Here's a summary of a research report on the topic.
This is just the first step of what is likely to turn out to be a multi-year value unlocking process. SPH’s confirmation of a retail REIT spin-off in the future adds another, more exciting dimension to the stock.
The proposed REIT can fetch a potential distribution yield of 5.6%, relatively attractive when compared to the average S-REIT yield of 5.3% at this end of the yield compression cycle and even lower returns from fixed income. The market now expects a special dividend from the spinoff, which is estimated at SGD1b (SGD0.63 a share) assuming tax savings from a REIT structure and debt repayment.
Dividend yield still looks attractive at 5.7% even after recent share price surge. However, it does not have a long enough tail of injectable assets and concerns over SPH’s waning media business.
Not many details are available yet on SPH’s proposed retail REIT, but Paragon and Clementi Mall are the two most likely assets in the initial portfolio. Seletar Mall is unlikely to be considered as it is still under development, but could be saved for future injection. SPH shareholders could receive special dividends or REIT units post the spinoff.
• Paragon: A freehold property with an estimated net lettable area (NLA) of 700,600 sq ft, of which 70% is for retail and the remaining 30% for office and medical suites. The fair market valuation of this asset as of Aug 2012 is SGD2.43b.
• Clementi Mall: A leasehold suburban retail mall with an estimated NLA of 194,000 sq ft. SPH holds a 60% stake in the mall. The fair market valuation of this asset as of Aug 2012 is SGD598m.
Since REITs are exempt from corporate tax, SPH shareholders stand to enjoy tax-saving benefits from the REIT spinoff. In FY8/12, Paragon and Clementi Mall together contributed SGD190m in operating income. The two properties were valued at SGD3,028m, implying a gross cap rate of 6.3%. Assuming full tax savings of 17% (corporate tax rate) being released following the duo’s injection into a REIT, it will mean SGD32m in additional income (assuming full tax pass-through to future unitholders). The total capital value of Paragon and Clementi Mall will then inch up to SGD3,540m – at the same implied cap rate. On a per share basis, the potential tax savings can unlock roughly SGD0.30 a share for shareholders.