotel rooms, ranging from deluxe rooms to presidential suites. The hotel tower has a unique curvilinear design and is set to become an iconic landmark in Tokyo. The curves of the building maximises the viewing angles of all the guest rooms, giving the development a superior panoramic view of Tokyo’s skyline as compared to other hotels. 8.3 Development Phase The redevelopment process is categorised into 5 basic phases, illustrated in the timeline below. The redevelopment process is expected to be completed in approximately 3 years. Year Month Concept Pre-Development Construction Marketing & Sales Launch Completion & Handover Jul-16 Year 1 Oct-16 Jan-17 Apr-17 Jul-17 Year 2 Oct-17 Jan-18 Apr-18 Jul-18 Year 3 Oct-18 Jan-19 Apr-19 Figure 21: Development Timeline Before the actual commencement of construction, CDL is scheduled to complete the Concept phase and Pre-Development phase by April 2016. During the Concept phase, CDL will be identifying the most feasible type of development, location and target market. Members of the development team including architects, lawyers, engineers, development consultants and construction managers are also engaged to initiate the redevelopment project. In the PreDevelopment phase, the members of the development team will continue to refine the development plan, secure financing sources and conduct market analysis to determine the overall feasibility of the project. The Construction phase will start immediately after demolition in May 2016, and the contractors will be selected through a competitive tendering process. The Marketing and Sales Launch phase will begin concurrently with the Construction phase. Marketing plans and strategies will be executed in this phase. The development is scheduled to be completed at the end of the first half of year 2019. The Completion and Handover phase is expected to be accomplished by early 2019, ensuring that hotel operations can commence in May 2019. This will provide Mitsui Grand Millennium Hotel Yaesu with some adjustment period prior to the Tokyo Summer Olympics which would be held in 2020. Great Execution is the Ultimate Differentiator Marketing Strategy Page. Page. 21 20 9. Marketing Strategies 9.1 Marketing Targeting 9.1.1 Business Travel Market According to the statistics of International Congress and Convention Association (ICCA), the number of international conferences held worldwide has been growing over the years. This rise is especially significant in the Asia region, where increased globalisation converges with rapid economic growth. In 2013, Tokyo was ranked the 7 most popular city for international conferences in the Asiapacific and Middle-east regions. This indicates Figure 22: Number of International Conferences held in the rapidly growing Meetings, Incentives, Asia-Pacific/Middle East Cities (2013) Conferences and Exhibition (MICE) industry, bringing about vast opportunities in the hospitality industry. Hotels are crucial stakeholders in the MICE industry as they provide venues for conferences and accommodations for corporate guests. By capitalising on Mitsui Grand Millennium Hotel Yaesu’s prime location in the center of business districts, CDL would be able to target the business travellers from Tokyo’s MICE industry. th 9.1.2 Luxury Leisure Market In 2013, Tokyo has pulled ahead of Osaka and Kyoto as the most appealing destination for both foreign and inbound visitors in Japan. This is partly due to Tokyo being the most renowned metropolitan city in Japan, as well as the presence of its unique indigenous culture and various appealing tourist attractions in the region. Furthermore, with Tokyo being awarded the honour to host the 2020 Olympic and Paralympic Games, promotions and advertisements were initiated by the government to further develop and Figure 23: Japan’s Real Inbound Guests/ Tourism boost the tourism industry in Tokyo (Kodera, Spending by Prefecture (2013) 2014). These efforts to attract inbound and domestic tourists from both the private and public sectors have proved successful as there has been a significant increase in the number of tourists to Tokyo in recent years. Fueled by the strong purchasing power of domestic tourists, the sales of Tokyo retailers especially in the luxury retail sector, experienced a significant surge of approximately 30% in 2015 (World Property Journal, 2016). This has prompted global luxury brand companies to sharpen their focuses on Tokyo due to its reemergence as a popular shopping hub for luxury brands. Being surrounded by several luxury shopping districts, Mitsui Grand Millennium Hotel Yaesu would be able to attract the extravagant tourists. Page. 21 9.2 Market Positioning Based on the data collected from Japan Tourism Agency (JTA) Accommodation Survey, business and city hotels achieved high occupancy rates of 81.7% and 82.7% respectively in 2013. This suggests that the hospitality industry in the capital city is experiencing a strong and stable performance. Mitsui Grand Millennium Hotel Yaesu, which targets the business travel as well as luxury leisure market would position itself as a 5-star luxury hotel catering to business executives and high-end travelers. This is intended to capture the growing demand in the high-end hospitality industry. Figure 24: Japan’s Guestroom Occupancy Rates by Prefecture and Accommodation (2013) MARKET POSITIONING: CDL VS FOUR SEASON Location Intensive Competition Number of rooms Attractiveness Room price Security and Safety Aesthetics Accessibiity Affordability Service and Quality The new hotel development is faced with intensive competition in the vicinity due to the availability of various hotels providing a range of service levels, from world-class to mid-range and budget. Four Seasons, Shangri-La and The Peninsula are amongst the five-star hotels in the area, which hold dominant positions in the highest-end spectrum of luxury hospitality industry by capitalising on their internationally-acclaimed hotel brands that are steep in heritage. The high-end hospitality industry is highly competitive partly due to the Figure 25: Market Positioning between CDL’s Hotel and Four Season lack of product differentiation, often Hotel leading to pricing pressure. Therefore, CDL should reinforce its product differentiation and pricing strategies so as to acquire the dominant position at the forefront of the five-star hotel business. With the hotel rooms being priced at a considerably lower rate as compared to the other dominant high-end luxury hotels, Mitsui Grand Millennium Hotel Yaesu would be able to attract a larger pool of clientele which include travellers ranging from the high-end to the highest-end of the market. Iconic aesthetic appeal at the tangible level in terms of architecture and interior furnishing, complemented by the first-class ambience at intangible level, would help to further amplify the attractiveness of Mitsui Grand Millennium Hotel Yaesu. The ability to remain fairly affordable while providing excellent services at the same time would allow the establishment of an enduring competitive advantage for Mitsui Grand Millennium Hotel Yaesu, by creating a unique position which appeals to the luxury clientele more than its existing dominant competitors. CDL FOUR SEASONS Page. 22 9.3 Marketing Mix 9.3.1 Product Strategies 9.3.1.1 Physical Aesthetics and Interior Furnishings Located in the center of the business district and near the luxury shopping area in Tokyo, Mitsui Grand Millennium Hotel Yaesu would be designed to reshape and enhance the city skyline by introducing an aesthetically unique and appealing physical façade. As mentioned earlier, CDL is encouraged to collaborate with well-known architecture firm, KPF, to design the hotel development according to its targeted market and position. In addition, KPF would also be in charge of Mitsui Grand Millennium Hotel Yaesu’s interior design, providing guests with unique experiences during their stays through alluring guestroom configurations. 9.3.1.2 Product Branding Being branded under Grand Millennium, the proposed hotel development would benefit on the positive spillover effect of customers’ perceptions and attitudes, generated through the exceptional image and high status the brand possessed. With Grand Millennium’s international reputation in extending five-star as well as deluxe quality hospitality services, the hotel and consumers could derive values through the reduction of perceived risk and providence of quality assurance. By attaching a strong hotel brand on Mitsui Grand Millennium Hotel Yaesu, CDL would be able to differentiate its hospitality services from competitors and establish a distinct identity. 9.3.1.3 Unique Features Mitsui Grand Millennium Hotel Yaesu will provide an extensive range of amenities to cater for its business and leisure travellers. These include bars, restaurants, pool and gym facilities, conference rooms and ballrooms. A full range of pampering services such as babysitting services, family pool, spa and manicure services for families as well as female visitors are also offered to bring an indulging experience. Last but not least, the hotel will also incorporate “Onsen” - hot springs facilities which allow visitors to encounter sensual Japanese rituals of relaxation amidst the hustle and bustle of the inner city of Tokyo 9.3.2 Pricing Strategies 9.3.2.1 Premium Pricing Figure 26: Pricing Strategy Matrix Based on the framework of Pricing Strategy Matrix, hotel businesses’ pricing system can be divided into four broad strategies based on two variables - quality and price. Since Mitsui Grand Millennium Hotel Yaesu targets the luxurymarket who demands for high quality services and fittings, it can be categorised under “premium” according to the matrix. Premium pricing strategy involves charging high rates for superior finishes and services. Furthermore, premium pricing subtly embodies intangible qualities such as style, uniqueness, occasion and experience which present consumers a sense of prestige and luxury. Page. 23 9.3.2.2 Time-based Pricing Peak Season Off-Peak Season Cherry Blossom - Early April January to March Autumn foliage - Mid-November Golden Week - End April to early May Obon - Mid-August Year-End holidays - Mid-December to Early January The time-based pricing is widely used in the tourism industry, where prices are not permanently set and vary based on the demand during the period. The reference point of the pricing is set and controlled based on the different seasons - peak and off-peak. During peak period, demand exceeds the capacity, hence encouraging CDL to only sell the limited capacity to the most profitable mix of customers. In contrast during low demand periods, rooms should be priced at discounted rates, making it available for everyone. Figure 27: Peak & Off-peak Seasons 9.3.3 Place (Distribution) Strategies Distribution strategy is an essential part of Mitsui Grand Millennium Hotel Yaesu’s revenue management plan. Traditionally, companies will utilise tour agencies as their primary platforms to publicise to consumers who are keen on joining a tour. However in the age of information technology, most companies' distribution strategy has evolved to utilising internet platforms due to its convenience and efficiency. This allows customers to make their room reservations more efficiently. Mitsui Grand Millennium Hotel Yaesu’s official website will serve as an effective platform for service distribution, providing a wide range of user-friendly features as well as practical assistance to potential customers. Additionally, Mitsui Grand Millennium Hotel Yaesu should also be present on internet distribution channels such as Expedia, Bookings and TripAdvisor. These channels allow travellers who are in search of hotel recommendations, to book their rooms directly. Furthermore, CDL’s Millennium & Copthorne PLC has also an extensive network of reservation offices as well as global sales offices. These offices are able to address bookings made by leisure travellers as well as corporate reservations from business organisations. 9.3.4 Promotion Strategies 9.3.4.1 Advertising In order to capture the attention of potential customers, a strong advertising strategy has to be formulated to communicate the presence of Mitsui Grand Millennium Hotel Yaesu to the market. The marketing message can be relayed through various forms of platforms such as newspapers and magazines, which are popular among the senior management professionals to capture the MICE industry. These magazines include Forbes, Fortune, The Economist and Financial Times. Moreover, active online marketing through social media platforms and popular search engines for tourists will enable the new hotel development to capture a larger target audience. The social media platform provides visual and experiential sights of the hotel as travellers often use social networking to share their travel experiences. Mitsui Grand Millennium Hotel Yaesu can also ride on the testimonials made by its customers to improve and broadcast future promotions. 