Embed Size (px)
Citation preview
Draft Business Valuation& Assessment under IAS-36(Impairment of Assets) Report
w w w . i n s i g h t s s . c o
AlAhli REIT Fund [1]
01st March 2020
Contents
Executive Summary
Project brief
Company Pro�le
Property Details
Manpower and Management
Site Analysis
KSA’s Economic Overview
Market Overview
Major Competitors
Business Analysis
Risk Assessment
Valuation Methodology
Valuation Assumptions and Results
Requirements of IAS – 36 “Impairment of Assets”
Impairment Testing
Signature
Appendices
04
10
13
15
23
25
28
24
28
42
47
50
52
63
67
70
72
www.insightss.co
www.insightss.co
3
Disclaimer of LiabilityThis report has been prepared for AlAhli REIT Fund (1) to calculate value in use of their businesses under International Accounting Standards (IAS) 36, “Impairment of Assets”. The properties are located in Jeddah, Kingdom of Saudi Arabia i.e. Al Andalus Mall, Staybridge Suites and Salama Tower.
The terms of our engagement were such that we were mandated to rely solely on the information provided to us by the client. Values will differ or vary periodically due to various unforeseen factors beyond our control such as supply and demand, inflation, local policies and tariffs and change of various inputs, etc.
The scope of our work did not include any due diligence procedures. It should not be construed that we have verified any of the information provided to us, or that our inquiries could have verified any matter, which a more extensive examination might disclose.
This report is issued for the internal use of client, and that of their professional advisers, for the specific purpose to which it refers. Insights will not accept any responsibility to any third party for the whole or any part of its contents.
Executive Summary
5
Executive Summary
Scope of WorkInsights has been appointed by NCB Capital (the “Client”) to provide Business Valuation & Assessment under IAS-36 (Impairment of Assets) (the “Project”) in connection with its Al-Ahli REIT Fund, a real estate investment traded fund in Saudi Stock Exchange (Tadawul).
The valuation work has been performed under the guidance ofInternational Valuation Standards and in accordance with SaudiAuthority for Accredit Valuers (Taqeem).
This report contains the Valuation of the individual assets under REIT reporting to Saudia Capital Market Authority (CMA) for AnnualReporting of market vaule in accordance with Taqeem Regulations as at 31st December 2019.
The valuation approach used to value Al Andalus Mall, StayBridge Suites and Salama Tower considers the Discounted Cash Flow (“DCF”)methodology as a primary approach, based on the cash flowsprojections between 2020 and 2024, (the “Projection Period”) as detailed in the Financial information.
www.insightss.co
6
Executive Summary
Brief background of Al Ahli REIT Fund (1)AlAhli REIT Fund (1) is a Shariah-compliant fund that aims to provide semi-annual rental income to the Unitholders by investing mainly in income-generating ready-to-use real estate assets, in addition to growth in the total value of assets.
The Fund manages the portfolio of real estate properties comprising of
Al Andalus Mall consist of a fully enclosed shopping mall with national and international tenants. The Mall has a Gross Leasable Area of approximately 90,272 sqm spread over ground, first and second floors. The property has seven entrance gates as well asapproximately 3,000 car parking spaces. The construction ofAl Andalus Mall concluded in 2006 and it is operational since 2007.
Staybridge Suites is an upscale hotel that adjoins the Mall and consists of 164 guestrooms, a restaurant, banquet hall with two additional meeting rooms as well as a fitness center with leisure facilities. The hotel opened for public in 2017.
Salama Tower is located in a prime location in Al Salama district on Al Madina road close to Hira intersection. The tower has 13 floors above ground and 1 basement floors and mezzanine floor. The towercomprises 84 offices, 4 showrooms, and 4 warehouses. The tower is 100% leased for a period of 5 years
www.insightss.co
7
Executive Summary
Valuation Conclusion
Valuation Results - DCF approach:
We have assumed that the information provided by theclient in relation to revenues and operating expensesassociated with the business is accurate and that we havebeen provided with information that has significant effecton the value of business. We believe that this report and valuation fulfills therequirements of your instructions. This report is issuedwithout any prejudice and personal liability. Based on above we have concluded the value in use ofbusiness as at 31st December 2019 is:
Al Andalus MallSAR 1,185,009,000 (One Billion One Hundred Eighty-Five Million Nine Thousand Saudi Riyals )
Staybridge SuitesSAR 185,356,000 (One Hundred Eighty-Five Million ThreeHundred Fifty-Six Thousand Saudi Riyals )
Salama TowerSAR 264,640,000 (Two Hundred Sixty-Four Million Six Hundred Fourty Thousand Saudi Riyals )
Total ValueSAR 1,635,005,000 (One Billion Six Hundred Thirty-Five Million Five Thousand Saudi Riyals )
www.insightss.co
8
Executive Summary
www.insightss.co
Impairment Testing
Insights was also engaged by AlAhli REIT Fund (1) for the determination of the Value in Use as per the IAS – 36(Impairment of Assets). The properties involved included:
Al Andalus MallStaybridge SuitesSalama Tower
IAS 36 requires annual impairment tests for certain assets and for any non-financial asset where there is an indication of impairment.
Based on the analysis for impairment testing, we conclude that the properties of NCB Capital are not subject to any impairment.
