M+S – a new chapter has begun
• Improving Malaysia and Singapore ties to maintain growth sustainability in the next 5 years. Growth could return to pre- Asia financial crisis if relationship strengthens further
• Integrated development of 6 land parcels and projects at the Iskandar zone amounting to RM30 billion to be jointly invested by Khazanah and Temasek has multiple spin offs for the economies
• Rapid transit link for Singapore-Johor Bahru for seamless connectivity by 2018 will boost cross border travel and tourism
• Main beneficiaries in Singapore include Keppel Land, Mapletree Commercial Trust, Capitaland, CMT, Genting Singapore, OCBC and CDL HT, and in Malaysia – Genting Plantations, UEM, E&O, MMC Corporation.
• A new chapter has begun in the history of Singapore and Malaysia. Malaysia has agreed to swap the railway land which it owned in Singapore in exchange for 6 parcels of land with permitted GFA of up to 501,020 sqm. Both countries will set up joint ventures to develop the land parcels and invest in Iskandar, as well as to build a rapid transit link for Singapore-Johor Baru by 2018.
We believe the breakthrough agreement was reached because of the need to improve co-operation on national security and growth sustainability and in facing increased threats from terrorism and competition.
The sectors which will benefit from the new initiatives are Singapore property, construction, transport and Malaysia property and construction. Improved traffic and commuter flow between Johor Baru and Singapore should lift the hospitality sectors in Singapore and investments into Johor.
We believe that improving Malaysia and Singapore ties will maintain growth sustainability over the next five years. There are many areas of cooperation such as banking, manufacturing, logistics, environmental which were left behind after the Asia financial crisis. Growth could return to a pre- Asian financial crisis levels, if the relationship strengthens further.
Despite the protest rally over the weekend, we remain confident about Malaysia’s ETP and its economic benefits. Opposition rallies aimed at garnering support are to be expected in the run up to the elections. It would not be in the interests of the opposition party to ruin investor confidence prior to any successful outcome in the elections.
We have created a Singapore – Malaysia portfolio to ride on the theme.
Economic transformation in place
Singapore and Malaysia economies both have the same exports model with the exports sector accounting for more than 1 – 2 times the size of GDP (including re-exports). Over the years increased competition from China due to cheap labor costs and tariffs subsidies, as well as from the rest of other Asian tigers (Hong Kong, Korea and Taiwan) for exports share have threatened the exports model. Growth contribution from this sector is at a stagnant level and many times volatile due to the slowing demand in the developed markets.
Over the years both countries have endeavored to transform the economic model with new initiatives to boost share of domestic demand. In Singapore a population target of 6.5m, the development of two integrated resorts, and opening up of the financial services sector have given rise to a higher level of GDP growth in the last 5years.
In Malaysia the current PM Najib has initiated on an economic transformation plan with a target to lift the level of per capita income to US$15,000 by year 2020. Plans to privatize the government linked companies for more active private participation in the economy, opening up its oil & gas sectors, government land sales and projects to transform city landscape, and increase spending on infrastructure for highways and land transport projects. Most recently the bold step of setting up the Iskandar economic region with the size of 3 times Singapore vowed to bring in projects including education, healthcare and hospitality to improve employment and income levels have drawn a lot of interest and investments.
Agreement reached to land swap deals and RM30 billion investments
In a historic moment in May last year both countries agreed to a land swap deals for Malaysia’s railway land in Singapore for 6 parcels of land at Marina South and Rochor. Details were later released at end of June this year on further cooperation. 2 joint ventures companies, M+S Pte Ltd, and Pulau Indah will be set up to spear head the developments in Singapore and in Iskandar amounting to RM30 billion. A rapid rail system between Singapore and Johor Bahru will be ready by 2018 to bring the two cities closer to each other. We believe the warming up of ties between the two countries could bring about a change in business environment.
Singapore and Malaysia has long outstanding relationship due to its proximity in geographic, culture and history.
Singapore could leverage on Malaysia’s growth potential while Malaysia could tap on Singapore’s track record on execution
At this stage the additional GDP contributions from these projects are hard to quantify but we believe current GDP growth can be sustained as economic activities such as financial and business transactions, construction projects and logistics are set to increase. Commitment by both governments in the Iskandar region could attract more FDI into the region.
Temasek and Khazanah to set up joint ventures on projecst up to RM30billion
M+S Pte Ltd will be set up to develop four land parcels in Marina South and two land parcels in Ophir Rochor as a integrated development. Khazanah NAsional Berhad will hold 60% and Temasek will hold 40% in the joint ventures.
UEM Land and Mapletree Investment, real estate arm of Khazanah and investment arm of Temasek will oversee the marketing and development of the project at Marina South.
UEM Land and Capitaland, both real estate units of Khazanah and Temasek will respectively oversee the marketing and development of the project at Rochor-Ophir.
Total project costs are estimated to be RM27 billion with a GFA of 50,020 sqm which will include office, residential, hotel and retail components.