9.3.4.2 Public Relations Mitsui Grand Millennium Hotel Yaesu should establish and maintain goodwill with the public as well as organisations through good public relations efforts. Public relations with the selected target market should be sustained through issuing online and offline press release, in addition to communicating with organisational stakeholders through newsletters. Adopting an intensive public relations strategy is crucial in attracting the MICE industry as hotel reputation remains a determining factor in its choice of events locations. Besides engaging a third party consultant to manage public relations, Mitsui Grand Millennium Hotel Yaesu’s website could also serve as an effective platform for public relations. Investing for Growth Financial Analysis Page. 24 10. Financial Analysis 10.1 Key Assumptions This redevelopment project is predicated on several key assumptions. Firstly, it hinges on the fact that Mitsui Fudosan would have to be willing to enter into a conditional joint venture agreement with CDL on a 40:60 basis. Furthermore, it is essential that Mitsui Fudosan agrees to divests the Yaesu Mitsui Building to the joint venture Special Purpose Vehicle at a fair and open market value. Lastly, CDL Hospitality Trust will have to be given the first right of refusal to acquire the completed hotel asset at the end of a 10-year investment period as part of the exit strategy elaborated later on in the report. 10.2 Determining Weighted Average Cost of Capital (WACC) WACC of the project can be determined by computing the weighted average cost of equity and debt. The average cost of equity is derived through the use of Capital Asset Pricing Model (CAPM) and the average cost of debt can be determine using the weighted average cost of debt reported in CDL annual report 2014. CAPM equation is as follows: KM = Rf + βM(Rm – Rf) Where, KM = Project’s cost of equity Rf = Risk-Free Rate of Japan 3-Month Bond Yield βM = Project’s Beta RM = Average Market Return based on 3 listed real estate company* in Nikkei 225 *Companies include Mitsui Fudosan, Mitsubishi Estate and Sumitomo Realty & Development Co. Rf of Japan 3-Month Bond Yield 0.09% 12.00% ΒM 0.93 LTVM 81% D/E RatioM 416% 10.28% 9.35% 10.00% 8.42% 7.49% 8.00% Cost of Capital RM of 10.15% 6.56% 5.63% 6.00% 3.59% 3.55% 3.32% 3.09% 2.85% 2.72% 4.00% 1.88% 2.00%0.54% 0.54% 0.54% 0.80% 1.23% 0.00% 40% 50% 60% 70% 80% 90% 100% Loan to Value Cost of Debt Cost of Equity D/E Ratio LTV Beta 205% 257% 308% 359% 410% 416% 462% 40% 50% 60% 70% 80% 81% 90% 0.55 0.64 0.74 0.83 0.92 0.93 1.01 WACC Figure 28: WACC of different gearing ratios The cost of equity, cost of debt and project’s beta will vary based on the percentage of debts used. Figure 28 summarises the traditional weighted average cost of capital for different gearing ratios. The resulting WACC for different LTV values shall serve as an input for scenario analysis for discounted cash flow later. Page. 25 10.3 Open Market Valuation (OMV) A standard discounted cash flow (DCF) model was created and the income approach was used to determine the open market valuation of the Yaesu Mitsui Building as seen in Appendix I. Based on the DCF analysis the Yaesu Mitsui Building is valued at ¥ 65,600,000,000. This fair value will be the assumed acquisition price paid by the CDL and Mitsui Fudosan joint venture consortium. 10.4 Holding Period of the Project At the end of the year 3, the period where the hotel development is expected to be completed, an investor will be in the position to consider the whether to hold or divest the stakes of the development. Divesting 100% stakes of the hotel development is expected to generate a before tax equity reversion (BTER) of ¥ 37,336,000,000. In order to determine the optimal holding period, the opportunity cost of tying down this equity sum to the hotel investment needs to be considered for an additional 10 years first. The opportunity cost of holding the investment for 10 years is calculated to be 16.0%. This will serve as a hurdle rate to evaluate the minimum before tax internal rate of return (BTIRR) that would have to be earned for an alternative investment to be deemed as financially viable. As holding the hotel development for another year is considered an alternative investment decision, the Marginal Rate of Return (MRR) is calculated for each additional year the development is held. The below graph displays the MRR from year 4 to year 13 of the hotel development, compared against the hurdle rate. Marginal Rate of Return Considering the opportunity cost utilising this equity to upkeep the investment for an additional 10 more years, one will have forgo the opportunity to use the equity on other investment. The opportunity cost of holding the investment for 10 more years is 16.0%. This will serve as a hurdle rate to evaluate the minimum before tax internal rate of return (BTIRR) that would have to be earned for an alternative investment. The alternative form of investment in this case shall be the return on investment for holding one more additional year, or Marginal Rate of Return (MRR). The below graph displays the MRR from year 4 to year year 13 of the hotel development, compared against the hurdle rate. 40.00% 30.00% 20.00% 10.00% 0.00% 4 6 8 10 12 Holding Period MRR Hurdle Rate Figure 29: Marginal Rate of Return from year 4 to 12 Figure 30: Investment Timeline Base on figure 29, the MRR from year 4 to year 10 remains higher than the hurdle rate while the MRR from year 11 onwards is lower than the hurdle rate. This suggest that the investor should hold the investment for additional 7 years upon the completion of the development, or a total period of 10 years. Therefore, our DCF model is based on the derived optimal 10-year holding period. Page. 26 10.5 Investment Analysis and Monte Carlo Simulation In order to determine the financial feasibility of the redevelopment project, an investment analysis of the proposed project using a DCF model was conducted. The DCF analysis for this project is illustrated in Appendix III. To create a more rigorous analysis, a Monte Carlo Simulation was run on the standard DCF model to establish the worst and best scenarios. This ensures that the whole spectrum of possible outcomes have been duly considered. This process also helps developers to validate or correct any preconceived notion that they may have previously hypothesised with regards to how each critical input variable may impact the analysis. The assumptions for the DCF model and Monte Carlo Simulation annexed in Appendix II and IV are determined by the market analysis. 10.5.1 Optimal Capital Structure & Equity Returns Developers might be interested to use debt financing in exchange for being able to raise the tender price without undermining profit margins when undertaking a real estate development project. The following scenarios provide an analysis on the level of debt a developer should use to finance the site development. As mentioned earlier, 100,000 simulations of the DCF model was performed for the following scenarios through the Monte Carlo Simulation. A list of probable outcomes (certainty) for return (IRR) and net present value (NPV) is generated under each scenarios. 10.5.1.1 80% Loan-to-Value (LTV) Based on the Monte Carlo Simulation, an 80% LTV would generate the lowest risk reward ratio, the highest IRR and the highest NPV. Figure 31: Distribution of Simulated Development Net Present Value Initial Land Cost (20% of Land Value) Stamp Duty and Legal Fees Initial Equity Outlay Construction Cost Professional Fees Financing Cost Total Development Cost Figure 32: Distribution of Simulated Development Annualised Equity Internal Rate of Return ¥ 13,120,000,000.00 ¥ 393,600,000.00 ¥ 13,513,600,000.00 ¥ 7,657,079,040.00 ¥ 765,707,904.00 ¥ 115,670,149,786.75 ¥ 137,607,000,000.00 Page. 27 Based on these 3 different LTV scenarios, we recommend CDL undertake an 80% LTV financing structure, to generate the highest IRR of 13.98% and NPV of ¥ 54,744,000,000. Based on the proposed 40:60 joint venture structure with Mitsui Fudosan, CDL is expected to fork out an initial equity outlay of ¥ 5,405,440,000 and the total development cost for CDL is estimated to reach ¥ 55,042,614,692.30. 10.6 Exit Strategy It recommended that CDL adopts an exit strategy for this project via its existing fund management platform, CDLHT. This is aligned with CDLHT’s predominant strategy of investing in a portfolio of hospitality-related income-generating properties. Although envisaging global investments, its priority remained in the Asia Pacific region. This is further supported by the recent acquisitions of 2 Japanese hotel properties by CDLHT on 19 December 2014. Therefore, the % stake in the project can be divested to CDLHT Hospitality Real Estate Investment Trust (H-REIT) as an acquisition property when the opportunity surfaced. As of March 2016, CDL owns 36.43% of the issued stapled securities in CDLHT. The exit strategy thus allows CDL to functionally retain an indirect stake, maintaining its footprint in the Japan hospitality market. It additionally complements the corporate objective of CDL to recycle capital for maximised return and sustainable growth. Safeguarding Your Tomorrow Sensitivity and Risk Analysis Page. 28 11. Sensitivity and Risk Analysis 11.1 Sensitivity and Correlation Analysis ADR 0.87 Growth Rate of ADR 0.65 Occupany Rate 0.54 Growth Rate of F&B Income 0.07 Growth Rate of Other Income 0.03 Efficiency Ratio 0.00 Other Income Expense -0.02 Discount Rate -0.05 F&B Expense -0.07 Borrowing Rate -0.08 Hotel Room Expenses -0.13 Termination Capitalisation Rate -0.18 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 Figure 33: Correlations between the variables required for Monte Carlo Simulation The correlations between the variables required for the Monte Carlo Simulation are shown in the figure 33. These correlations are based on observed historical values that have been adjusted according to their estimated behavior and interaction in the future. From the figure 33, it can be observed that the ADR, occupancy rate and growth rate of ADR are highly correlate to the NPV of the project. For every 1% increase in the standard deviation of ADR, occupancy rate as well as growth rate of ADR, this leads to a 0.87%, 0.54% and 0.65% increase in standard deviation for NPV respectively. Therefore, in order to achieve the forecasted levels of NPV for this project, it is imperative that ADR, occupancy rates and growth rates of ADR are maximised throughout the whole investment period. 11.2 Identification of Risk 11.2.1 Development Phase Risks 11.2.1.1 Construction Cost Risk Japan has been facing rapidly rising construction cost due to increasing demand coupled with a shortage in skilled labour. As this project is a redevelopment, there will be significant construction cost incurred and this cost of construction may continue to increase during the construction period. Such a situation would increase total development cost and thus reduce the actualised profit margin of CDL. 11.2.1.2 Time Risk Another pivotal risk that should be analysed is time risk. The redevelopment of this hotel project is scheduled to be completed within 3 years. This construction time period is crucial as the hotel has to be ready for the 2020 Olympic games where the surge in tourists and ADR is expected to be significant. Potential delays during the construction period may lead to a later completion and opening date for the hotel, thereby failing to capitalise on the tourism boom. Page. 29 11.2.1.3 Approval and Regulatory Risk As this redevelopment proposal involves converting an office to a hotel development, necessary planning approvals will need to be secured from the Bureau of Urban Development of the Tokyo Metropolitan Government. As such, there is a risk of the redevelopment proposal being rejected by the urban planners. A rejection of the proposal would mean that a complete overhaul of the proposal would need to be done in order to salvage the project and minimise losses. 11.2.2 Post-Development Phase 11.2.2.1 Vacancy Risk Upon completion of the redevelopment, there is a potential risk of high vacancy levels as the hotel has a total of 402 rooms. This number of hotels rooms is significant and it may be difficult for the market to absorb this influx of supply. A high vacancy rate will lead to low RevPAR which would affect the overall cash flow and IRR of the development. 