9
Executive Summary
www.insightss.co
Basis of information
In the preparation of this report, we have relied on the followinginformation:
Information provided by Management including:Salama Lease AgreementAl Andalus Mall Tenancy Schedule 2019Al Andalus Mall Operational Expenses year ended 2019Staybridge Suites Consolidated Profit and LossStatement – year ended 2019All Email correspondence
Meetings and discussions with ManagementOther publicly available information
Project Brief
11
Project brief
Project Overview
Insights has been appointed by NCB Capital (the “Client”) to provide Business Valuation & Assessment under IAS-36 (Impairment of Assets) (the “Project”) in connection with its Al-Ahli REIT Fund , a real estate investment traded fund in Saudi Stock Exchange (Tadawul)
This report has been structured into three parts:Desktop study: This section has been drafted based on a desktop study and contains information on sector as well as an overview of the competitive sector. Financial information section: This section contains theinformation and assumptions which form the basis of thevaluation along with the historical financial information on theproperties.Valuation section: This sets out the valuation of the business along with the methodologies used.
This report solely relies on information provided by the NCB Capital. Insights has not reviewed nor updated, and neither does it assume any responsibility for any of market, economic, technical oroperational assumptions used in the development of the prospective financial information for the purpose of this report. Please note that we have not performed a due diligence on the preparation of pro-forma accounts and expect our valuation to be updated.
www.insightss.co
Project brief
Valuation StandardsWe confirm that this valuation report has been prepared under the guidance of International Valuation Standards and in accordance with Taqeem Regulations as at 31st December 2019.
Purpose of ValuationInsights has been asked for Business Valuation of the REIT reporting to Saudia Capital Market Authority (CMA) for Semi Annual Reporting of market value in accordance with Taqeem Regulations at 31st December 2019. The main purpose of Value in Use for AlAhli REIT Fund (1) was the impairment test for Al Andalus Mall,Staybridge Suites and Salama Tower. For the calculation of impairment it is necessary to have a comparison between the Carrying Amount & Recoverable Amount. The recoverable amount includes two further sub classifications as Fair Value and Value in Use.
Date of ValuationThe date of this Valuation is 31st December 2019.
Sources of InformationWe have been provided with the information of revenues, operating expenses and financial performance of the properties. We have assumed that the information provided to us by the management is accurate and has a material effect on the valuation of properties.
12
www.insightss.co
Company Profile
14
AlAhli REIT Fund (1)
Portfolio of Investment
Al Andalus Mall
AlAhli REIT Fund (1) is a Shariah-compliant fund that aims to provide semi-annual rental income to the Unitholders by investing mainly inincome-generating ready-to-use real estate assets, in addition to growth in the total value of assets.
Company Profile
www.insightss.co
Staybridge Suites Salama Tower
15
Debt Analysis
Dividend Payout Policy
The Fund entered into an agreement to obtain a SR 650 million aShariah-compliant Ijara facility from the National Commercial Bank.Facility term is 15 years with a grace period for the first 5 years (interest only). As of today, the fund has only drawn down 255 million.
Dividends distributed per nominal value: 2018 distributions of 6.5% of par value were in line with the Fund Manager's projections. The first half distribution was made in August 2018 and the second half distribution was made in February 2019.The Fund Manager aims to distribute at least 90% of its annual net profit as cash dividends to unit holders twice a year, excluding the capital gains resulting from the sale of real estate assets andinvestments in money market funds and transactions which may be reinvested in additional assets for the Fund.
Company Profile
www.insightss.co
Property Details
Al Andalus Mall is situated in the heart of the city at King Abdullah Street intersection with Prince Majed Street, Jeddah. Al Haramain Train Station and Kind Abdul Aziz University are in close proximity.
Al Andalus Mall has finest brands and a diverse tenant mixconsisting Fashion, Food & Beverage, Entertainment, Indoor Sports etc. It is one of the biggest malls with 415 retail shops.
It is a preferred shopping destination for families which is evident from the huge influx of visitors. During previous year, Millions of visitors visited AlAndalus Mall. It enjoys highest occupancy amongst comparable malls in Jeddah.
Empire cinema with 27 showrooms are expected to open in first quarter of 2020 which will likely increase footfall further
Al Andalus Mall comprises a fully serviced shopping mall with national and international brands. We have been told that construction of the Mall concluded in 2006 and that it isoperational since 2007.
The Mall extends in approximately 152,910 sqm of land area. The Mall has construction of ground floor and one floor. The leasable area is approximately 90,272 sqm as stated by the client. The Mall benefits from 7 entrance gates as well as approximately 3,000 car parking spaces.
17
Al Andalus Mall
Property Details
www.insightss.co
LocationAl Fayhaa District, Jeddah
Total Land Area152,910 square meters
Leasable Area90,272 square meters
Operator and Lease ManagerAl-Andalus Property Company
Purchase PriceSR 1,150,000,000
The building is of reinforced concrete frame construction beneath a concrete/profiled metal roof. The external envelope is finished with painted pre-cast concrete panels to all elevationsincorporating full height glazed sections to the entrance gates
Access from ground to first level is facilitated via 6 elevators, 14 escalators and 2 panoramic lifts which are located within the mall and provide good interconnectivity between each level.