Pulau Indah Ventures – a 50:50 JV owned by Khazanah and Temasek - will develop projects in Iskandar Malaysia. Two sites in Nusajaya – Urban Wellness development in Medini North and Resort Wellness development at the Heritage Cluster in Medini Central have been confirmed.
Collectively both projects will have GDV of RM3bn and a permitted GFA of up to 1.37m sqm. Pulau Indah plans to develop serviced apartments, a corporate training centre, as well as commercial, retail, residential and wellness-related offerings on the sites. Planning and design works for the projects had already commenced in first quarter of 2011.
Rapid transport system by 2018
Other than the integrated developments, both parties have also formed a joint technical group to call the tender for a consultancy study by the fourth quarter of this year. This will be in the vicinity of JB Sentral Johor Baru and in the vicinity of Republic Polytechnic, Singapore with a co-located Customs, Immigration and Quarantine (CIQ).
Immediate impact muted
The immediate impact from the new developments for Singapore companies is likely be muted as the projects will take 5-10 years before any results become visible.
Construction companies are likely to see an impact during the construction phase, while bank loans and syndication activities may rise in the initial stage. Over the medium term, property companies will benefit from enhanced land values if the projects are located near to their existing land bank, such as Tanjong Pagar, Bugis and Woodlands. Over the longer term , Improved ridership on MRT lines will be significant if scores of visitors, tourists and workers travel and connect through the CIQ and other integrated MRT lines in Singapore. In Malaysia, the impact should be felt post 2012’s tipping point. Over the past four years, the federal-state governments (via Iskandar Investment Berhad) and UEML (as master developer of Nusajaya with 10,400 acres of land bank) have been focusing on building up infrastructure and catalytic developments to attract critical mass to Iskandar Malaysia (IM). The proposed joint venture undertaken by both Singapore and Malaysia governments should provide a vote of confidence for potential investors to IM and could see it being a successful economic zone.
Details of impact for Singapore sectors and companies and an update on IM can be found on page 6. Our analysts have identified the Singapore Property, Construction, Land Transport, Banks, Gaming sectors, and Malaysian Property and Construction as sectors being impacted the most.
Huge potential once relationship improves
The enhanced relationship between Singapore and Malaysia could offer huge potential to the cooperation over the long run. Singapore’s growth has been limited by its small size and population. Johor has always been potentially seen as a special economic zone for Singapore due to its proximity where land resources can be tapped. Singapore was a big investor in Johor in the early 1990s before the bilateral relationship turned sour post the Asian financial crisis. Rising costs in China, ASEAN-China FTA promoting a free tariff zone with China, rising external competitive pressures, and strong government incentives are some of the factors which may make this possible this time round.
The investments into Johor fit Singapore’s goal in boosting domestic demand. Firstly, more visitors from Malaysia can be expected which will raise the relevance of the hospitality and services sector. Secondly, Singapore has always been mulling the idea of setting up retirement homes for Singaporeans in Johor. Thirdly, water, wind, and solar projects are possible in Johor due to the availability of land. Fourthly, manufacturing and logistics sectors could be set up in Johor as infrastructure development in Johor is quite established. Singapore also relies on a lot of food and agricultural imports from Malaysia. A food logistics plant could also be set up in Johor which could boast Halal food processing.
Malaysia’s Prime Minister Najib is also pushing for higher growth targets and IM was set up four years ago to attract investments to bring higher employment and income growth for Malaysians. Singapore’s involvement in IM will help institute a vote of confidence into IM in attracting more FDI.
With improved Malaysia and Singapore ties, we believe that growth can be sustained over the next 5 years. Growth could return to a pre- Asian financial crisis level if the relationship strengthens further.
We believe investors will increasingly be interested in investing in a Singapore – Malaysia portfolio as warmer ties develop.
Singapore Malaysia portfolio
The combined market cap of companies listed in the Singapore and Malaysia stock exchanges is close to US$1 trillion. Combined, it has the potential to be the 4th largest market after Hong Kong, India, Korea. The Malaysian market offers higher growth prospects but valuations in terms of P/E and D/Y are dearer than in Singapore. A selection of top stock ideas in Singapore and Malaysia could complement each other on growth, valuations and yield.
Politics not a major concern
Notwithstanding the protest rally over the weekend, we remain confident about Malaysia’s ETP and its economic benefits. Rallies by opposition groups aimed at garnering support are to be expected in the run up to the elections. At the same time, it is worth remembering that it would not be in the interests of the opposition party to ruin investor confidence prior to a successful outcome in the elections.
• Promoting greater bilateral ties between Malaysia and Singapore
• Collaborative ventures to generate significant economic benefits
• Medium term impact on Singapore property market, a boost to commercial sector supply
Paving the way for greater cooperation
The historic signing that officially sealed the Points of Agreement (POA) on Malayan railway land in Singapore, has heralded in a new era of bilateral cooperation between the two countries and provide significant direct and indirect positive economic spin-offs for both nations.
To recap, in 1990 there was an agreement between the governments of Malaysia and Singapore to relocate the railway terminal station in Tanjong Pagar to Woodlands in the north of Singapore and swap the railway land for 3 parcels in Singapore for joint development. Differences between the two countries in interpreting this agreement led to deadlock for 20 years. The historic signing on 27th June 2011 marked the end of a year-long round of negotiations on implementation details which had kicked off after the landmark announcement of a POA breakthrough in May last year.