11.2.2.2 Revenue Volatility Risk As the proposed hotel is a full service luxury hotel, the risk of revenue volatility is naturally higher compared to a budget hotel or serviced apartment. This is because luxury hotel guest tend to be more sensitive to macroeconomic changes thus affecting the ADR, RevPAR and occupancy of the hotel. The short term nature of hotel room bookings makes it difficult for hotels to maintain high levels of occupancy unlike serviced apartments which usually rent out their rooms for 1 week or longer. These volatilities may lead to lower than expected annual cash flows which would in turn affect the projected IRR. 11.2.2.3 Earthquake Risk Tokyo, Japan is located near the boundaries of several tectonic plates making it highly prone to earthquakes. As established by JLL, natural disasters such as an earthquakes have several negative repercussions on the hotel industry. Firstly, inbound tourism is expected to decline due to tourists’ fears of secondary tremors and other dangers. Expatriates were also being evacuated out of Japan by their corporations due to safety concerns. Finally, corporations also started executing their business continuity plans and transferred their operations to regions outside Tokyo. The combination of these 3 factors, have all lead to poor performance of ADR, occupancy rate and RevPAR for full service luxury hotels in Tokyo. 11.3 Risk Mitigation Strategies 11.3.1 Employ Construction and Project Management Expertise In order to mitigate the construction cost and time risk, CDL should call for a competitive tender bid and secure a construction company once the development proposal has been finalised. This would enable CDL to negotiate and agree on the construction cost needed for this development, and also allow CDL to sieve through the potential bidders and select a capable contractor who would be able to deliver the project on time. CDL can also reduce the chance of delays in construction by seconding their experience project managers from Singapore and co-manage the site with Mitsui Fudosan’s project managers. Page. 30 11.3.2 Advance Co-pitching of Redevelopment Proposal CDL should leverage on Mitsui Fudosan’s experience in dealing and negotiating with the Tokyo urban planners in order to neutralise the risk of the redevelopment proposal being rejected. CDL and Mitsui Fudosan should conduct an advance co-pitch to the Bureau of Urban Development and secure the necessary planning approvals before the acquisition of the Yaesu Mitsui Building. This ensures that the actions spelt out in the proposal can be achieved. 11.3.3 Combined Corporate Synergies A strategy to dampen the risk of high vacancies in the newly built hotel would be to depend on the global sales and reservation offices of both CDL and Mitsui Fudosan. This would allow the Mitsui Grand Millennium Hotel Yaesu to tap on the corporate clientele, thereby boosting the demand amongst corporate travellers. With a combined guest list database, the hotel will be able to appeal to the loyal guests of both hotel brands thereby increasing the demand for hotel accommodation among leisure tourists. 11.3.4 Flexible Room Configuration and Rental Leases The Mitsui Grand Millennium Hotel Yaesu has a significant portion of suites that can be converted into long term serviced apartments to capture the demand in the long term accommodation market. This flexibility allows the CDL to reap stable income from long term service apartment customers during a difficult market while also enabling CDL to enjoy high ADRs from short term guest during a tourism boom. CDL could also lease out the restaurant spaces in the hotel to food and beverage tenants thereby allowing CDL to receive consistent rental income and thus stabilise the hotel’s cash flow. Bibliography Back, A. (2016). Japan's Negative Rates Are Rocket Fuel for Property Stocks.The Wall Street Journal. Retrieved from http://www.wsj.com/articles/japans-negative-rates-are-rocket-fuelfor-property-stocks-1454406201 Binh. D. (n.d.). Agglomeration Economies and Location Choices by Foreign Firms in Vietnam. School of Economics and Management, University of Trento, Italy. Canina, L., & Enz, A. C. (2006a). Revenue management in U.S. hotels: 2001 - 2005 Cornell Hospitality report, 6(9), 35 – 47. Retrieved from: http://www.hotelschool.cornell.edu/research/chr/pubs/reports/abstract-14021.html Favela, M. (2016). Tokyo Retailers Enjoy Strong Uplift in Sales from Tourism Spike in 2015. World Property Journal. Retrieved from http://www.worldpropertyjournal.com/real-estatenews/japan/tokyo-real-estate-news/tokyo-retail-report-2015-cbre-tokyo-retail-services-japantourism-data-for-2015-retail-space-for-lease-in-tokyo-tokyo-retail-rents-in-2016-japan-realestate-news-akihisa-sato-9660.php Japan GDP Growth Rate. (2016). Trading Economics. 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Retrieved from http://worldpopulationreview.com/worldcities/tokyo-population/ APPENDIX I: YAESU MITSUI BUILDING VALUATION APPENDIX II: HOTEL DISCOUNTED CASHFLOW (DCF) ASSUMPTIONS Property Summary Site Area Plot Ratio GFA Efficiency Ratio Net Lettable Area 29,450 sq ft 13 382,854 sq ft 80% 306,283 sq ft Professional Fees (% of Construction) Land Cost Fees (% of Land) Architect 4.5% Stamp Duty and Legal Fees Structural Engineer 1.15% M&E Engineer 1.15% Quantity Surveyor 1.15% Landscape Architect 0.55% Project Manager 1.5% Total 10% Hotel Information Type of Hotel Rooms Deluxe Rooms Premier Rooms Junior Suites Executive Suites Presidential Suites Total No of Rooms GFA (Sq Ft) 200 500 125 700 50 860 25 1290 2 1720 402 3% Total GFA for Rooms (Sq Ft) 100000 87500 43000 32250 3440 266190 Club Lounge Ballroom 1 1 2000 10000 2000 10000 Meeting Rooms Lobby Lounge All Day Dining Restaurant Specialty Restaurants Bar Fitness Centre 8 1 400 2000 3200 2000 1 3 1 1 6000 3500 1800 3500 6000 10500 1800 3500 Spa Total Grand Total 1 1000 1000 40000 306190 Hotel Income and Occupancy Variables Average Daily Rate ¥ 50,000.00 Occupany Rate 85% RevPAR ¥ 42,500.00 Revenue Hotel Room Food and Beverages Other Income 65% 25% 10% Operating Expenses (% of Revenue) Hotel Room Food and Beverages Other Income 15% 60% 30% Administrative & General Sales & Marketing Repairs & Maintenance Utilities Management Fees Fixed Expenses Property Tax Property Insurance Furniture, Fixtures & Equipment Reserve Incentive Management Fee 8.00% 5.00% 4.00% 5.00% 2% 3.00% 0.50% 3.00% 3.30% APPENDIX III: HOTEL DISCOUNTED CASHFLOW APPENDIX IV: MONTE CARLO ASSUMPTIONS Variables Mean ADR ¥ 45,000 ¥ 40,000 ¥ 50,000 5.00% 4.00% 6.00% 85.00% 80.00% 90.00% 1.00% 0.50% 1.50% Growth Rate of ADR Occupancy Rate Minimum Maximum Growth Rate of F&B Income Growth Rate of Other Income Other Income Expense 1.00% 0.50% 1.50% 27.50% 25.00% 30.00% F&B Expense 60.00% 55.00% 65.00% Hotel Room Expenses 15.00% 10.00% 20.00% Discount Rate 3.15% 3.00% 3.30% Interest Rate 1.21% 0.54% 1.88% 0.80 0.75 0.85 4.00% 3.80% 4.20% Efficiency Ratio Terminal Capitalisation Rate
Flow for Part 2 1. Executive Summary Reasons for Mixed-Use Development in Singapore Site Assessment Joint Venture with Frasers Proposed Development P.S: These are the sections that I require help with!!! Mainly the calculations of the values and the rationale/ reasoning / steps of arriving at the values Marketing Mix (pg 32) Financial Analysis ( pg 38) Risk and Sensitivity Analysis (pg 43) Context: Country: Singapore Developer Chosen: City Development Limited (CDL) Project: Redevelop Katong Shopping Centre into a mixed-use developent (serviced apartments + retail mall) Useful references http://katongshoppingcentre.com/ http://www.cdl.com.sg/ http://www.todayonline.com/business/katong-shopping-centre-collective-sale-agains630-million https://www.ura.gov.sg/uol/~/media/User%20Defined/URA%20Online/master-plan/masterplan-2008/written-statementMP2008.ashx http://www.straitstimes.com/business/property/katong-shopping-centre-makes-4th-bid-forenbloc-sale-with-nod-to-redevelop-into http://themiddleground.sg/2017/03/28/breaking-third-time-unlucky-for-katong-shoppingcentre-en-bloc-cushman-wakefield/ http://www.cushmanwakefield.sg/en-gb/news/2017/02/2017-katong-shopping-centre-collectivesale-up-for-2nd-launch/ http://www.businesstimes.com.sg/real-estate/s2248-psf-ppr-reserve-price-for-katong-shoppingcentre-seen-as-lofty http://www.straitstimes.com/business/property/katong-shopping-centre-may-soon-go-on-saleen-bloc-for-630m http://www.channelnewsasia.com/news/business/katong-shopping-centre/2874678.html http://www.cdl.com.sg/ https://www.srx.com.sg/commercial/katong-shopping-centre-cbkat005/floor-plans 1. 2. Executive Summary 3. Market Analysis√ ○ GDP and growth rates Demographics Interest Rate Currency Trends Unemployment rates Construction costs Supply Demand Government policies Capitalization rate and investment transactions? SWOT analysis 4. Joint Venture & Rationale √ 5. Proposed Development***** Site Assessment √ Selection of SITE LOCALITY Site and locational analysis Site description Obsolescence (Physical, Functional, Economic, Under utilized floor area?) Imposed development regulations Locational analysis Redevelopment proposal Integrated Development - Retail - Serviced Apartments Construction - How - Timeline 6. Marketing Mix√ Primary Target Market Secondary Target Market Why? 7. Financial Analysis***** 8. Risk and Sensitivity Analysis***** ○ ○ ○ Social Cultural Risk Institutional & Legal Risk Environmental Risk ○ Development Risk Financial Risk 8. Part 2:A Specific Site or Project Study Following from your firm-wide study in Part 1, your Team has been tasked with an additional mission. It must identify ONE key project for the firm that can be instrumental in delivering the firm’s corporate objectives and which the company must activate soon. Depending on the company, the project can but need not necessarily be a fresh development scheme. The project required may be the redevelopment of a specific site, the activation of an idle parcel in the firm’s land bank for which the “time” has come or even a major repositioning of an important existing development. If your Team believes that the firm should actively pursue a new development scheme and does not have the land for doing so, source for an appropriate potential development site. Also suggest a procurement strategy and the appropriate pricing for it. In any case, your Team must provide a justification for its choice. Your Team should conduct a full formal feasibility and (re)development study. Provide a recommended game plan for the selected site or project. Your analysis should include suggestions as to how the venture should be structured and financed. Identify the risks involved in the proposal and offer appropriate ways to manage them. Finally, prepare a strategic action plan for timing the various phases, including the marketing and management issues for the proposed project. You may make any relevant assumptions to support your analysis, provided they are reasonable and stated clearly. Flow for Part 2 1. Executive Summary Reasons for Mixed-Use Development in Singapore In the UK, the post event of Brexit has weakened the country’s currency, encouraging potential purchasers of luxury homes and commercial buildings in London to overlook the uncertainty around Brexit. Indonesians have been scaling down on property purchases in Singapore as their own residential real estate is performing better in terms of price stability, appreciation prospects and yields. Statistics have shown a 65% drop in the number of units bought by Indonesians, from 112 units in 2014 to 39 units in 2015. Even though Singapore and Hong Kong share similar ABSD rates of 15 per cent for foreign buyers of private homes, the private residential sector in Singapore has weakened, while those in Hong Kong continue to set records. Chinese nationals perceive private residential homes in Singapore to be less attractive, upon factoring in relative distance from Singapore to China versus that of Hong Kong (Whang, 2015). The number of private residential homes (resale and new launch condominium projects) bought by locals have increased to 9,967 units in 2015 (a 12.4% gain as compared to 2014), while purchases made by Singapore permanent residents have also increased by 13.7% (to 2,522 homes) in 2015 year-on-year. Even though analysts reckon that the number of property purchases by foreign buyers will continue to decline in 2016 due to the subdued global economic situation, positive signs are still showing as Singaporeans are expected to be actively buying into local properties as prices reach a stabilised point. http://news.asiaone.com/News/The+Business+Times/Story/A1Story20100721-228220.html https://farm4.staticflickr.com/3838/14901758706_f61b1fb6bc_o.jpg 