The children’s entertainment area includes several removable rides and arcade games as well as an ice skating rink.
Al Andalus Mall management office is situated on the second floor, which is accessed via a service corridor.
A Building Management System is installed within the Centre in addition to a comprehensive security system featuring numerous CCTV cameras. Overhead fire sprinklers, fire alarms, hose reels, extinguishers and detectors are fitted throughout the entire prop-erty.
The Mall has been extended from its southern elevation by 8,000 sqm. We have not been provided with the development cost but we understand works were completed at the end of 2016. The expanded area has already been fully leased, with anchor tenants including Red Tag and City Max.
18
Alandalus Mall (Continued)
Property Details
Additionally, 5 new food court units have been developed as an exten-sion to the existing area. These units range from 52 sqm to 62 sqm each. The extension was completed in Q2 2018.
The following are some of the brands representing their presence in Alandalus Mall:
Hyper Panda
Smart Mango
Centre Point
Red Tag
City Max
Home Box
Riva
Paris Gallery
New Look
City Max
H&M
Kiabi
www.insightss.co
Staybridge Suites
Property Details
Staybridge Suites is a 5 star hotel, attached to Al Andalus mall, operated by Holiday Inns Middle East Limited (100% owned by Inter Continental Hotels Group). It is just 20minutes from King Abdul Aziz International Airport Jeddah and a 10-minute drive from downtown and Jeddah Sea Port.Hotel comprises 44 studios, 90 one bedroom and 30 two bedroom apartments.
Guests at Staybridge Suites can unwind in the state-of-the-art fitness center, play tennis, and enjoy time at elite café besides swimming pool. In addition to the leisure amenities, the hotel offers business center, meetingconvention spaces, and a ballroom for the business segment.
19
One Bedroom (type 1) 75
One Bedroom (type 2) 15
Two Bedroom (type 1) 15
Two Bedroom (type 2) 15
Studio (type 1) 14
Studio (type 2) 15
Studio (type 3) 15
Total Keys 164
www.insightss.co
Staybridge Suites (Continued)
Property Details
Staybridge Suites is an upscale hotel that adjoins the Mall and benefits from 164 guestrooms. In terms of theconfiguration of the Hotel, the reception is located on the ground floor. There is a restaurant on the first floor, which benefits from 70 covers and is identified as ‘The Hub’, as well as a club lounge.
On the second floor there is a banquet hall that can bedivided into 5 meeting rooms, as well as 2 individual meeting rooms with audio visual equipment. On this level there is also a fitness centre, sauna room and a 20 metre outdoor swimming pool. The Hotel also benefits from an outdoor tennis court, which is located on the fourth floor.
20
www.insightss.co
LocationAl Fayhaa District
Total land area6,223 sqm
Total Construction Area28,255 square meters
OperatorHoliday Inns Middle East Limited (100% owned by Inter Continental Hotels Group)
Purchase PriceSR 200,000,000
21
We have seen the copy of Title Deed for the property. We have assumed the following details to be correct for the purposes of this report.
However, if there have been found any different details of the property, we reserve the right to amend our business valuation.
Key Characteristics
Property Details
Description
City
District
Owner Name
Property Type
Land Area (sq. m)
Plot size of the Mall (sq. m)
Plot size of the Hotel (sq. m)
Information
Jeddah
Al Fayhaa
Sandooq Tamkeen Real Estate Company
Al Andalus Mall & Staybridge Suites
159,133
152,910
6,223
www.insightss.co
22
Salama Tower is located in a prime location in Al Salama district on Al Madina road close to Hira intersection. It is 25-minute drive from downtown and less than 10 minutes away from the new King Abdul Aziz International Airport, Jeddah.
The tower has 13 floors above ground and 1 basement floors and mezzanine floor. The tower comprises 84 offices, 4 showrooms, 4 warehouses and 400 car parking space.
The tower is 100% leased for a period of 5 years. The tower is occupied by strong brand names such as Samsung Gulf Electronics, Al Rajhi cooperativeinsurance company, Al Rajhi Takaful, Taajeer Group, Tim Hortons, NationalAviation Services Company, Salama insurance company to name a few.
Salama Tower
Property Details
www.insightss.co
LocationAl Madina Road
OpreatorJabel Edsas
Acquisition PriceSR 255,000,000
Total Net Leasable Area29,502sqm23,780 sqm (offices)5,710 sqm (retail)
Manpower and Management
24
Manpower and Management
www.insightss.co
Al-Andalus Mall Al-Andalus mall is managed and operated by Al-Andalus Property Company (i.e real estatecompany listed at Tadawul). There are around 40 employees in the mall management team located inside the mall responsible for handling the leasing, collection, marketing, tenants relationship, and operations maintenance. Facility management (cleaning, security, etc.) is outsourced to external specialized third parties. The mall operation agreement is for 3 years, with option for renewal.
Staybridge SuitesStaybridge Suites is managed and operated by Holiday Inns Middle East Limited (100% owned by Inter Continental Hotels Group). Holiday Inns Middle East Limited operates the Hotel, including determination of room rates, provision of hotel services, development of hotel policies for guests, conclusion and execution of leases, licensing contracts and concession agreements. The hotel management agreement with Inter Continental Hotels Group has a term of 15 years renewable for two consecutive five year terms.