The latest accord includes i) relocating the Malaysian railway station and CIQ facilities to Woodlands by 1 July 2011, ii) operating a rapid transit system between Johor Bahru and Singapore by 2018, iii) swapping the 6 pieces of Malayan railway land in Singapore for 6 plots of land of equivalent value in Ophir-Rochor and Marina South areas, iv) increasing connectivity between the two countries and v) jointly cooperating to enhance the tourism and environment sectors including developing an iconic wellness township project in Iskandar Malaysia. To this end, both Khazanah and Temasek have established a JV (‘Pulau Indah Ventures’), and have identified two sites at Medini North and Medini Central in Iskandar Malaysia.
The land swap
Essentially, both governments have agreed to swap three parcels of land in Tanjong Pagar, Kranji and Woodlands as well as three additional pieces of land in Bukit Timah (Lot 76- 2 Mk 16, Lot 249 Mk 4 and Lot 32-10 Mk 16), on the basis of equivalent value, for four sites in Marina South and two in Ophir-Rochor areas totaling 5.3ha of land area and 5.4msf of gross floor area. The sites in Singapore are slated for mixeduse developments and are estimated to have a collective gross market value of cS$11b.
The 6 sites in Singapore will be vested in a joint venture, M-S Pte Ltd between Khazanah Nasional, holding the larger 60% share while Singapore’s Temasek Holdings will take the remaining 40% stake.
M-S Pte Ltd has appointed UEM Land and Mapletree Investments to jointly oversee the development and marketing of the Marina South sites while Capitaland and UEM Land have both been appointed to perform similar functions for the Ophir-Rochor Road sites.
From a real estate perspective, not only does this agreement open up collaborative opportunities on an unprecedented scale in both countries, but there are also numerous and significant economic benefits from these development activities. For one, the Malaysian government can build and leverage on appreciation in capital values of the 6 prime land plots in the longer run. Secondly, resuming ownership of the land parcels in Tanjong Pagar, Woodlands and Kranji would enable the Singapore government to amalgamate, re-parcel and re-zone land use to facilitate its medium term development plans in land scarce Singapore.
Exciting prime projects in the making
The 6 white sites vested in M-S Pte Ltd are located at the heart of the new Marina Bay financial district while the Ophir- Rochor plots are in the new Marina Centre, Bugis, Bras Basah growth nodes. Together, these can yield a total 5.4msf GFA of which 2.9msf is earmarked for office use, 0.26msf for hotel/related uses and the remaining for retail/residential or other uses.
Ophir-Rochor sites. The two plots in Ophir-Rochor Road are next to the Kampong Glam historic district and across the road from the Gateway office building on Beach Road, which is designated as the new growth corridor. This new growth corridor will be the connecting node for the established Marina Centre, Bugis and Bras Basah commercial areas. The 2 sites can generate 1.7msf of GFA of which 40% must be for office use, 15% for hotel or hotel related uses and the remaining 45% for other uses.
Marina South parcels. These adjoining sites at Marina South are located at the heart of the financial and business cluster in Singapore, making these sites one of the prime commercial spaces in Singapore. The Marina South site is situated between a proposed central linear park and a major public open space just above Marina Bay MRT Station. In total the white site will generate 3.67msf of GFA, of which 60% is zoned for office use while the remaining 40% can be for other uses. Mapletree Investments and UEM Land have cited plans to develop two office towers with ancillary retail and two residential towers in the Marina South component.
Construction of the development is expected to commence in June 2012 and complete in mid 2016.
Leveraging on the Southern growth corridor
Relocating the Malaysian railway station in Tanjong Pagar, in turn, would free up the land for future planning. In a recent media report by Straits Times, it was reported that the railway station is sitting on a sprawling 15.9ha prime 999-year leasehold site in Tanjong Pagar.
Earmarked as a growth area in the 2008 Master Plan, this area is south of the current CBD and is adjacent to the Harbourfront and Alexandra Precincts and near iconic developments such as the Sentosa Integrated Resort. Plans to redevelop this locality include the establishment of a new waterfront city at the existing port site at Tanjong Pagar and Pulau Brani and the potential redevelopment of the KTMB railway station at Tanjong Pagar. The new waterfront area will essentially expand the CBD and integrate the Downtown area with quality housing, hotels, lifestyle and amenities. The anticipated increase in vibrancy through the rejuvenation of the entire area as well as increased connectivity in the locality is likely to have a positive impact on property prices in the area.
Meanwhile, we think the remaining land plots at Woodlands, Kranji and Bukit Timah, which are located in the vicinity of retail and residential properties or located near vacant or reserve land which can be potentially amalgamated and parceled for future land rezoning and use. The impact on value of land or properties may not be realized immediately, depending on the potential use of these sites in the future.