2. Introduction + Rationale Introduction After the examination of City Development Limited’s (CDL) current practices and organizational framework, we propose that CDL take advantage of the changing economy where mixed-use developments are getting more and more popular. Also, it should aim to reposition an important existing development such as Katong Shopping Centre in Singapore, capitalising on available opportunities. The proposed development plan is a collaborative joint venture project, which is to be undertaken together with an experienced developer, Frasers Centrepoint. The proposed development is a redevelopment project of Katong Shopping Centre in order to generate higher revenue. The redevelopment of the mall is also in line with CDL’s goals which is to focus on optimising returns on its assets by undertaking refurbishment projects, whilst remaining vigilant with regard to controlling costs. This feasibility proposal presents an in-depth analysis concerning the prospects of the project as well as a recommended development structure which CDL should assume in order to meet its corporate objective. Rationale The redevelopment of Katong Shopping Centre would be vital as well as advantageous for CDL. Development in Singapore is easier as the market is relatively transparent, efficient and has effective corporate governance. Besides, CDL possesses the experience and expertise in development in Singapore as it is one of the pioneer developers. There is a need to reposition the malls in CDL’s retail segment of their diverse portfolio and Katong Shopping Centre is an excellent choice to start off with as they have tried to go on enbloc sales since 2012. Based on the macro market analysis of Singapore, the redevelopment of Katong Shopping Centre into a mixed-use development consisting of retail and serviced apartments would be viable as there is projected demand in the future as well as a shortage of such developments. Besides, the strategic location of Katong Shopping Centre plays an important role in ensuring the success of the development due to its proximity to transport nodes, amenities and the lack of competition in the vicinity. 3. Singapore’s Market Analysis - GDP and growth rates Economic growth forecast in Singapore has been trimmed due to global uncertainties such as Brexit, China and in the United States. Gross Domestic Product (GDP) is now expected to expand 1.8 percent in 2017, compared with the 2.1 per cent forecast in June 2016. However, the decrease in economic growth is still considered to be optimistic. Pockets of growth and resilience are still present in sectors such as medtech, chemical, tourism, retail, healthcare, education as well as construction in the public sector. This provides certainty and an opportunity for growth in difficult business conditions. - Demographics Singapore has a population of approximately 5.6 million as of 2016. Projected population rates is expected to increase over the next few years. Singapore’s population have also been rising steadily over the last 10 years. However, despite the rise in population, there has been a problem of aging population in Singapore. As seen from the figures above, Singapore's population has grown older over the years. The age pyramid shows the population ageing since 2006, with the number of residents in the older age groups increasing significantly. The median age of the resident population rose from 36.1 years in 2006 to 40.0 years in 2016. This phenomenon should be taken into consideration. - Interest Rate The increase in interest rates in Singapore is not beneficial for the slowing economy in the short term. Higher interest rates could further dampen spending and weigh on companies' investment plans. Also, higher rates prompt investors to move money out of emerging markets into US dollar-denominated assets, putting pressure on Asian currencies and asset markets. However, the Monetary Authority of Singapore has implemented measures to ensure households are better equipped to deal with an uptick in rates, including moves to curb imprudent borrowing as the rise in increase rates have already been anticipated. - Currency Trends The SGD has weakened against the USD due to the Monetary Authority of Singapore (MAS) easing its monetary policy by not allowing the Singapore dollar to appreciate. Also, the SGD is expected to be pressured downwards due to fiscal policies announced by the US. In addition to external factors, the SGD is also affected by a growth deceleration in Singapore's economy. Noting the presence of "bigger factors" such as sluggish external demand and falling trade intensity that are weighing on Singapore's exports, a weaker SGD will not necessarily prove to be such a huge boost for exports. - Unemployment rates Unemployment rate remained low at 1.9% despite negative economic outlook. While some sectors such as the offshore and marine and manufacturing are retrenching staff, others such as healthcare, education, and ICT are hiring. Singapore’s unemployment rate has been low and decreasing slowly over the years. - Construction costs Rising construction labour costs due to increased levy for foreign workers in the construction segments as announced in Budget 2015. However, to minimise the impact of rising construction costs, potential project delays resulting from reduced manpower and lower profit margins, BCA has introduced the Construction Productivity and Capability Fund (CPCF), a financial incentive aimed at workforce development, technology adoption and capability development in Singapore's built environment. The overall objective is to raise productivity by 20 to 25 per cent by 2020. 4. Analysis of sector we choose to venture in e.g. hotel/residential/etc Serviced Apartments - Supply Despite being one of the top city destinations as mentioned earlier, the supply of serviced apartments in Singapore stands at a relatively low rate of only 1.8 apartments per 1,000 business visitors. This is in contrast to New York, Hong Kong and Sydney, which have 5.2, 5.3 and 2.6 apartments per 1,000 business visitors respectively. (Frasers Hospitality, 2014) In terms of supply pipeline, there will only be one upcoming serviced apartment project, Ascott Orchard Singapore, which is expected to be completed in 2017. The development is part of Capitaland’s Cairnhill Nine Integrated development and its launch will introduce 220 new luxurious units which will be located at Orchard Road. (Capitaland, 2016) The unit types range from studio to 2-BR as well as penthouses, offering standard amenities. - Demand Over the years, the serviced apartments market in Singapore was fueled by the strong growth of the economy, the positioning of the country as an international business hub, and the globalisation of capital markets which has led to greater staff mobility. Singapore is also the third most popular city destination in the world with 17 million travellers arriving in 2015, of which business visitors make up the bulk of it. (The Apartment Service, 2016). The demand for serviced apartments has been always strong from these business travellers, as well as expatriates on longer term assignments. We observed relatively high occupancy rates of serviced apartments of 75% on average. In particular, the rate of BTMICE (Business Travel and Meetings, Incentive Travel, Conventions and Exhibitions) visitor arrival is an important driver of Singapore’s overall tourism performance. Despite the slight decline in the hospitality sector’s Average Daily Rates (ADRs) from $258 in 2013 to $245 in 2015 (Singapore Tourism Board, 2016), there have been government efforts such as the extensive Singapore Incentives & Rewards (INSPIRE) programme to make Singapore an even more attractive global destination for BTMICE visitors (Singapore Tourism Board, 2016). Hence, our team believes that with the government’s support, there is an impending potential for the growth of the ADR for the hospitality sector, due to an increased influx of BTMICE visitors into Singapore. This will thus enhance the attractiveness of the serviced apartments market, with the rise in demand. - Government Policies Short-term Rentals An amended planning act was passed in February 2017 which states that short-term home rentals would be illegal. The enacting of such strict regulations and heavy enforcements will negatively affect AirBnb in Singapore. As such, the supply of home sharing properties will decline substantially. This potentially reduces the threat of home sharing platforms while increasing the occupancy of traditional accommodation such as hotels and serviced apartments. Retail - Supply As seen from the first graph, the stock of available retail space has significantly decreased from Q32016 to Q42016, highlighting the opportunities available to the retail sector. Vacancy rates have also decreased. Pipeline supply of retail space after 2020 totals to 26, therefore the construction of a retail mall is viable as the supply of retail space would not be overflooded by the time our development is completed. Hence, retail space would have a higher demand due to the lack of supply. - Demand - Market Outlook Despite the bleak economic outlook, it can be observed that retail sales in Singapore have still been growing steadily throughout the years. In recent years, the retail sector has faced strong competition from e-commerce and m-commerce, as well as a declining global economy. However, our team is confident that the retail industry in Singapore would not be obsolete. This could be due to the gradual shift from traditional brick-and-mortar stores to incorporating a larger proportion of the space to food and beverage options. Also, retailers are looking at the adoption of multi-pronged strategies such as downsizing and shifting to cheaper locations to tackle the challenges. Besides, the serviced apartment market is primed to enjoy strong levels and growth in ADR, occupancy and RevPAR in coming years. Serviced apartments has also been proven to be resilient even during uncertain economic climates such as a market downturn. The sector positions itself to be a niche market with little or no close substitutes as it is a ‘sandwich class’, between hotels and private apartments. Our team feels that incorporating serviced apartments with a retail mall would be optimal in maximizing the land use and leveraging on the crowd present in Katong. In order to fully utilise the scarce land space in Singapore, a mixed-use development would be recommended to achieve the best outcome for CDL. 6. Site and locational analysis - Site description Selection of Site Locality Amenities Katong Shopping Centre is also situated in proximity to a wide range of amenities. Such amenities includes the number of shop houses in the area which houses many cafes, eateries and provides services such as beauty salon and spas. Convenience stores are also readily accessible. Residential properties such as Cote D’Azur and Amber Residences are also aplenty in Katong. The presence of residential properties allows Recreational places such as East Coast Park as well as Marine Parade are also close to Katong, further enhancing the location of the site. Katong also comprises of 4 schools such as Tanjong Katong Primary School and Chung Cheng High School Main. It is also near regional business hubs in Paya Lebar and Changi Business Park. The wide array of amenities provides convenience for guests who will be residing in the serviced apartments. Also, the presence of residential properties and schools signifies the constant flow of traffic in Katong which is beneficial to the retail segment in our development. Rich Culture Joo Chiat is Singapore’s first heritage town. It contains uniquely Singaporean architecture mixing Chinese, Peranakan and English colonial styles. The conservation area consists of many shop houses which are refurbished into cafes as well as specialty shops. Surrounding Developments Apart from Katong Shopping Centre, the only other shopping mall in Katong is I12 Katong therefore competition in the retail segment is not strong. There is also no serviced apartments in Katong, only hotels such as Village Hotel Katong are present. These hotels may pose as a threat to our serviced apartments. All in all, The strategic position of Katong Shopping Centre has great potential to appeals to a large spectrum of guests in the various surrounding districts. Property Name Katong Shopping Centre Address 865 Mountbatten Road - Site Area 87,000 sq ft Gross Floor Area 280,249.11 sft Age of Building 44 years Plot Ratio 3.0 Zoning Commercial and Residential Use Obsolescence Physical Obsolescence Built in 1973, the 44-year old shopping mall is currently suffering from physical obsolescence