Salama TowerSalama tower is operated and managed by Jabal Edsas. However, there is no direct contractual agreement between the fund and Jabal Edsas. The fund has leased the entire tower to Dr. Saleh Maliakah on a triple net lease bases for a period of 5 years.
Site Analysis
26
Site Analysis
Location Analysis
Jeddah is the second largest city in Saudi Arabia after theKingdom’s capital city Riyadh.
The site of Salama Tower is located on Madinah Road with Salamah district.
The location is dominated by residential apartment buildingsKing Abdulaziz International Airport is located approximately 6 km away from the tower.The site is 5km away from sea.
The site of retail shopping mall (Alandalus Mall) and Staybridge Suites is located in the middle of Jeddah in Al Fayhaa District.
The location is considered as a prime location in Jeddah at the intersection of Prince Majid Rd and King Abdullah Road. The area consists of many high end residential buildings.The area currently is occupied by two shopping malls (Al Salam Mall and Al Andalus Mall) and Jeddah Gate, which is a master planned community. King Abdulaziz International Airport is located approximately 23 km away from the mall.The site is 78 km away from Masjid al-Haram, Mecca.
www.insightss.co
Source : Images from Google Map
27
Site Analysis
Site Accessibility
www.insightss.co
The business site of retail shopping mall (Alandalus Mall) and Staybridge Suites is easily accessible through King Abdullah road and Prince Abdul Majeed road. Further Al Harmain Expressway is nearly 7 km away from the location of property.
The business site of Salama Tower is easily accessible through Al Madinah Al Munawarah Road
Source : Images from Google Map
KSA’s Economic Overview
29
Vision 2030
Major Goals
KSA’s Economic Overview
www.insightss.co
GDP Women’s Participation
Heritage
Road Safety Drugs
To increase SMEcontribution to GDP
from 20% to 35%
To increase capacity towelcome Umrah
visitors from 8 millionto 30 million every year
To raise country’spostion from 26 to
10 in the socialCapital index
To flight drugs abuse,ensure traffic safety,
reduce traffic accidents
To more than doublethe number of Saudia
heritage sites registeredwith UNESCO
To increase women’spariticipation in the
workforce from22% to 30%
By 2020, there will be more than 450registered and professionally organized
amateur clubs
To increase spendingon cultural and
entertainment activitiesinside the Kingdom
from 2.9% to 6%
To have three Saudicities be recognized in
the top ranked 100cities in the world
30
Budget - 2020
KSA’s Economic Overview
www.insightss.co
2013
2014
2015
2016
2017
2018
2019
829
855
715
514
692
783
975
1,131
1,046
608
528
696
895
917
820
855
860
840
890
978
1,106Source : Saudi budget
925
1,100
975
825
926
1,030
1048
206
-54
-367
-297
-230
-136
-131
9
0
-145
-326
-198
-195
-131
Projected
RevenueYear
Expenditure Surplus/Deficit
Projected ProjectedActual Actual Actual
Projected Budget Deficit isSR 187 Billion
Projected ExpenditureSR 1020 Billion
Projected RevenueSR 833 Billion
The government has budgeted for non-oil revenue to reach SR 320 billion in 2020 compared to SR 315 billion in 2019, showing an increase of 1.6%.According to the MoF, the real GDP growth of the Kingdom is expected to reach 2.3 percent in 2020, as a result of relatively stable oil prices, implementation of Vision 2030 programs, and increased spending on infrastructure. Inflation is also expected to increase to 2.0 percent in 2020. Moreover, widening the tax net is likely to help the country diversify its revenue stream. This, coupled with the government’s effort to improve the efficiency of expenditures, should also help the country achieve fiscal balance by 2023
Source : Saudi budget
31
Expenditure - Budget 2020
KSA’s Economic Overview
www.insightss.co
Year
Education
Military
Health & Social Development
General Items
Security and Regional Administration
Economic Resources
Infrastructure & Transport
Municipality Services
Public Administration
18.9 %
17.8 %
16.4 %
13.8 %
10.0 %
9.6 %
5.5 %
5.3 %
2.7 %
Percentage
According to the MoF, the total public expenditure budget has decreased by 2.7 percent to SAR 1,020 billion in 2020, as compared to the 2019 estimate of SAR 1,048 billion.Despite the oil market volatility, which had some impact on the expendi-ture, the government has made notable progress on the Vision Realization Programs (VRPs). In addition, allocation of over one-trillion SAR budget expenditure for 2020 demonstrates the government’s commitment towards driving economic growth.Sector priorities for 2020 budgeted expenditure are consistent with recent years, with education, military and healthcare accounting for more than 50 percent of total allocations.
Departments
18.9 %
10.0 %
9.6 %
5.5%
5.3 %
2.7 %
17.8 %
13.8 % 16.4 %
32
Revenue - Budget 2020
KSA’s Economic Overview
www.insightss.co
Year
Saudi Arabia has been taking prudent measures to increase the ratio of non-oil revenues to total revenues, such asimposing excise taxes on sweetened drinks in December 2019 and continuing the implementation of the levy on expatriateworkers. Oil is nevertheless expected to remain asignificant contributor to public revenue.