Impact on the Singapore property market
Near term impact neutral. We expect the impact from the new developments to be relatively neutral in the near term and to take effect only in the longer run when the new developments are constructed. Given that 53% of the total 5.4msf GFA from the 6 sites will be office space, the impact on Singapore commercial property will be more significant. Whilst the visibility of office supply should now be extended beyond 2015, the quantum of impact would depend on the actual completion of these new projects, scheduled to take place from 2016.
In the near term, supply of office space in the Central Area is likely to peak this year with the completion of Ocean Financial Centre (OFC), OUE Bayfront and Asia Square Tower 1, which account for 83% of total new inventory this year.
Beyond 2012, new supply appears to be well spread between Fringe and Central areas, with the inclusion of the redevelopment of Market Street carpark by CCT and
Capitaland into an 850,000sf Grade A office complex. This is slated for completion in 2014, while non-central supply is largely coming from Ho Bee’s Metropolis @ One-north in 2013. Hence, supply will increase to 1.77m sf NLA in 2014. Average annual supply over 2012-2015 will be 1.56msf, in line with the long-term average demand for office space.
Meanwhile, leasing activities remained healthy with a positive absorption of 0.5msf of NLA in the 1Q. Newly completed buildings also saw high take-up rates. For instance, commitments for OFC have hit a high of 83% and are still rising. DBS economist Irvin Seah is maintaining his projection of 7% GDP growth in 2011 and 6.5% in 2012. This will support rents and asset values, which are still way below the most recent peak in 2007.
We are retaining our projection of an average 10% rise in office rents and capital values in 2011, underpinned by economic growth and job creation. We expect a net take up of 2.5msf this year, which should result in stable occupancy rates this year.
In terms of listed beneficiaries, conceptually, this development would likely have a positive impact on the property values of companies such as CapitaMall Trust (CT SP, BUY, TP $2.05), which have a good presence in the Bugis area as well as CapitaLand (CAPL SP, BUY, TP $4.34) and UEM Land who have been appointed as the project and marketing managers of the development projects. However, the direct impact is likely to be minimal given the small percentage of fees charged as a proportion of the group’s income base. In the medium term, we believe the rejuvenation of the railway land in Tanjong Pagar is likely to have a positive effect on Keppel Land’s (KPLD SP, BUY, TP $4.69). Keppel and GE Tower are located nearby and Mapletree Commercial Trust (MCT SP, BUY, $1.05) has significant exposure to the Southern growth corridor.
How will tourist arrivals affect the demand for rooms?
• Warming ties between Singapore and Malaysia is a boost to the tourism sector
• New hotel site in Ophir-Rochor to boost dream of 17m tourist arrivals
• Further supply needed to alleviate another potential “supply crunch” in 2015
Warming ties between Singapore and Malaysia is a potential boost to the tourism sector; another step towards 17m goal in 2015. Singapore’s ambitious and long-term tourism vision of 17m visitors by 2015 has received another shot in the arm. The long intertwining political history between these two countries with very similar cultures has made a significant breakthrough and the warmer ties between them will bode well for the tourism industry in both countries. Malaysia is one of Singapore’s largest international visitor arrivals (“IVA”) source markets, accounting for a consistent c8% (excluding Malaysians traveling across the causeway) of total international arrivals since 2000. With the latest development, the proportion of Malaysian visitors to Singapore will continue growing strongly in the years to come The sustainable strong growth momentum in Malaysian visitors (+36% yoy in 2010) was largely attributed to the opening of Resorts World @ Sentosa and Marina Bay Sands. Universal Studios @ Sentosa remains a major draw and will continue to ramp up visitors in 2H11. The opening of the West Zone in 2011-2012 should further attract tourists.
The proposed Johor-Singapore rapid transit link by 2018 and potential bullet train to KL will make traveling between Singapore and Malaysia even more seamless. Such infrastructure development will further support growth in the coming years and Malaysia will remain as one of Singapore’s top IVA source markets.
Singapore government’s support for an increase in hotel room supply is key to its longer-term goal. With its 2015 target of 17m visitors in mind, the Singapore Tourism Board has introduced initiatives to revamp Singapore’s offering to visitors. Several new attractions and hotspots will sprout up throughout the island over the coming years. The Singapore government has also invested in infrastructure to support the expected growth in tourist arrivals.
Known hotel supply to grow by CAGR 5.6%. With the opening of the integrated resorts, Singapore’s tourism industry has weathered the largest supply increase in 2010. The supply picture points towards a 5.6% increase in rooms currently under construction and expected to be completed progressively over the next 3 years. We note the projected increase in hotel rooms is lower than the expected 7.9% growth in visitor arrivals needed to attain our 2015 goal of 17m visitors. Thus in our view more investments are needed to boost room supply to support STB’s goal.
GLS supply and potential new development in Ophir-Rochor Road site to add 4,200 rooms. Current Government Land Sales (GLS) program for 2H11 will offer c3,750 rooms. In addition, the recent land swap agreement at Ophir-Rochor Road site could potentially build an additional 400, bringing potential new supply to 4,200 to be added from 2014 onwards.
We believe these new rooms will be easily absorbed on the back of the projected growing number of tourist arrivals. These new rooms will continue to support the longer term growth of Singapore’s tourism sector.
