Research houses and investment banks noted that the acquisition price of £257 million (RM1.392 billion) comes at a 20% discount to the price paid by the original vendor.
Following this transaction, Gamuda has acquired seven projects with an accumulated gross development value of RM7 billion, many of which are located in Vietnam.
WH, the current headquarters of Deutsche Bank AG in the United Kingdom, will undergo a two-year refurbishment upon the expiry of its current lease with the German financial giant in April 2024.
Public Investment Bank Bhd (PublicInvest) noted that upon refurbishment, the asset will achieve prime office status.
“Prime office rents refer to the top 10% of Grade A achieved rent, which has seen an average rental growth of 3.4% per annum over the past 10 years,” it said.
Additionally, RHB Investment Bank Bhd said the chances of finding a tenant were high due to the huge undersupply of top ESG-rated office buildings in London – with major multinational firms already on the lookout.
The process would see an increase in the building’s number of storeys from eight to 11, bringing the total amount of space to around 500,000 sq ft.
Gamuda will also upgrade the building’s environmental, social and governance credentials to “Outstanding” rating via BREEAM (building research establishment environmental assessment method) among others.
The group aims to have divested the asset within five years or prior, upon the full lease-up of the building, which may materialise through pre-lease arrangements prior to the building’s completion.
Gamuda’s baseline strategy is to pre-lease 30% of the office spaces before practical completion in Q4 2026.
The balance will be leased out subsequently after full completion of the refurbishment to capitalise on uplift in rents (3% CAGR for the rental rate).
Upon Gamuda’s targeted exit from WH at the end of 2027, the overall exit price is projected to be at £1.1 billion (RM5.95 billion) based on a 4.5% capitalisation rate and an internal rate of return (IRR) of 27%.
Minimal bottom line impact
Research houses, however, are more conservative in their opinions as opposed to Gamuda’s 27% IRR projection.
PublicInvest was neutral on the acquisition owing to several risks, namely investment holding period, interest rates and foreign exchange risk.
“The acquisition raised the group’s net gearing ratio by 12.4%, which also depleted its debt headroom by 17.7%,” it said.
However, the net gearing ratio increase may not be too concerning as Gamuda has the opportunity to acquire undervalued sterling assets amid UK’s political and economic turmoil, added PublicInvest.
“Nonetheless, the acquisition will not affect the group’s bottomline in FY2023-25 as earnings impact is expected to commence from FY2026 onwards,” it said.
RHB Investment Bank Bhd has not made any revisions to the earnings forecasts pending the deal’s completion.
Similarly, Kenanga Investment Bank Bhd noted no short-term changes, as the project will come into fruition at the end of 2027.
“We make no changes to our FY2023F and FY2024F numbers which are backed by unchanged construction replenishment of RM15.5 billion and RM12.0 billion, respectively,” it said.
Deal structure
Gamuda is undertaking the acquisition in partnership with Castleforge Partners Limited, a UK-based real estate private equity investor.
Gamuda and Castleforge, via Venta Belgarum II Limited Partnership, signed a sale and purchase agreement (SPA) on March 27, 2023 to acquire 100% equity interest in Wessex Winchester Propco Ltd.
The two parties have negotiated for a staggered payment schedule. From the total sum, only £20 million (RM108 million) is payable upon the SPA’s signing, with the remaining balance of £237 million (RM1.3 billion) to be funded by non-recourse debt and final payment within 24 months from the agreement’s date.
“Based on Gamuda’s 75% stake in the joint venture, the group is required to fork out £15 million (RM81.3 million) upon the SPA’s signing and take on £225 million (RM1.2 billion) debt subsequently,” said PublicInvest.
“The group intends to syndicate around 37% of its 75% stake to interested investors post-completion of the acquisition by Q3 FY2023.”
If successful, Gamuda will be able to halve its debt level, pertaining to the acquisition, to £121.6 million (RM658.7 million) effectively reducing its stake to 38%.
At noon break, Gamuda’s share price was down 2.16% or 9 sen at RM4.08, giving it a market capitalisation of RM10.85 billion.