According to the MoF, total public revenue is expected to reach SAR 833 billion in 2020, as compared to SAR 917 billion in 2019. Oil revenue is expected to remain a majorcontributor to the country’s revenue, with a share of 62 percent in 2020 (with a value of SAR 513 billion), while the share of non-oil revenue is expected to reach 38 percent, valued at SAR 320 billion
2016
2017
2018
2019
2020
334
436
611
602
513
520
692
906
917
833
186
256
294
315
320
Year Non - OilRevenue
OilRevenue
TotalRevenue
Source : Saudi budget
33
Economic Indicators - Budget 2020
KSA’s Economic Overview
www.insightss.co
Key Statistics
Budget
Economic Output
Trade and External Sector
Nominal GDP (SR Billion)Nominal GDP (YOY)Real GDP (YOY)Revenue (% of GDP)Oil Revenue (% of GDP)Non-Oil Revenue (% of GDP)
Export (SAR Billion)Oil Export (SAR Billion)Current Account (SR Billion)Current Account (% of GDP)
Revenue (SR Billion)Oil Revenue (SR Billion)Non-oil Revenue (SR Billion)Expenditures (SR Billion)Surplus/(Deficit) (SR Billion)Surplus/(Deficit) (% of GDP)Gross Public Debt (SR Billion)Gross Public Debt (% of GDP)
2016
2,419 -1.4%1.7%
21.5%13.8%7.7%
688 511 (89)-3.7%
832 638 39
1.5%
1,104 868 265 9.0%
1,066 830 204 7.3%
520 334 186 830 (311)-12.9% 317
13.1%
2017
2,582 6.7%-0.7%26.8%16.9%9.9%
692 436 256 930 (238)-9.2% 443
17.2%
2018
2,949 14.2%2.4%
30.7%20.7%10.0%
906 611 294
1,079 (174)-5.9% 560
19.0%
2019
2,811 -4.7%0.4%
32.6%21.4%11.2%
917 602 315
1,048 (131)-4.7% 678
24.1%
1,068 831 183 6.3%
2020
2,902 3.2%2.3%
28.7%17.7%11.0%
833 513 320
1,020 (187)-6.4% 754
26.0%
1,032 796 121 4.0%
2021
3,027 4.3%2.2%
27.7%21.1%6.6%
839
990 (151)-5.0% 848
28.0%
Source: MoF, GaStat, SAMA, IMF
Market Overview
35
Mall
Market Overview
www.insightss.co
Year
Supply Analysis
There were no notable mall completions in 2019, leavingthe total retail supply in Jeddah relatively unchanged atapproximately 1.43 million sqm. Market is expected to witness an additional 172,000 sqm of retail GLA in 2020 respectively, with the potential completion of the retail component of Jeddah Park (Serafi Mall – 125,000 sqm) on Tahlia Street. Notable projects including Atelier Lavie, Sunset Avenue, Obhur Mall, Manuel Square, Al Hamra Square, and WOW observed in ther pipeline.Number of commercial-driven cinema multiplexes have emerged across the country, 2019 saw the launch of the King-dom’s first art house ‘Cinema El Housh’ in Jeddah’shistoric district Al Balad.More entertainment initiatives to launch in the future as the Kingdom aims to increase household spending onentertainment, and improve participation in cultural activitiesin line with Vision 2030.
Real estate market in Jeddah remained subdued in Q2 2019. Retail sector registered mixed performance, with the better quality super regional malls with entertainment options recording stable rents.
Performance
Average retail rents in Jeddah saw mixed performance in 2019.Rents in regional malls decreased 3% on an annual basis, rents in super regional centres remained stable over the same period. Landlords continued to offer yearly leasing incentives to retain tenants, market wide vacancies decreased marginally to reach 10% Y-o-Y. Retail rents and vacancies are likely to face further pressure as more supply is expected to enter the market .Tenants will have more choice and negotiating power. Retail market supported by many initiatives such as theintroduction of e-tourism visas in time for the Jeddah Season 2019. Visitors buying online tickets for the festival are able to secure an e-tourism visa at the same time.
2021 F
2020 F
2019
2018
2017
2016
2015
0 0.5 1.0 1.5 2.0
1.25
1.35
1.39
1.42
1.43
1.51
0.07
0.172
1.68
GLA (sqm million)
36
Market Overview
www.insightss.co
Year
Hotels
Year
Supply Analysis
Total supply of hotel keys in Jeddah was 11,900.New properties include Ibis Jeddah Alesayi Plaza, the new Jeddah Marriott in Al Bawadi, Crowne Plaza Jeddah, and Park Inn by Radisson Madinah Road, the first property for the brand. Growth in the branded serviced apartment segment was observed due to Adagio Jeddah Malik Road and Adagio Alesayi Plaza. Recently-opened Neom Bay Airport, as part of the Neom Project, is expected to attract more investments due to enhanced connectivity, thus boosting demand in thehospitality market.Branded hotel segment prepares to cater to a more diverse tourist base.
Real estate market in Jeddah remained subdued in Q2 2019. Hotel occupancy rates decreased marginally in 2019compared to 2018. In turn, average daily rates andrevenues per available room registered annual declined.