At 17m visitors: what will demand look like?
Potential 15.1m in room nights for 2011 assuming 17m tourists. Assuming the average length of stay remains at 4.0 days and an average 4.5 persons/room (based on historical sharing figures), we believe that total demand for rooms could increase to 15.1m room nights, which will mean 93%-95% of the total 46,390 rooms currently available. Such occupancy rates are extremely tight and may subsequently result in an unwanted supply crunch.
Inclusion of the potential new room supply from GLS program and Ophir-Rochor Road site of 4,200 rooms would lower average occupancy rates to a more sustainable 86%. Hence, in our view the new developments will alleviate the potential supply crunch.
Beneficiaries of a buoyant Tourism sector going forward
CDL Hospitality Trust (BUY, TP S$2.30): As one of Singapore’s largest room owners, we believe that its strategically located hotels should continue to benefit from the robust tourism outlook till 2015 while Genting Singapore (BUY, TP S$2.75) ; being one of the game changers of Singapore Tourism sector, Resorts World @ Sentosa will continue to be a magnet for visitors coming to Singapore for their holidays. On top of that, RWS will have an upper hand in attracting Malaysian visitors given its parent Genting’s 40-year operating history on its home turf.
New catalyst for loan growth
• A clearer catalyst for Singapore banks
• IR-driven loan growth revisited (peak growth of 26% in May-08)
• Buy Singapore banks for upside in loan growth
Loan growth beat expectations in 2011!
Loans grew at its strongest rate in May-11 at 3.5% m-o-m, 8.7% q-o-q and 24.2% y-o-y. Business loans expanded 4.3% m-o-m, 12.2% q-o-q and 27.5% y-o-y, the highest growth rates achieved since end-2008; reflecting a clear cycle of business loan growth from capacity expansion. Assuming that loans were to grow at an average of 1% per month from June to December 2011, total loan growth for 2011 could rise to as high as 20% (Note that the 6-month m-o-m moving average loan growth over the past two years is 1.1%).
Integrated Resorts loans revisited - a boost to loan growth On average, loans grew above 20% across the banks for 1Q08, driven mainly by the Integrated Resorts’ (IR) loan syndication activity. All three Singapore banks participated in the syndication facility. A total of S$11bn worth of loans for the IR was booked over 2007-08, which helped to spur Singapore banks loan growth to an all-time high of 26% y-oy with business loans growing as fast as 38% y-o-y.
In Jan 2007, Singapore banks total loan base stood at S$197bn. By end 2007, loans grew by 20% to S$233bn. The bulk of the S$11bn integrated resorts loans were disbursed in 2008. Loan growth peaked in May 2008, a 26% y-o-y rise on a total loan base of S$250bn. By end 2008, loans grew by 17% y-o-y to S$272bn.
2009 was a year of weak loan growth at only 3.4% y-o-y to S$281bn, due to the global credit crunch, as well as the near completion of the integrated resorts. By 2010, loans grew by 14.7% to S$323bn, largely driven by consumer loans. By May 2011, loans grew by 12.6% YTD to S$363bn, believed to be largely from corporate loans. Assuming 1% loan growth per month, this would bring total loan growth for 2011 to almost 20% or S$386bn.
Smaller impact from Marina Bay and Bugis projects.
There is potential upside to our base loan growth assumption for 2012 at 10% to S$425bn. Media reports indicated that the development value of Marina South and Ophir-Rochor Road parcels amounted to S$11b. While this value is close to the total project cost of S$15b for integrated resorts, the impact would be relatively smaller as the bulk of development cost is in the land value of the sites injected by the government. We estimate construction cost at 35% i.e. S$4bn of the entire development value. Assuming these will be disbursed largely in 2012 and add only another 1%pt or total loan growth of 11%. This excludes peripheral benefits of other commercial or residential property loans coming out of the project, which could further boost loan growth.
Loans growth remains the variable for earnings surprise for the Singapore banks. Based on our estimates, every 1% increase in loans growth (holding other variables constant), earnings could increase by 2-3%.
We have buys on both OCBC (TP S$11.30) and UOB (TP S$21.70), as beneficiaries of the upside in loans growth.
Singapore Construction sector
• Projects to boost construction demand by S$3b to S$4b from 2012, +5% to existing demand
• Impact is smaller than integrated resorts projects in 2007 – 2008 with construction demand of S$7b
• Cost pressure remains. Key beneficiaries are Tiong Seng and Pan United.
2 new integrated developments to come up in Singapore.
According to the recent agreements reached by the Singapore and Malaysian governments over the Malaysian railway land in Singapore, Malaysia was given 4 parcels of land in Marina South and two more in the Ophir-Rochor region of Singapore in exchange for giving up Malaysian railway land in Singapore. A 60-40 JV company will be set up between Malaysia’s Khazanah Nasional and Singapore’s Temasek Holdings to develop the 6 prime land parcels. The land parcels will be developed into mixed-use integrated properties that will include office, residential, hotel and retail components with a combined GFA of about 501,020 sq m. The project is valued at about S$11bn.
