URA rejects Raffles Medical's building conversion plans

It poses threats of traffic congestion.

According to Nomura, Raffles bought Thong Sia building in 2011 with the intention to convert the building into a specialist centre.

Here's more from Nomura:

As it turns out, however, the URA has rejected the application for change of use of the commercial space. One of the reasons, as we understand it, is that the URA had concerns about potential traffic congestion in the area.

We understand that management is working to address the concerns raised and appeal the decision. The initial plan was to commence by 1H2013 but this appears to be delayed to 2H2013 due to the rejection.

We currently have no visibility on how the concerns will be addressed but believe that more clarity will be provided in the upcoming results briefing on 22 Oct 2012.

We think the base case is for RFMD to continue pursuing the approval process. Management is very clear that their business is in healthcare and not real estate.

We think there are a few possible scenarios:
1) Approval obtained after resubmission: impact – short delay; minimal
2) Approval obtained only after multiple resubmissions: impact – long delay; moderate
3) Can’t get approval: impact – negative; may sell building or continue to rent it out

Overall, the impact will be negative on the growth profile of the company, though that may be compensated by a one-time windfall from selling the property or continued rental of the building.

Recall that Raffles bought the 42,668 sq ft space for S$92m or S$2,158 psf. Data from JLL suggests that current pricing is close to what they paid. In short, they are not worse off from the asset purchase. We estimate that rental income on a fully rented basis should bring in operating income of ~S$4mn.

We are estimating an EBITDA contribution of S$7 – S$9mn from the first year of operation of the specialist centre. It would have an impact of 3% in FY13F and 5% for FY14F respectively, if we back out the contribution while assuming continued rental income from the asset.