Performance
Hotel occupancy rates registered 53% in the YT May 2019, compared to 54% in the YT May 2018. Average daily room rates (ADR’s) declined 12% Y-o-Y toregister USD 215 (SAR 806). Revenue per available room (RevPar’s) dropped 13% to record USD 114 (SAR 428) over the same period. Hotel performance expected to soften further. However, the hotel market remains positive in the long run, given the government’s commitment to investing ingiga-projects that not only promote tourism, but alsodiversify the Kingdom’s tourist base.Jeddah, which is dominated by religious tourism, these investments are likely to drive a mix of corporate, leisure, local and international visitors.
2021 F
2020 F
2019
2018
2017
2016
2015
0 5 10 15 20
8
10
11
11
12
13
2
3
1
16
Keys (In 000s)
37
Market Overview
www.insightss.co
Towers
Year
Supply Analysis
Demand for office space remained weak in 2019 on the back of slow business activity. Total office stock in Jeddah at 1.06 million sqm of GLA. Some developers put their projects on hold, others aim to attract new tenants by offering them the flexibility of choice between shell and core, semi or fully fitted-out or serviced offices within the same premises. Expected completions include Al Rawdah Business Avenue and Caira Plaza on Prince Saud Al Faisal, Vision Tower on Prince Sultan street, and Signature and Sara Square on Malik Road, in addition to Corniche Centre on Corniche Road.
Real estate market in Jeddah remained subdued in Q2 2019. Office rents weakened further while vacancy rates showed annual improvement mainly in quality office space. With more supply expected to handover in the short term, officeperformance will likely remain under downward pressure.
Performance
Commercial rents remained under downward pressure across Jeddah in 2019. Landlords continue to offer leasing incentives to attract new tenants, average Grade A rents dropped 17% to reach SAR 1,030 per sqm per annum, while average Grade B rents dropped 12% to average SAR 750 per sqm per annum. Market wide office vacancies decreased 200 basis points to reach 20% Y-o-Y. In the short to medium term, rents would drop further as more supply enters the market. In the long run however, increased investment opportunities and the ease of travel stimulated by the new King Abdulaziz International Airport (KAIA) is expected to reflect positively on the appetite for doing business in Jeddah. In turn, this will reflect positively on the performance of office buildings across the city, particularly Grade A space.
2021 F
2020 F
2019
2018
2017
2016
2015
0 0.5 1.0 1.5 2.0
0.89
0.97
1.01
1.06
1.06
1.14
0.079
0.026
0.0051.17
GLA (sqm million)
Major Competitors
39
Major Competitors
www.insightss.co
Key Market Players – Al Andalus Mall
Founded AddressStrength/Value to Customers
Al Salaam Mall
Aziz Mall
Haifa Mall
Mall of Arabia
121,113
72,153
32,946
109,185
1,825
1,422
914
2,053
92.9%
95.0%
83.6%
96.5%
3,400
4,000
3,200
6,100
2,600
3,500
2,700
4,000
1,900
2,600
1,800
3,100
1,400
1,800
1,200
2,400
500
700
1,000
1,100
2012
2005
2011
2008
Company Parking spaces Occupancy Year builtRents
0-50 sqmRent
1,500 sqmRents
51-200 sqm Rents
201 - 500 sqm Rents
500 - 1,500 sq mGLA sqm
Key Market Players – Salama Tower
Public Prosecution Building – Jeddah
Alrawdah Business Centre – Jeddah
Khaldiyah Business Centre – Jeddah
14,574
11,188
17,762
N/A
2,278
7,114
19,342
17,526
24,860
100%
69%
68%
284
660
560
3 years
1-5 years
2-10 years
6.0%
12.7%
12.3%
Company Area of offices(sqm)
Area of Retail(sqm) BUA (sqm) Occupancy Avg Rent/sqm
(SAR) Lease Term Opex% of Revenue
40
Major Competitors
www.insightss.co
Key Market Players – Staybridge Suites (1/2)
Occupancy
Source: Hotels.com
Radisson Blue RoyalSuite Hotel Jeddah
Ascott Tahlia Jeddah
Citadiness Al SalamahJeddah
Novotel JeddahTahlia Street
112
125
129
139
440
879
606
1245
Located a 30-minute drive from King Abdulaziz International Airport, this hotel in Jeddah features 2 restaurants, a gym and a spa. Free Wi-Fi and free private parking are available.The Al-Diwan Restaurant serves Lebanese, seafood and Egyptian buffets, and there are also healthy options available for guests. The Blu Jeddah also features the Hokkaido Restaurant, which serves Japanese sashimi and sushi prepared by Tepenyaki chefs.
Offering views of the city, Ascott Tahlia Jeddah is set in Jeddah in the Makkah Region, 1.4 mi from Jeddah Mall. An array of popular stores and shops are within walking distance from the property.Guests can enjoy the on-site restaurant and a a rooftop lounge, Kenza's lounge (sheesha coffee), with an amazing city view.King Fahad Fountain is 3.1 mi from Ascott Tahlia Jeddah, while Al Shallal Theme Park is 3.7 mi away. The nearest airport is King Abdulaziz Airport, 8.1 mi from the property.