This could imply additional construction demand of about S$3-4bn, according to our estimates. Given the project value of S$11bn and our estimates of land costs at these land sites – based on recent transactions – as well as our estimates of prevailing construction costs, we estimate that the new developments could add to overall construction demand in Singapore to the tune of about S$3-4bn over the next 2-3 years. This will likely represent additional demand of about 5% per year in 2012-13 on top of the current Building & Construction Authority (BCA) forecasts, and we could likely see BCA revising its forecasts in its next review.
Reminiscent but likely much smaller impact than another private sector construction boom – the two Integrated Resorts in 2007-08. After the licenses for the two Singapore casinos were awarded in 2005-06, private sector construction demand skyrocketed in 2007-08, due to the new orders for various components of the two Integrated Resorts – Resorts World Sentosa (RWS) and Marina Bay Sands (MBS). MBS was completed at an investment value of about US$5.5bn and RWS at about US$4.5bn.
Contractors had benefited significantly from the 2007-08 boom. From piling works to structural steel works to basement and main building works for the Integrated Resorts, the local construction players enjoyed a boom time for new orders during 2007-08, which were then fulfilled over 2007- 09. It is estimated that the two IRs together generated S$6- 7bn in construction orders. Compared to the IRs, though, these two land parcels will likely generate significantly lower construction demand, given potentially lower complexity and structural requirements.
Some of the major projects won by SGX-listed construction companies for the Integrated Resorts are highlighted below.
As is evident from the chart below, aggregate orderbook of local construction companies received a boost in 2008 before sliding down in 2009 and recovering in 2010, owing to a higher number of public sector contracts as the government’s focus on mass housing and public transportation projects was renewed.
This additional demand is on top of existing strong drivers from the public sector – HDB flats and public infrastructure projects. As we have highlighted before, the public sector will be a key source of construction demand in Singapore in the near to medium term. The government has indicated that a larger number of HDB flats will be built to ease some of the supply pressures in the residential market. In May 2011, it announced that 25,000 HDB units would be launched in 2011 instead of the earlier 22,000. Moreover, the LTA has commenced the award of contracts for the Downtown Line 3 since March 2011, which should further add to demand in the near term.
New construction activities will also enhance demand for construction materials. As is evident from the chart below, the demand for construction materials like cement and ready mixed concrete received a substantial boost from 1Q07 onwards, and peaked during end-2008. Since then, there has been a gradual normalization of demand, but there could be renewed activity once the proposed new developments at Marina South and Ophir-Rochor come in.
Our top picks in the sector would be Tiong Seng and Pan United. We continue to favour Tiong Seng given its strong revenue visibility over FY11/12 (order book of S$1bn+) and use of prefab production methods, which improves productivity and mitigates impact of higher wages. We continue to rate Pan United Corp a BUY as it stands to benefit from higher demand for ready-mixed concrete and higher ready mixed concrete prices.
Costs will continue to be a concern. While higher raw material prices are positive for suppliers like Pan United, it may squeeze margins for the building contractors. With crude oil prices higher than last year, wage pressures and inflation concerns rising, construction costs will move up in 2011, but the tender price index is more likely to be flattish, given the adequate local contracting capacity. While wage costs will be impacted by the Singapore government’s decision to raise employer’s contribution rate to CPF by 0.5% to 16%, the hikes in foreign workers’ levies will impact the construction sector to a larger extent given the sector’s heavy reliance on foreign workers.
Increased foreign competition in the fray. Anecdotal observations lead us to believe that there are more and more foreign players eyeing the Singapore construction pie. In addition to the entrenched Japanese and Korean players, a number of Chinese and European players are also setting up shop in Singapore and competing with local contractors for tenders. A look at recent Land Transport Authority (LTA) contracts for Downtown Line 3 reveals that three foreign contractors have been awarded their first contracts in Singapore.
Singapore Land Transport
Land Transport: Rolling towards better connectivity -
Implications of RTS
• A new RTS provides a new gateway
• Connectivity in Singapore raised with seamless links to MRT network.
• A substitute for travelers through the Causeway.
• A boost to long-term rail ridership
A new gateway: Rapid Transit System by 2018. Under the recently signed Points of Agreement (POA) between Singapore and Malaysia, both parties have agreed that the connectivity will be improved by expanding the rapid transit system (RTS) from Singapore to Johor Bahru by 2018. Singapore-Johor Bahru (SJB) link have a co-located CIQ… The SJB RTS terminating stations will be in the vicinity of JB Sentral, Johor Bahru and the Republic Polytechnic, Singapore. The RTS will have a co-located Customs, Immigration and Quarantine (CIQ) facility in both Singapore and Johor Bahru. This will be more convenient for commuters as it requires them to clear immigration only once per direction.
…and will be linked to the new Thomson Line. The terminating stations of the RTS in Singapore will be linked to the upcoming Thomson Line MRT (TSL), which will also terminate in the vicinity of Republic Polytechnic. The TSL is also expected to intersect with the current existing North- South Line (NSL, Red Line) at Woodlands Station. The TSL is projected to complete by 2018.