due to general usage as well as the lack of maintenance over the years. The interior furnishings as well as the exterior structures have deteriorated. The current physical aesthetics of the building is outdated and incompatible with the outlook of the area. Besides, Katong Shopping Centre is unable to compete with the newer I12 Katong, which result in a decrease in the property value due to their inability to generate favourable returns. Functional Obsolescence Katong Shopping Centre is also no longer able to function in the way that it was intended to. The layout as well as building structure of the mall is inefficient as it does not incorporate newer technologies and features such as energy saving features due to it’s age. The current inflexible layout have resulted in functional obsolescence as these shortcomings are not easily rectified. Economic Obsolescence It is believed that the mall is also economically obsolete. Today, it mainly caters to maid agencies, printing shops and textile and clothes outlets, with offices on the upper floors. The tenant mix in the mall is unable to successfully keep up with the changing preferences and needs of consumers. Hence, rent in the mall is not up to date i.e. lessees pay $1,000 a month for a basement space of just over 200 sq ft. This shows that the mall is no longer in a position to generate positive returns as it is degenerating. From the above, it is evident that redevelopment of Katong Shopping Centre is necessary to increase economic returns as well as to unlock its development potential to its highest and best use. - Imposed development regulations Mandatory Green Building Ratings Building and Construction Authority (BCA) has set out specific initiatives to lead Singapore’s building and construction industry in greening our built environment. In 2005, BCA kick-started its drive to green Singapore’s physical landscape by launching the BCA Green Mark: a rating system to evaluate a building’s environmental impact and recognise its sustainability performance, designed specifically for buildings in the tropics. Various incentives are also given to encourage green buildings in Singapore. 80% of the buildings in Singapore is expected to be green by 2030. Amendments to the State Lands Act Amendments were made to the State Lands Act in 2015 to improve transparency as well as to provide a more in depth guide for developers. The amendments removes ambiguity regarding the development of subterranean space where developers are only able to develop to the depth specified by the Land Titles Act or -30 metres from the Singapore Height Datum. Also, developers now have a greater responsibility to use their land without injuring the subjacent land as rights to subjacent support is now clarified as an easement. - SWOT analysis Strengths 1. Comprehensive transport network 2. Strategically located near to amenities 3. Upcoming area with government initiatives to revitalise the area Weaknesses 1. Presence of nearby shopping malls such as Parkway Parade and I12 Opportunities 1. Financial incentives such as BCA Green Award 2. Growth and resilience in the retail and tourism sector 3. Focus on decentralization in Singapore Threats 1. Uncertain global conditions 2. Competition with other upcoming townships (ie Jurong East, Punggol) 3. 7. Joint Venture with Frasers - Rationale for Joint Venture Taking into consideration the estimated high capital outlay required for a development like our proposed development; it is imperative that we secure a well-grounded source of financing; via a joint venture. A joint venture also allows us to diversify and reduce the financial risk it has to bear for the development. Therefore, through a joint venture, our team may then obtain an optimal debt and equity structure, enhancing the profitability and viability of the project. Our team has chosen Frasers Centrepoint as CDL’s joint venture partner. It is a Singapore real estate company with international presence and experience in residential, commercial, hospitality and industrial asset classes. Frasers Centrepoint is one of the largest owners and operators of shopping malls in Singapore, having a portfolio comprising of 12 malls that span both urban and suburban areas (Frasers Centrepoint Limited, 2014). They are however, not as active as other bigger developers in Singapore; it is also observed that Frasers adopts an approach in developing such properties with a joint venture partner instead of doing it alone. Financial Position In essence, a joint venture coupled with a healthy financial statement is recommended so to reduce the level of risk and increase returns. Maintaining a healthy financial statement will enable us to take up loans at more favourable financing rates and LTV ratios from the bank. Therefore, embarking on a joint venture and maintaining healthy financial reports will enable us to receive a lower interest rate coupled with a higher LTV ratio, which will ultimately increase the development’s NPV. Frasers delivered highest ever 1Q Distrubution Per Unit (DPU) in 2017 at 2.89 cents. Their DPU growth has been steady and growing since its listing. Despite the decrease in revenue by 6.4% from 2016 to 2017, it is mainly due to lower contribution from Northpoint which is undergoing Asset Enhancement Initiative (AEI) work. The consistence in Frasers financial position will be able to provide CDL with financial security as well. The good financial performance of the company is contributed to their strategic planning and financing of the projects over the years. Default Risk Default risk is the chance that developers would not be able to follow up with the required payments on their debt obligation. The joint venture will enable CDL to reduce the risk of bankruptcy while developing a project with high total development cost. The JV will enable the sharing of costs and risks with Frasers, providing a cushion for negative impacts which would affect CDL in case the event is not successful as the total development cost for the project is also contributed by Frasers. This will allow the project to yield a higher level of return due to the combination of expertise and other positive spillovers. Joint Expertise Frasers has expertise in both retail as well as serviced apartment, they would be a valuable asset to CDL as a joint venture partner. Numerous prestigious accolades were awarded to them; some of many which are listed below: · World's Leading Serviced Apartments 2015 · World’s Leading Serviced Apartment Brand 2012, 2014 & 2015 · Singapore's Leading Serviced Apartment Brand 2013 & 2016 · Singapore's Leading Serviced Apartment Brand 2013 & 2016 Frasers portfolio also consists of 12 malls which are well situated in both urban and suburban prime precincts with a total net lettable area of over two million square feet, across about 1,400 shops. Their malls includes The CentrePoint, as well as the newly launched Waterway Point. Therefore, by forming a joint venture with Frasers, CDL could leverage on its critical knowledge and industrial experiences in the hospitality and retail sectors. A highly-experienced joint venture partner would contribute to better decision-making and project implementation. Moreover, the partner’s credible reputation as well as strong corporate brand would efficiently aid in the marketing process of the project and substantially enhance the probability of success for the redevelopment project. Beneficial towards Frasers Recently, Frasers has been rather active in forming joint ventures in developing properties. We are thus confident that this is a strong indication that they are open to joint venture partnerships; it has also been noted that land cost in Singapore are generally expensive, which led to Frasers pumping more money into other countries than Singapore, as the risk would be spread out by not focusing too much of their funds in one country. However, our team strongly believes that if given the opportunity of developing a first-of-its-kind mixed-use development with service apartments, Frasers would definitely be interested, as these developments are their forte, and that being a pioneer in such a development will greatly aid in diversifying their portfolio. Also, the company is currently looking into exploring strategic investment opportunities to grow its hospitality portfolio and for pipeline assets to be injected into its Frasers Hospitality Trust (FHT), the first international hospitality trust listed on the SGXST (Frasers Centrepoint Limited, 2014). Therefore, the joint venture would be beneficial to both parties, which will further entice Frasers to work with CDL. - Proposed Joint Venture Structure Our team proposes an ownership structure of 70:30 between CDL and Frasers due to considerations regarding the high-debt ratio of Frasers. By undertaking a higher equity stake, it would persuade Frasers to participate in this joint venture as they would not have to commit a large sum of money for the development of hte project. Also, it allows CDL to retain larger control over the project execution while spreading out risks. CDL would also be able to capitalise on Fraser’s expertise in serviced apartments as CDL is lacking experience in that aspect. CDL and Frasers would be able to benefit from the other as they specialise in different areas in the real estate industry. Both of them would contribute effective to the project by supplying new stream of global customers. Also, due to the lack of previous partnerships between CDL and Frasers, it is necessary for CDL to prove their sincerity in the joint venture by undertaking more risks. The project is regarded as an initiative to build future partnership opportunities as well as a chance to generate higher revenue for both parties through the redevelopment of Katong Shopping Centre. According to the proposed joint venture structure, Frasers would only be required to contribute 30% towards the total development costs for the project which would impose a lower financial burden on them. This will allow them to undertake a lucrative development with minimal cost burden. PART 2 ES DRAFT (+overview) KEY Objective(s): Strategy formulation & decision making processes & converting raw lands into the highest and best uses (HBU) Real estate development ideas, strategies, and creative designs; maximizing land use values; international/regional. Real estate and township development projects; integrated resorts and theme parks developments; project financing and management; land bidding and banking strategies; compare and contrast PROVEN STRATEGIES by successful developers JV Partner CapitaLand/CapitaMall (retail mall)/Asccotts (serviced apartments) Compatibility of JV Partner Investment strategy is assumed to be the same; both are looking at a speculative investment for redevelopment of Katong REMA Residential: (-) Oversupply & weak demand, Medical: (-) Challenging outlook & legislative risk, Retail: (+) Strong Occupancy rates & Increasing Rental; Sector Analysis Serviced Apartments have been targeted for Residential Market; Luxury Market for Retail Plot Analysis KATONG was chosen to be developed. The large land area of xx posed a large financial risk due to high development cost. Whereas Plot 3 carried a legislative risk as the government may decide to zone the commercial land to medical. Development Concept Integrated development consisting of a serviced apartment in the residential sector as well as a mall in the retail segment. Financial Analysis Leverage: D / E ratio xx:yy. Hurdle Rate: xx%. WACC: xx% Debt Financing SGD$xxx will be borrowed; consisting of both offshore and onshore financing 8. Redevelopment proposal PROPOSED DEVELOPMENT Proposed redevelopment of Katong Shopping Centre into an integrated development consisting of serviced apartments and a mall for the retail section. Mixed use projects and integrated projects are commonplace in central Singapore. In recent years, widespread decentralization, the rise of regional centres and neighbourhood centres have led to large integrated projects at the city fringe and suburban areas. The extent of integration in the projects varies. Some are multi-purpose projects with negligible synergy between the different components. An integrated development project, on the other hand, should produce an ecological environment where the degree of integration is deeper. It can be seen in a physical space like a shared park or green space, or in common activities of different users, sometimes called “place-making”. Integrated projects are now designed to allow residents to enjoy not only the convenience of direct access to retail space, but also the benefits of direct provision of tenants from the office buildings. There is ample