Located in Jeddah, Centro Salama Jeddah by Rotana offers 4-star accommodations with an outdoor swimming pool, a fitness center and a terrace. The property is around 4.2 mi from Mall of Arabia, 3.6 mi from Stars Avenue Mall and 8.5 mi from Red Sea Mall. The property features a 24-hour front desk.Centro Salama Jeddah by Rotana offers a buffet breakfast. There is an on-site restaurant, which serves a variety of international and Middle eastern dishes.Jeddah Mall is 2.7 mi from the accommodations. The nearest airport is King Abdulaziz Internation-al Airport, 6.2 mi from Centro Salama Jeddah by Rotana.Al Salamah is a great choice for travelers interested in luxury brand shopping, restaurants and family-friendly trips.
Novotel Jeddah Tahlia is located in the convenient access to Jeddah's major business hubs, leisure attractions and luxury shopping areas. Guests can enjoy complimentary access to spa facilities including a fitness center, steam room, sauna and the rooftop swimming pool.The Palm restaurant offers wide variety of international delicious meals breakfast, lunch and dinner buffet and a la carte menu available in a modern and comfortable atmosphere with glass windows all around, view onto famous Tahlia Street. Guests can also enjoy beverages and light meals at Novotel lounge located in the lobby.The hotel is 1.6 mi from Jeddah Mall and 3.1 mi from Stars Avenue Mall. King Fahad Fountain is 3.3 mi from Novotel Jeddah Tahlia, and Al Shallal Theme Park is 4.1 mi away. The nearest airport is King Abdulaziz Airport, 8 mi from Novotel Jeddah Tahlia.Al Andalus is a great choice for travelers interested in food, luxury brand shopping and restaurants.
Company Value Preposition No of Rooms ADR (SAR)
41
Major Competitors
www.insightss.co
Key Market Players – Staybridge Suites (2/2)
Company Value Preposition No of Rooms ADR (SAR)
Jeddah Hilton
Source: Hotels.com
Sheraton JeddahHotel
Inter ContinentalJeddah
MovenpickHotel Jeddah
388
149
300
140
1,900
650
850
320
Luxury hotel with full-service spa, connected to theconvention center, near Red Sea Mall.This hotel has 388 rooms arranged over 12 floors.On site outdoor tennis courts, sauna, steam room,basketball, and racquetball/squash.
Luxury hotel with 3 restaurants, near Red Sea Mall.On site Health club, sauna, steam room, tennis, fitnessclasses, basketball, playground, squash, and volleyball.
Luxury Jeddah hotel with outdoor pool, connected to the convention center.This hotel has 300 rooms arranged over 5 floors.On site health club, spa services, and business center.
4 - star Jeddah hotel with outdoor pool, connected to a shopping center.This hotel has 140 rooms arranged over 5 floors.On site free children's club, health club, and business center.
Business Analysis
43
Business Analysis
www.insightss.co
SWOT Analysis - Mall
New gates installation in the rear elevation of mall to increase the footfall to certain areas.
SWOT
STRE
NG
THS
OPP
ORT
UN
ITIE
STHREATS
WEAKN
ESSES
Well established mall with decent occupancy rates.Secured income from �nchor �yper �anda & �inema, City Max, Home Box, and Centre point.Presence of highly demanded kids fun area, renovated food court, and excellent parking.
Rise in competition from nearby malls.Older property would require increased opex and capex in future.Unaffordable price level for the low scale purchasers.
Decline in the visitor base, resulting from the emergence of new malls in neighborhood.
44
Business Analysis
www.insightss.co
SWOT Analysis - Hotel
SWOT
STRE
NG
THS
OPP
ORT
UN
ITIE
STHREATS
WEAKN
ESSES
Strategic location – adjacent to Andalus Mall.Large room sizes, variety of meeting spaces, and diversity of class along with higher specifications, increases the capacity to cater more customer requirements.International branded serviced apartments to capture the existing gap in the rental units industry.
Significant contribution in the hotel demand, stemming from the construction of Dr. Sulaiman AlHabib Hospital, adjacent to Staybridge Suites.
Traffic congestion, poor vehicle accessibility, and limited F&B facilities.Reduction in the growth, resulting from the shift to the Jeddah Economic City.
Adverse impact on the demand caused by increase in the supply of serviced apartments, booming hospitality sector, and completion of pipeline projects.
45
Business Analysis
www.insightss.co
SWOT Analysis - Tower
SWOT
STRE
NG
THS
OPP
ORT
UN
ITIE
STHREATS
WEAKN
ESSES
Prime location: 25 minute drive from downtown and less than 10 minutes away from the new King Abdul Aziz International Airport, Jeddah.Continuous revenue stream with 100% leased for 5 years. Occupied by strong brand names such as Samsung Gulf Electronics and tower distributed between offices and retail for diversification of revenue stream.
Reduction in the growth, resulting from the shift to the Jeddah Economic City and rising parking issue evident from large population parking in the adjacent empty plots.
Adjacent empty plot might not be available for parking in future – increasing further traffic congestion.
Comprising 84 offices, 4 showrooms, and 4 warehouses. Hence, securing the revenue drifts and enabling the diversity of operations as per need.Upon expiry of lease, the head lease will be increased for next tenancy contract.
46
Business Analysis
www.insightss.co
PESTLE Analysis
PoliticalKSA “Vision 2030” initiative aims to diversify its economy away from oil dependency, creating a healthier and a more competitive private sector, bringing in investments and growth in every sector.Government plans to cultivate viable non-oil sectors, such asmanufacturing and services (through providing incentives such as subsidized property leases, interest free loans and other subsidies).Government has commitment to support the economy andcontinues to finance strategic projects, such as key infrastructure developments (including mega projects in transport, housing, power and water sectors).
