• Bee Land continues its overseas diversification with 2 nd acquisition of office property in London for £171mn
• Strengthen its position as an office landlord
• Maintain at Accumulate with higher TP of $2.51

What is the news?

Ho Bee Land announced on 7 March that it would acquire a 276792 sq ft freehold property 1 St Martin’s Le Grand in London for £171 mn (S$ 361 mn) from Nomura Properties Plc, through its wholly owned subsidiary, HB Le Grand Pte Ltd. This property is located at the western core of the London City, with a high demand from the financial occupiers and is easily accessible with a number of underground train stations within walking distance. The purchase consideration will be financed by internal funds and bank borrowings. A 5% cash deposit has been made and the balance payable is expected to be made on completion date 28 March 2014. The property is currently fully let to 5 tenants (Mitsu & Co Europe, Pyramis Global Advisors, Julius Baer International, SS&C Technologies and Nomura International Plc) with leases expiring in 8-12 years.

How we view this

Ho Bee continues to diversify its portfolio risks with the 2nd acquisition of an office property in London. We perceive this as a strategic move by Ho Bee Land in view of the lacklustre local luxurious residential market sentiment and the improving office outlook in London. The office leasing market in London had sprung back to life since 2013 with re-emergence of leasing activities from companies with the recovery of the economy. We expect the office rental to improve over the coming years considering the scarcity of new supply in the area. With a current passing rent in the range of £9.9 mn per year (£36 per sq ft), this reflects an initial yield of 5.5% for the acquisition. The passing rent is about 20% lower than the current asking rent of surrounding areas. We expect positive rental reversion in the range of 25% in 5 years’ time when 50% of the lease are due for rental review in 2019. This will further solidify Ho Bee’s recurring rental income.

Investment Action

We increased our FY14-15 EPS forecast from 8-13% and RNAV to $3.86. The stock remains undemanding with its last closing at $2.XX, over 40% discount to our revised RNAV $3.86. We reiterate our Accumulate rating in view of stronger recurring rental income and low gearing of 32% post acquisition which will allow Ho Bee to acquire further accretive investments should opportunities arise.

Source: Phillip Securities Research - 11 Mar 2014