green space to connect different parts of the integrated project, which also means that residents can enjoy the park outside the residential facilities. If only one residential area is being serviced, facilities such as day-care centres may not be set up due to low cost-effectiveness, but with a larger office user base, residents will have access to these facilities. The point is that the whole project becomes a larger community space for the residents. Parks are not only for residents, but also serve as a bridge between public and private spaces. Residents can feel more at home. Selling points and higher prices for local integrated projects; integrated projects near to MRT stations cost about 30% more A study by Knight Frank on projects with direct connectivity to MRT stations shows that residential units within these projects typically cost between 25% and 30% more than the pure residential projects launched in the same period and 300 to 400m away from subway stations. New units of Wallich Residences in Tanjong Pagar Centre’s sold about 28% higher than the average selling price of new units in Altez and Skysuites. The latter two projects are 250 to 300 m away from the MRT station. Watertown is another good example. In 2012, the average selling price of Watertown was 27.6% higher than Parc Centros’ price in the same year and 30.4% higher than A Treasure Trove. Parc Centros and A Treasure Trove are 220 to 230m from the closest MRT station. The same is true of North Park Residences and Symphony Suites, both of which are due in 2015. North Park Residences prices are still higher than the 30.0%. A comparison of the total debt service ratio (TDSR) before and after the introduction of the framework also shows a price premium of between 25% and 30% for projects near to MRT stations. Compared to non-integrated projects away from the MRT station, the higher prices reflect buyers’ attention to the benefits of integrated projects directly connecting to MRT stations. The price gap is equal to the premium paid by the buyer for the opportunity cost. Large-scale integrated projects, especially those located at the city fringe and suburbs, are quite rare and the supply is very limited. Since 2014, only seven new residential projects are part of a mixed-use project. In the coming year, the launch of new integrated projects is still rare. The integrated project of the Paya Lebar Quarter is expected to be the most compelling. The project, which has large- scale office and retail spaces, will stimulate growth in the area of Paya Lebar. As a result of the rarity, good connectivity and lifestyle characteristics of integrated projects, such developments are likely to sustain their popularity. The popularity of integrated projects can be seen from the stellar sales performance. The 920unit North Park Residences in Yishun sold 413 units in four days after it was launched in April 2015. This project is part of an integrated development and retail mall, Northpoint City. The same is true for past integrated projects. 60% or 350 units of Bedok Residences were snapped up on the day of the launch. Punggol’s Watertown have sold more than 500 out of 992 units in a week. To carve out a big chunk of Paya Lebar and transform it into a sustainable and modern urban space, while also respecting its deep historical and cultural ties, is quite the gargantuan task. It is one that now rests on the shoulders of Mr Richard Paine, a 51-year-old Australian leading the Paya Lebar Quarter transformation project for developer Lendlease. Three weeks ago, Lendlease released fresh details about the $3.2 billion mixed development right next to Paya Lebar MRT station. The usual development details expected of such an announcement were all there. For example, there will be three office towers with one million sq ft of Grade A office space. There will also be a shopping mall comprising 200 stores and cinemas over seven floors. And a residential component, Park Place Residences, will offer 429 one- to three-bedroom units. But to say that Paya Lebar Quarter will simply comprise these structures is to miss the grander vision that Mr Paine has in mind – that of a vibrant, sustainable community deeply connected to the area’s history and cultural roots. “This area is at the junction of three culturally rich areas – Katong, Joo Chiat and Geylang. We’re going to modernise it and at the same time, more importantly, be part of the community,” he told The Straits Times in a recent interview. “We want to give people more lifestyle options while being respectful of the community that they’re in.” So one of the first things that he and his management team did after moving their office into the area in April was to take walks through the neighbourhood and learn about its history. “We went on heritage trails; we explored different areas. That was really about understanding the context of where we are. We learnt a lot of interesting things which gave us a sense of the community,” he said. That helped the team come up with ideas about signature events that could be held at Paya Lebar Quarter when it is completed, and even inspired the development’s architectural design. “We are in the cultural heart of the Malay community, so we took inspiration from traditional Malay fabrics like the songket, and you will see that reflected in the architecture,” Mr Paine said. Another way that Paya Lebar Quarter hopes to build a community is by making the whole area very cyclist-friendly. “You’ll be able to cycle here, park your bike safely, go to a facility for a shower and towels and get ready for the day,” Mr Paine said. “If you can exercise on the way to work via park connectors that feed into this project, that enhances your life. That allows you to be healthier and bond with friends by cycling together. It’s time efficient and changes the way people behave.” If he sounds especially fired up about this, it is because he has a vested interest – he is an avid cyclist who cycles at least five days a week, chalking up 12km to 15km in total as part of a cycling club. Mr Paine has lived in Singapore for 16 years, and over that time has cycled all over the island, seeing it transform to become a more liveable and sustainable city. The father of three – two girls and a boy aged between 10 and 17 – expects his family will continue to live in Singapore for the foreseeable future. “Singapore has been on its own journey and it’s changing all the time. I feel a certain pride about Singapore and how it’s evolved.” And he knows a thing or two about liveability and sustainability, having been raised by parents who practised sustainable living before it was fashionable. “My father was a pioneer in things sustainable. Forty years ago, he built a solar water heater from scratch, by himself,” he recalled. “When I was brought up in Canberra, we had a huge vegetable garden in our backyard. We ate everything we sowed. I would pull carrots out of the ground and just wash them and eat them. That was very formative. Seeing that process, understanding the produce. That gives you an inherent understanding of sustainability.” He feels a deep sense of satisfaction at the way Lendlease practises sustainability, by bringing new life into old neighbourhoods with the highest standards of design and service. He has seen it first-hand. When he moved to Singapore in 2000, Lendlease was in the process of buying Parkway Parade Shopping Centre, its first foreign asset in Asia. It then revamped the shopping centre and its immediate surroundings into the bustling community it is today. “I’ve enjoyed the evolution of that asset and community,” Mr Paine said fondly. Up until April last year, he was the managing director of Lendlease’s investment management business, looking after its property funds. Then Lendlease bought the Paya Lebar Quarter site and began planning this project, and turned to him to lead it. Looking back on his years with Lendlease and ahead to more exciting ones to come, Mr Paine said he feels a deep satisfaction. “I look back on… the people I’ve worked with, watching their careers grow and seeing them reach more senior positions. It’s something I get a real kick out of,” he said. “And when I look at the diversity that the job has given me – the different types of projects, different geographies, roles in development and investment management – it’s been incredibly interesting.” Construction Timeline MODULAR VS TRADIITIONAL Timeline: DEC 2017 to DEC 2021 Carried out in 5 stages Retail Tenants: GREEN FEATURES •Daylighting Technology; glass-skin at the top of the shopping mall & boulvard. The exterior of City Square Mall is constructed with a curtain wall system of architectural glass, which makes up about roughly 80 percent of the exterior finish of the building (both ceiling and exterior walls inclusive). The particular type of glass commonly used in architecture for building finishes is a high performance double-glazed glass. Glass was chosen as a material of the exterior of the mall not only because it complements the eco-friendly initiatives of the shopping mall; glass as a building material also fulfils other secondary purposes such as adding a touch of aesthetics to the building and the low maintenance requirement. Glass plays a notable role in accomplishing greater indoor environmental quality and energy efficiency as well, and in so doing it satisfies several of the criteria for green buildings. It is also generally an easy material to work with, and thus allows the architect to manipulate it to its advantage. The design of glass and how it is utilised in architecture is of paramount importance and is taken into serious consideration, especially when developing green buildings. Besides serving its primary purposes, glass as a building material can add a sleek and modernised look to a building (Fig 1.3). Figure 1.4: Daylighting providing natural lighting through the glass panels (interior) Because of its transparent characteristic, glass allows sunlight to filter into the building, resulting in a process called daylighting. Daylighting (Fig 1.4) greatly reduces the lighting required in the building, as sunlight that penetrates into the building through the glass provides a natural and effective internal lighting on its own at zero cost and minimal energy usage. With natural light through the windows, there is a lesser need for artificial lighting in the building. Additionally, developers exploit the thermal properties of glass to their advantage as well, as it is a bad conductor of heat. Double glazed glass can help alleviate the heat and intensity of solar rays penetrating into the building significantly. Thus, a lower and more constant level of temperature is passively maintained internally in the mall, greatly reducing the usage of air conditioning. Also, glass typically do not require a high level of maintenance, and is much easier to clean than other exterior building surfaces such as granite. This not only saves huge utility costs for the building, as the costs of air conditioning and lighting of a building such as a shopping mall is extremely high, but at the same time, it is also more eco-friendly as energy resources are being efficiently used and not wasted with the reduction in the usage of electricity. Since glass is also a renewable resource, it is fully recyclable and for an infinite number of times, promoting efficient use of resources. The downside of glass, however, is the high costs. Especially in the context of City Square Mall, which utilises a large amount of glass for both the interior and exterior of the building. The Skypark is yet another green roof, this time on top of the mall. It helps lower the temperature and heat gain of the building with the use of greenery. It is open to the public to enjoy the outdoor scenery. 