Long-term positive impact on overall rail ridership. We see the RTS link, while short, will serve as a new gateway between Johor Bahru and Singapore. This is likely to boost the overall rail ridership in Singapore, as we expect the RTS link to merge seamlessly with the expanded rail network. Doubling of rail network by 2020 with 3 more new trunk MRT lines. The Singapore LTA is currently putting in place plans to expand its rail network by 2020. Besides the current 3 and half lines in operational (NSL, EWL, NEL and CCL), there will be Downtown Line (DTL – Brown Line), Thomson Line (TSL - Blue Line) and Eastern Region Line (ESL) adding a total of c.90km to the current rail network.
Who will use the RTS?
About 240k commuters and 100k vehicles pass Woodlands Causeway daily. Vehicle traffic and commuter flow between Singapore and Johor Bahru through Woodlands Causeway is heavy. Based on 2006 statistics, on a monthly average, 2.9m vehicles and 7.1m travelers clear the Woodlands checkpoint. While we note that this is a dated figure, we believe current data should at least be the same, if not higher.
Positive for long term, adding to 2018 ridership. We project that average daily rail ridership could double from 2010’s 2.1m to c.4.1m by 2018. Assuming 50% of the total number of travelers use the RTS and connect to the other MRT lines, this will add an estimated 120k commuters to the rail network, and boost ridership further by c.3%. Note that our back-of-envelope estimates do not include additional incidental travel arising from improved convenience of the new RTS.
But near term pressures persist: Hold SMRT, Buy CD for its larger international exposure. Notwithstanding the positive impact over the longer term, we see near term headwinds for SMRT arising from costs pressures and slower than expected ramp up in Circle Line ridership. In addition, with the recent focus on public transport crowding and rising cost of living, there could be near term pressure from any potential new policies. Of the two transport operators, we prefer CD given its larger international exposure and lower valuation of c.13x (FY11F PE) vs SMRT’s 17x FYE Mar 12 PE. More convenient for visitors by land – a boost to the integrated resorts. Since the opening of both the integrated resorts in Singapore (Resorts World Sentosa and Marina Bay Sands), visitor arrivals per month from Malaysia have approximately doubled to an average of 17k/mth (on a 12- month moving average). The RTS could aid in further connectivity and aid tourism arrivals for both countries.
IMPACT ON MALAYSIA MARKET
Nusajaya closer to tipping point
• A vote of confidence from M’sia and S’pore governments to invest in Nusajaya
• Strong land price appreciation expected post 2012 tipping point
• Completion of catalyst developments enhance attractiveness of Nusajaya in near future
Acceleration of JV development. Pulau Indah Ventures – a 50:50 JV owned by Khazanah and Temasek – will develop projects in Iskandar Malaysia, Johor as part of the initiatives taken by both countries to resolve longstanding issue of the relocation of KTM railway station in Tanjung Pagar to Woodlands. Two sites in Nusajaya – Urban Wellness development in Medini North and Resort Wellness development at the Heritage Cluster in Medini Central have been confirmed.
Collectively both projects will have a GDV of RM3bn and a permitted GFA of up to 1.37m sqm. Pulau Indah plans to develop serviced apartments, a corporate training
centre, as well as commercial, retail, residential and wellness-related offerings on the sites.
E&O (Buy, RM2.10 TP) has been appointed by Pulau Indah Ventures as one of the project manager and joint development partner (50:50 JV) for the 210-acre Resort Wellness development in Medini Central. The 210-acre land will be purchased at an average of RM38psf, which is comparable to Nusajaya’s SiLC industrial land of RM35psf.
Multiple spillover effects. The warming bilateral relationships between the Malaysian and Singaporean governments could serve as a precursor for more investments coming into Iskandar Malaysia. We have seen more interest from property players to develop property projects in the region, especially in the marinafronting Puteri Harbour where latest transacted price has reached RM220psf, +52% from RM145psf in Nov09.
Potential entry by Singaporean developers into Nusajaya would not be far-fetched, given the relatively cheaper land price.
Industrial land selling price has touched RM35psf, +67% since 2007 while residential land has hit RM50psf (Bandar Raya Development bought Limitless’ 60% stake in Residential North). Land values are expected to appreciate further with the completion of key catalytic developments from 2012 onwards and rising investments in Iskandar Malaysia. Investment from Singapore can further expedite the overall development in Nusajaya.
2012 tipping point drawing closer. In the past four years, the federal-state governments (via Iskandar Investment Berhad) and UEML (as master developer of Nusajaya with
10,400 acres of land bank) had been focusing on building up infrastructure and catalytic developments to attract critical mass to IM. Last year saw the completion of the state government administrative centre, Columbia Asia Hospital, and a public marina. The other key developments that will follow are:
a) Coastal Highway (2011): New highway from Nusajaya to Johor Bahru city centre, which will cut travel time by half to 20 minutes;
b) Chelsea premium outlets in Kulai (Nov11). A collaboration between Genting Plantation and Simon Property Group (world’s largest developer, owner and operator of premium outlet centers) to develop ASEAN’s first premium retail outlet (similar to those found in the US and Japan). Targeting 4m visitors p.a. with potential catchment from Klang Valley’s 6m population and Singapore’s 4.5m plus 11.6m spillover tourists.
c) Legoland at Medini North (3Q12): Asia’s first Legoland (5th in the world), featuring >40 interactive rides, shows and attractions to cater to families with young children between the ages of 2 and 12. Aims to attract 1.2-1.5m visitors p.a. and create 1,000 jobs.
d) EduCity@Iskandar: To be positioned as a regional education hub with world-class institutions. First up will be Newcastle University Medicine Malaysia (Sep 2011), followed by Netherlands Maritime Institute of Technology, University of Southampton & Marlborough College Malaysia in 2012, and Management Development Institute of Singapore and Raffles University Iskandar by 2013.
