Why DBS' latest $1.035b acquisition move isn't jaw-dropping

Owning an HQ building is typical.

According to CIMB, DBS’s 30% stake acquisition of MBFC 3 is more of a strategic exercise to hedge against rental step-ups going forward. It could potentially be a better use of capital as yield on investment is around 40bp higher than NIM, though risks lie in upward rate revisions.

Here's more from CIMB:

It is not uncommon for banks to own their HQ building. We deem the acquisition as a mild positive.

DBS has agreed to acquire a 30% stake in MBFC Tower 3 from Choicewide Group Limited, a JV between Hutchison Whampoa and Cheung Kong for around S$1.035bn.

Choicewide also holds a put option that allows Choicewide to sell its remaining 31/3% for S$115m. DBS will own a 1/3 stake in MBFC 3 if Choicewide decides to exercise this option.

DBS is currently the anchor tenant of MBFC 3, leasing around 445 of NLA. Including DBS, occupancy at MBFC 3 is estimated to be around 86%. The acquisition will be internally funded.

DBS is entering into this strategic investment, as a hedge against potential rental step-ups. With an estimated asset yield of 3.8%, the acquisition appears fair compared to
existing market valuations.

However, our property analyst, Donald Chua, sees little near-term revaluation potential in the absence of major lease renewals. Contributions from MBFC 3 will be equity accounted and will offset rental expense.

This will normalise the comparison with UOB and OCBC who own their HQ buildings. Incremental yields on investment could be in the range of 1.97-2.23%, assuming 100% occupancy.

This is around 31-57bp higher than the 3Q12 NIM of 1.66%, a more efficient use of capital in a low interest rate environment. There will be minimal impact on capital as the acquisition consideration is merely 0.3% of total assets and 3.4% of shareholders’ equity.

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