4.3 Finishes and area estimate Hardwood is used as the main flooring material for the entire Skypark (Fig 1.7). Hardwood as a building material is an environmental friendly material as it is made from renewable resources and its relatively short life cycle, which averages about 20 to 30 years depending on the grade of the wood and how well it has been maintained, Wooden flooring is also recognised for its aesthetic properties as well as its durability, and in this case the natural aesthetics of the hardwood flooring complements and harmonizes with the design and ecological theme of the mall. Wooden flooring is not new to the Singapore flooring market, and the market now provides a vast range of designs to choose from at competitive prices. Wooden flooring is also recognised by the Singapore Green Label Scheme under the category Wood Products & Recycled-Renewable Fibres. The drawback of wooden floor in Singapore however, is the cost of it. The purchase of the material alone would incur huge costs, let alone the installation of it. Generally, Singapore is a country where has most of its resource imported from overseas. This will lift up the carbon footprint in a life cycle assessment of a product in the first place. It is an environmental-friendly choice due to its low life cycle and also it is manufactured using renewable energy •Landscaping; surrounding land is filled with green space. •Provide “Green Branding” to tenants When constructing a commercial building such as a mall, the developer usually takes into consideration a few main criteria to satisfy in the process. Aesthetics, practicability, cost effectiveness and ease of maintenance are fundamental key aspects that developers look out for the most when developing any type of building. However, unlike the typical shopping mall, City Square Mall was built and designed around the concept of environmental sustainability, the architect has to factor in environmental sustainability in the development process, so as to tie in with the building’s theme and eco-initiatives. This section of the report examines and evaluates the various finishes and building materials used in City Square Mall and why is it chosen and how does it relate to the mall. Katong Shopping Centre was Singapore's first air-conditioned shopping mall when it opened in 1973 The property's reserve price remains S$630 million, which translates to a land price of S$2,248 per square foot of gross floor area. d glass can help alleviate the heat and intensity of solar rays penetrating into the building significantly. Thus, a lower and more constant level of temperature is passively maintained internally in the mall, greatly reducing the usage of air conditioning. Also, glass typically do not require a high level of maintenance, and is much easier to clean than other exterior building surfaces such as granite. This not only saves huge utility costs for the building, as the costs of air conditioning and lighting of a building such as a shopping mall is extremely high, but at the same time, it is also more eco-friendly as energy resources are being efficiently used and not wasted with the reduction in the usage of electricity. Since glass is also a renewable resource, it is fully recyclable and for an infinite number of times, promoting efficient use of resources. The downside of glass, however, is the high costs. Especially in the context of City Square Mall, which utilises a large amount of glass for both the interior and exterior of the building. 4. Skypark Floor area: 15,069 square feet Width: 35 metres Length: 40 metres Figure 1.7: Skypark The Skypark is yet another green roof, this time on top of the mall. It helps lower the temperature and heat gain of the building with the use of greenery. It is open to the public to enjoy the outdoor scenery. 4.3 Finishes and area estimate Hardwood is used as the main flooring material for the entire Skypark (Fig 1.7). Hardwood as a building material is an environmental friendly material as it is made from renewable resources and its relatively short life cycle, which averages about 20 to 30 years depending on the grade of the wood and how well it has been maintained, Wooden flooring is also recognised for its aesthetic properties as well as its durability, and in this case the natural aesthetics of the hardwood flooring complements and harmonizes with the design and ecological theme of the mall. Wooden flooring is not new to the Singapore flooring market, and the market now provides a vast range of designs to choose from at competitive prices. Wooden flooring is also recognised by the Singapore Green Label Scheme under the category Wood Products & Recycled-Renewable Fibres. The drawback of wooden floor in Singapore however, is the cost of it. The purchase of the material alone would incur huge costs, let alone the installation of it. Generally, Singapore is a country where has most of its resource imported from overseas. This will lift up the carbon footprint in a life cycle assessment of a product in the first place. It is an environmental-friendly choice due to its low life cycle and also it is manufactured using renewable energy 9. Marketing Strategy Factors to take into consideration when marketing Target market; dimensions of the target market Market segmentation criteria Market segmentation techniques Market gridding for target marketing Effective Trading Area When to undertake Real Estate Asset Disposal Serviced Apartments: Retail: First mover advantage: No direct competitors in the vicinity Positive outlook for our holding period of 10 years Both mass market and luxury positioning to cater to the mixed used development and nearby catchment area 5.2 Market Segment Analysis 5.2.1 Retail The outlook for flats in Singapore does not seem positive. The event of Brexit has weakened the country’s currency, encouraging more potential purchases of residential properties in London instead of Singapore as they are cheaper. Singapore’s properties bought by Indonesians have decreased by 65% from 112 units in 2014 to 39 units in 2015 as “their own residential real estate is performing better in terms of price stability, appreciation prospects and yields” (Whang, 2015). According to URA, it’s a new record low in foreign buyers buying properties in Singapore. As the cooling measures are expected to persist, people are looking outside of Singapore for better investment prospects (Foo, 2016). Therefore, analysts reckon that the number of property purchases by foreign buyers will continue to decline in 2016 which is also exacerbated by the subdued global economic situation. Overall, there has been increasing vacancy rates in flats of 9.1% to 11.0% in Singapore from Q1 2016 to Q2 2016 (URA, 2016). This suggests that the demand for flats have been falling, and is expected to fall even further 5.2.2 Serviced Apartments Despite being a niche segment in a highly competitive sector, Singapore’s serviced apartments sector is anticipated to expand further as evolving travelling habits point to increased demand for short but more frequent stays. Increased knowledge, strong demand, flexibility of the model and higher returns for this product have led to significant investment in the sector in recent years. Even in uncertain economic climates, the serviced apartment sector has proven to be resilient. It offers a good value proposition for all types of travellers as certain features of serviced apartments have served well to meet the needs of travellers. The appeal of serviced apartments lies in the flexibility of lease terms which suits the accommodation needs of business clients who are on short trips and do not want to commit to the longer one-year residential property lease. On the flipside, hotel rooms tend to fall out of favour. Even though they are functional for short-term stays, they have high per-day room rates. As such, strong demand is still expected for serviced apartments as many companies and foreigners are turning to serviced apartments as an alternative accommodation option. 5.2.3 Demand for mid-tier serviced apartments in Katong The serviced residences sector is seeing a increasing number of serviced apartments being built in the suburban areas, especially near new regional hubs or commercial zones. Most of them are mid-tier serviced apartments or budget serviced apartments with monthly asking rents of 10 to 13 dollars per square foot or 6 to 7 dollars per square foot respectively for a onebedroom unit. One example is Fraser Place Fusionopolis, which opened in 2009 to serve expatriates working at the biomedical, infocomm and media hub of One North in Buona Vista. This may serve as potential compet ition for our development if it was to be built in Holland Village, as many expatriates would most likely prefer to stay near their workplace to save on time and cost of travelling, and be in close proximity with other expatriates for exchange of valuable knowledge and information. However, a conducive working environment may not equate a conducive living environment. There are many concrete buildings clustered in One North due to the need to maximise agglomeration of economies and although some greenery are integrated into the working environment, the expatriates living there may still feel ‘caved in’. Below is an aerial view of the working environment in One North taken from Google Earth, showing the density of high rise concrete buildings which may lower the quality of living there. Figure_: Aerial view of Fusionopolis One and business park in One North Furthermore, some expatriates working in One North or Central Business District (CBD) area may not want to live near their workplaces, as they may value their time spent away from work, especially expatriates with families. As such, they may choose Holland Village as their home. This means that they can experience a more homely environment away from their workplace and yet not being too far away from it due to the convenience of MRT transportation since Holland Village MRT station is only 2 stops away from One North MRT station. (Figure_) As such, demand for serviced apartments in Holland Village is still likely to be strong as many expatriates are attracted by the bohemian neighbourhood style and high concentration of fellow expatriates. Also, with many places of relaxation such as bars around, Holland Village provides a conducive place where expatriates can relax after a long day of work elsewhere. It also supports the exchange of information and ideas out of the workplace due to the high number of expatriates living there. On top of that, with current plans for Jurong Lake District becoming the second CBD, there is a projected increase in the number of expatriates coming into Singapore. (may need more info) As such, there will be a sustained demand for serviced apartments. Since Holland Village MRT station is only 4 stops away from Jurong East MRT station (Figure_), there is a high possibility that expatriates will seek for serviced apartments in Holland Village. Market segmentation criteria Market segmentation techniques Market gridding for target marketing Effective Trading Area When to undertake Real Estate Asset Disposal RETAIL MALL Primary Market F&B: Timbre Group, Harry’s Bar, Georges, McDonalds, Kenny Rogers Retail: Zara, Kate Spade, DKNY, Tommy Hilfier Secondary Market Performing Arts Theatre: Seek out partnership with Malaysia Arts Council Luxury segment Primary Market Fashion: Channel, Prada, Louis Vutton Healthcare: Poise Wellness Group , Thai Sanctuary Secondary Market Upscale Michelin Guide Restaurants: Nobu, Prime, El Cerdo a. History/Background/Heritage The unique history of Katong and Katong Shopping Mall. Using Singapore Flyer as illustration Location: happening downtown; stone's throw away from Orchard road to Clarke Quay) High accessibility; private transport (arterial roads, major highways, public transport (bus stop/MRT station), easy to find Connectivity; to other developments nearby, such as shopping malls (Suntec City, Raffles Shopping Centre), integrated pedestrian network (Raffles Link) Landmarks; Historical, cultural; Esplanade, Singapore Arts Musuem, Old Parliament House), other tourism developments Unique/ Iconic features to stand out; world's tallest... Others; 24-hour city "city that never sleeps" ; Lau Pa Sat b. PRESTIGE For the serviced apartments, concierge services,to evoke certain feelings like granduer, name Location; District 6 Architecture/concept/Design; as mentioned in last lecture, to evoke certain feelings like granduer, name Security; privacy, (eg Sentosa 'gated communitity" Luxury Amenities Management Demand and trends for this type of development c. Architecture/concept/Design; unique features such as green buildings, self sustainable, Lifestyle; visibility such as glass outer fittings; "to show" Must have open communal spaces Rooftop green spaces D. Incentives Incentive 1: ● Implement profit sharing rent model for One Metropolis shopping mall ● Reduce tenants’ reluctance to move in despite being the first retail shops in the area; downplay the risks Implement rent free periods for tenants who sign on to long term leases 1 month for every 1 year signed Endorsements; is it recognised officially by relevant authorities in Singapore? Branding; ie Jackie Chan endorsement of California Fitness Membership Systems; Exclusivity/prestige/value for money/ concierge services etc) World class/ top grade facilities of highest level People; members to trainers ----Perception of marketing towards certain individuals Assumptions about property life cycle that 100% occupation Emphasise accordingly to the stages; "Customised packages" E. PUBLICITY Organise Events to bring people in Utilizing online to offline (O2O) technology to bring customers to the retail sector Discount offered for mobile check in; eg Facebook & Yelp to create location awareness Establishing social media presence by offering prices / discount for hashtags on Twitter, Instgram & Facebook; #Metropolishub, #OneMetropolis, #Pavilionst 10. Financial analysis 1. 