Leveraging on Singapore’s record tourist arrivals. Visitor arrivals to Singapore is projected to jump to 17m in 2015 from 11.6m (8% 5-year CAGR), after achieving an enviable 20% growth in 2010 (strongest growth in a decade following the opening of two integrated casino resorts). There could be spillover tourists into Malaysia, especially with improved connectivity (budget airlines, shuttle buses) and added attractions (Legoland, Chelsea Premium Outlets). Malaysia welcomed 24.6m tourists in 2010 (+4%), with 53% originating from Singapore (60% of them visited Johor). Visitor arrivals from Singapore to Malaysia have been growing at a 2-year CAGR of 9% (post financial crisis).
FDI beat expectations. IM has attracted RM69b worth of committed investments as at Dec10, exceeding Iskandar Regional Development Authority (IRDA)’s initial target of RM47b (2005-2010). Of this, 41% or RM28b has gotten off the ground. 1Q11 saw another RM11b committed investments, with IRDA targeting RM73b (RM15b p.a.) over 2011-2015 (+18%). IRDA is aiming for 8% annual GDP growth over the next 5 years in order for IM to achieve international metropolis status by 2025. IRDA will continue to focus on investments from the Middle East, Singapore, China and India
Increased participation of local developers in IM should help fast-track development. Land sales have picked up over the past 1.5 years, especially in Nusajaya, e.g. UEML sold several parcels at Puteri Harbour to Encorp, UM Land, and Bandar Raya Development (took over Dubai-based Limitless’ 50% stake in Residential North development), while Khazanah acquired 4 acres to develop an indoor theme park (expected to be ready by 2012).
Beneficiaries: Landowners & developers
UEM Land (Buy; TP: RM3.45), the largest landowner in Nusajaya (10,400 acres) will be the largest beneficiary if Singaporean investments surge. The completion of major catalyst developments such as Coastal Highway, Legoland, Newcastle University and Johor Premium Outlet by 2012 will transform Nusajaya into a hive of activity.
We expect E&O (Buy; TP: RM2.10)’s 210-acre Resort Wellness development in Medini Central to do well given: a) Strategic location near Second Link + Medini is the only area within Iskandar Malaysia with special incentives (eg 10-year tax exemption, no Bumi quota); b) Temasek's stamp of approval which should see strong interest from Singapore buyers; and c) E&O's strong execution track record (masterplan likely to be similar with its flagship Seri Tanjung Pinang Phase 1).
Meanwhile, Genting Plantation (Buy; TP: RM10.65)’s 5,500 acres of property land bank in Kulai is poised to ride on the success of Nusajaya, and also the Johor Premium Outlet which it is constructing. The outlet will be the first such shopping haven in Malaysia, and is set for grand opening by 4Q11. The appreciation of Kulai land values will be the next major catalyst for GENP.
a) WCT is partnering Iskandar Investment Berhad (IIB) to develop 1Medini, with the first phase (300 units of condos) slated for launch in 2013 at RM500-600psf (GDV RM200m). WCT is also developing the RM688m Medini Business District;
b) Bina Puri developing 2.8ha-Medini Square in Medini North (GDV RM500m).
Beneficiaries: Infrastructure/asset owners
The increased activities in Johor will benefit MMC (Buy; TP: RM3.70) given its entrenched position in Johor. This could take the form of more investments at its land in Tanjung Bin and Senai, more passenger travel and cargo movements at Senai Airport, higher throughput in Port of Tanjung Pelepas and Johor Port, expansion of Tanjung Bin power plant by 1,000 MW, and in the longer term, possibly as proxy to the Johor- Singapore rapid transit system project.
WCT (Buy: TP: RM4.15) clinched a RM766m contract for Medini infrastructure work (package 1) and is constructing Pinewood Studios in Medini (RM28m). MRCB (Buy; TP: RM3.15) is building Marlborough College (a RM108m project) and the RM656m Eastern Disposal Link, which links the CIQ at Tanjung Puteri to the North-South Expressway via the Pandan Interchange in Johor Bahru. Apart from the rapid transit system project, we reckon there are still potential infrastructure and building jobs to be awarded. We understand IIB is in talks with several local and foreign investors to build a three-star resort hotel, a four-star business hotel, a retail mall, and a high-rise tower in Medini North worth RM1b.
Source/转贴/Extract/Excerpts: HwangDBS Research