2. - 3. 4. 5. 6. - 7. - Key Assumptions Proposed JV structure Determining Weight Average Cost of Capital (WACC) WACC of the project can be determined by computing the weighted average cost of equity and debt. The average cost of equity is derived through the use of Capital Asset Pricing Model (CAPM) and the average cost of debt can be determine using the weighted average cost of debt reported in CDL annual report 2015. Open Market Value (OMV) -- Using DCF and income method to derive the value of Katong Shopping Centre Holding Period of Project BTER, BTIRR Investment Analysis Investment analysis using DCF method and add simulation (i.e. Monte Carlo) Valuation for mixed use development (serviced apartment + retail) Capital Structure and Equity Returns The use of debt financing, elaborate a bit on advantages of debt financing Optimal Loan to Value (LTV) -- to generate lowest risk reward ratio, highest IRR and NPV. After that, calculate initial equity outlay + total development cost (can be derived from lecture notes) Exit Strategy CDL Hospitality Trust??? Current figures for Katong Shopping Centre The property's reserve price remains S$630 million, which translates to a land price of S$2,248 per square foot of gross floor area. freehold plot of nearly 87,000 sqft. S$630 million, which translates to a land price of S$2,248 per square foot of gross floor area plot should yield more than 400 units of serviced apartments, based on apartment sizes of about 500 sq ft. The mall had been launched for collective sale through tender in June last year, The mall, which contains 425 units, sits on a freehold plot of nearly 87,000 sqft. plot should yield more than 400 units of serviced apartments, based on unit sizes of about 500 sq ft. No development charges are payable Although the current master plan zoning for Katong Shopping Centre is commercial & residential, with a plot ratio of 3, approval has been granted for the development of a brand new mall/serviced residences at a plot ratio of 3.223. Katong Shopping centre has an expansive frontage of close to 170 m and is sited at the eastern end of Mountbatten Road leading to East Coast Road on a sizable freehold land size of 8,075.5 sq m (86,924 sq ft). Real estate is a viable option in attaining risk diversification, allowing relatively good returns with manageable risk levels, to improve one’s investment portfolio. Cash flows are generated through rental income and capital appreciation realised when the real estate’s value increases due to its propensity to fluctuate. Revenue is generated through the demand of rental space; which essentially translates to the demand for the tangibility of real estate. Thus, occupancy rates directly relate to the amount of cash flow received, and are highly dependent on the physical condition of the real estate. Optimising profits will therefore require the real estate to fulfil vital factors to achieve success. Fundamental principles Real estate entry and exit ownership Common and main types of financing Cash flow structure of real estate deal EQUITY FRASERS Large cap developer with diversified portfolio High retain earnings Low leverage policy 30% of total development cost CDL Land contribution 35% of total development cost = 20% equity contribution (35% of 70% total equity) 50% initial payment balance paid in 35% profit sharing DEBT FINANCING Land is used as collateral Strong local government-link partner Experienced and high-status foreign developer Central bank of Indonesia Base rate + project risk + developer risk = 11.2% Borrow locally for long term relationship building with banks 40% of total development cost Optimal capital structure: Optimise Cashflow Management with Long-Term Hold Strategy Long-term Hold Strategy: Initial game plan: Hold for about 10 years and beyond to be in-line with corporate goals of longterm hold strategy Divest Retail Components in Year 10 Strong retail NOI growth and optimistic demand outlook Challenges faced: NOI generated by serviced apartments component is at least two times lower as compared to retail component Potential oversupply of integrated developments Decision: Exit office sector as soon as possible Short-term Hold Strategy: Why 6 years? To avoid high tax on sale, minimum holding period is 5 years (subjected to 5% tax only) To avoid real property gains tax (RPGT), minimum holding period is 6 years (No tax) Higher IRR* can be achieved if both serviced apartments and retail component are divested early Final Game Plan: Speculative play; 6 year Short-term Hold Strategy 11. Sensitivity and risk analysis It is important to take into account the potential risks our company will face during the development process due to the nature of uncertain market conditions. Hence it is crucial for developers to come up with strategies to mitigate the potential risks. The potential risks are as follows: Increase in Interest Rates The increase in interest rates can affect the development in the following ways: 1) Financing risk - Increase in interest expense on the construction loan over the construction period and refinancing - Even with a separate fund set aside to buffer anticipated moderate movements in rates, a significant increase would cause a shortfall in loan budget and require the developer to top up the equity proportion in financing. - Since developer is expected to wait till the project is completed before collecting rental income, this could potentially lead to refinancing in a higher interest rate environment. 2) Development risk - Overall economic returns from the project - Capital constraints resulting from higher interest rates could potentially delay completion of project which contributes to longer, costlier holding periods of land without any potential returns from rental income. To mitigate interest rate risks, we can attempt to negotiate an interest rate cap of 5% per month for the construction loans. In the negotiated loan, the developer would receive timely (quarterly/ bi-annual) cash payments for any increase in rates above the rate specified in the cap agreement. Hence, all interest rates payments on the loan resulting from increases in interest rates above the cap rate would be offset with payments from the cap. Increase in Construction Cost The rise in construction cost is mainly caused by: 1) Labour - Governmental policies in Singapore heavily influence the labour market due to its control over the supply of foreign labour. The construction industry in Singapore is highly dependent on foreign workers and the quota cap and levies will significantly reduce the numbers of foreign workers. With a decrease in supply of labour in the market, construction firms have to spend more cost to engage more workers in order to finish the project by the targeted timeline. 2) Raw materials - Unlike other countries, Singapore is not blessed with an abundance of raw materials, hence, we have to import them from other countries. As such, we are vulnerable to any disruptions in the supply of raw materials. For example, Indonesia's ban on the export of granite to Singapore in 2014 has disrupted the construction industry. It increased the cost of granite due to the higher rates charged on the national granite stockpile (Straits Times, 2014). Hence, it would be necessary for the company to set aside contingency funds to allow for this increase in construction cost. We have set aside an additional 3% of construction cost to serve as a buffer in the event of a spike in the cost of raw materials. Downturn in Property Market Property market downturn includes several events such as increases in interest rates, cyclical movement in the real estate market and depressed or unstable general economic conditions. This will result in lower property values or increased holding costs until properties are sold. In order to mitigate the risks of profit loss, it is crucial to understand the property cycle’s boom and bust in order to time the start and finish of the project as accurately as possible. It is most ideal to look at acquiring sites during quieter times and market the completed project during times of heightened demand. This is in line with our timeline -- we are bidding for the land in 2017 where the economy is in the midst of a down market, allowing us to increase our land bank at a relatively lower cost and potentially gain when the market bounces back to normalcy. Institutional & Legal Risk Decentralized political system leads to conflicting dynamics and unclear business regulations hence is risky Social Cultural Risk -Difference in practices -Difference in Corporate Culture Risk Mitigation: Mitigation of Social Cultural Risks Form close relationship and ties with the major stakeholders Many benefits in forming close relationship and ties with the major stakeholders in the country Long term benefits of such relationships could help in areas such as: (i) accessing private information (e.g. information about land parcels) and distribution networks; (ii) speeding up the bureaucratic processes in land acquisition (iii) paving the way for joint venture opportunities. Help to mitigate the problems most of the institutional problems in land acquisition and help to expedite the land acquisition process Stratified vs. Diverse Ethic Group Composition Due Diligence -Understand the profile of local partners through due diligence -Enables the team to adopt the appropriate negotiation style according to the practices of the ethnic group which business partners belong to Observe Organisation Hierarchy -Hierarchy is the most important aspect in the social cultural environment of partnerships that should be observed. -Be respectful towards the high ranking management officials in the local partner’s organisation -The team should also observe some practices that are related to gift giving, body language and other factors that are of vital importance Environmental Risk Development Risk Financial Risks Credit Risk Liquidity Risk Interest Rate Risk Foreign Currency Risk References Foo, E. (2016). ABSD set to suppress foreigners buying Singapore property again in 2016 – NewLaunch101. Newlaunch101.com. Retrieved 27 September 2016, from https://newlaunch101.com/absd-set-to-suppress-foreigners-buying-singapore-property-again-in2016/ Ministry of Manpower Singapore. (2016). Foreign workforce numbers. Retrieved 27 September 2016, from http://www.mom.gov.sg/documents-and-publications/foreign-workforce-numbers Navaratnarajah, R. (2016). Homeowners to benefit from cheaper mortgages. PropertyGuru.com.sg. Retrieved 27 September 2016, from http://www.propertyguru.com.sg/property-management-news/2016/6/129479/homeowners-tobenefit-from-cheaper-mortgages AsiaOne Business. (2015). Singapore is third most expensive market in Asia for construction. Retrieved 27 September 2016, from http://business.asiaone.com/news/singapore-third-mostexpensive-market-asia-construction Whang, R. (2015). Foreigners buying fewer homes in Singapore. The Straits Times. Retrieved 27 September 2016, from http://www.straitstimes.com/business/property/foreigners-buyingfewer-homes-in-singapore Estioco, M. (2016). Here’s why Katong homes are losing their appeal for expats. Singapore Business Review. Retrieved 27 September 2016, from http://sbr.com.sg/residential-property/infocus/here%E2%80%99s-why-holland-village-homes-are-losing-their-appeal-expats Boon, R. (2016). Fitch affirms Singapore at AAA with stable outlook. The Straits Times. Retrieved 27 September 2016, from http://www.straitstimes.com/business/economy/fitchaffirms-spore-at-aaa-with-stable-outlook Services, L. (2016). Holland Village. Singapore.lmbhousing.com. Retrieved 27 September 2016, from https://singapore.lmbhousing.com/lmb-locations/holland-village Guzman, N. (2016). Serviced apartments: Home away from home - Commercial Property Auctions News, Commercial Property Investment | CommercialGuru Singapore. Commercialguru.com.sg. Retrieved 27 September 2016, from http://www.commercialguru.com.sg/property-management-news/2016/5/124968/servicedapartments-home-away-from-home Navaratnarajah, R. (2016). Ascott to open serviced apartment in one-north. PropertyGuru. Retrieved 27 September 2016, from http://www.propertyguru.com.sg/property-managementnews/2016/3/119032/ascott-to-open-serviced-apartment-in-one-north

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