EconomicExpected reduction in inflation in coming years.The government sponsored entertainment events in the mega cities of KSA are attracting much tourism. It was noted that tourism, culture and entertainment sector will grow from 2.9% to 6% by 2030Smaller household size due to the changing social norms and increased per capita income, the Personal Disposable Income per Head increasing SR 114 billion tourism contributes 8.7% of the GDP in 2018 and expected to increase to 10.4% in coming decade. 43.4% of total visitors in 2018 were foreigners. Majority of visitors come to KSA for leisure purpose while 20% for business activity.
EconomicSaudi Arabia population is 33.9 million with expectation of 1.8% increase bringing it to 39 million in 2030.Saudi Arabia has a growing young population (46% between age 20-44 ) expanding with rising per capita incomes, continually driving market demand.Urbanization is increasing with 84% population living in urban areas with greater exposure to employment opportunities. The increase in purchasing power of salaried employees dwelling in urban centres further drives the market.
TechnologicalTechnology playing an important role in attracting tourism asbranding is key selling point.
LegalIn June 2015, the Capital Market Authority (CMA) liberalized the local stock market, allowing foreigners to own up to 49% of a single stock and also allowing institutional foreign investors with a minimum of SAR 18.75 billion assets under management to invest in the stock market
EnvironmentalUmrah and Hajj pilgrims put pressure on the resources andenvironment. However, driving the tourism industry.
Risk Assessment
48
Risk Assessment
RentalsConsidering the current outlook of the real estate market, there might be uncertainty in trend for the rentals in the real estate market in the projected period of cash flows.
Low OccupanciesGenerally the low occupancy rates in the market is a very highrisk indicator. Even with reduced tenancy the investor still facesmaintenance costs and property taxes on his properties.
Future SupplyFuture supply in the market can affect business. The development of new malls or hotel in the catchment area will result in high competition. With more traffic in the catchment area this will also result in location risk for the properties.
Impairment RiskImpairment testing is not just an accounting exercise; it is an assessment of the business and its true value. The relevance of real estate asset impairment has increased in recent years due to economic conditions. Therefore, stakeholders need to be aware of the impairment risk and should factor it into their investing decision-making process.
Risk & Risk Mitigation (1/2)
www.insightss.co
49
Risk Assessment
Risk & Risk Mitigation (2/2)
Economic ConditionsThe economic conditions can impact significantly whiledetermining future cash flows and hence the value of business. Slow economic activity might impact overall commercial activities in the catchment area.
Environment RiskEnvironmental legislation and regulations have becomeincreasingly important in the recent years. Extreme weather or directly related regulations might affect the project. Theseevents may impact the project’s profitability, ability to servicethe debt obligations and future cash flows.
Political StabilityGovernment is focusing on social spending and employment asa strategy for maintaining stability. It is focusing on investments in infrastructure and human resources development that will provide employment and better services for Saudis. Assuming the government's strategy succeeds, the outlook of real estate market will be fairly positive.
www.insightss.co
Valuation Methodology
Valuation Approach
Valuation Methodology
51
In determining the Value in Use of the subject Property, we have applied the Income Approach via the Discounted Cash Flow technique.
Discounting Cash Flow (DCF) analysis is defined in theInternational Financial Reporting Standards as a financialmodelling technique based on explicit assumptions regarding the prospective cash flow of a property. This analysis involves the projection of a series of periodic cash flows that a property is anticipated to generate, with regards to the frequency and timing of associated development costs, contingencyallowances etc. To this projected cash flow series, anappropriate discount rate is applied to establish an indication of the present value of the income stream associated with a property.
With regard to the subject property, the cash flow has been calculated on an annual basis over a hold period of five years. With respect to the growth rate applied throughout our cash flow, we have adopted the average growth rate as applicable to such properties and the same is explained in themethodology portion.
The cash flow is discounted back to the date of valuation at an appropriate rate to reflect risk in order to determine the Net Present Value.
The future values quoted for the exit value of the property using the exit yield, the projected rents as well as costs are forecasts formed on the basis ofinformation currently available to us and is not necessarily therepresentations of what the value of the property will be at any particular future date.
www.insightss.co
Valuation Assumptions and Results
Insights adopted the Discounted Cash Flow (DCF) technique for the calculation of Value in Use.
This approach involved the discounting of the net cash flow on a yearly basis for Al Andalus Mall,Staybridge Suites and Salama Tower over a 5-year cash flow horizon based upon the expected cash flows.
The projected income stream reflects the anticipated rental growth inherent in a property investment based upon the physi-cal, tenancy or market characteristics related to that property. In addition to projected operating costs and allowances, future capital expenditure can also be reflected in the cash flow.
Cash inflows comprise income from the property adjusted to reflect actual and assumed lease conditions and rental growth, whilst cash outflows comprise operating costs adjusted to reflect anticipated inflation.
This cash flow is discounted at an appropriate rate to reflect the associated risk premium, in order to determine a Net Present Value of the subject property.
53
Valuation snapshot under DCF Valuation Uncertainty
Valuation Assumptions
The factor of market instability cannot be ignored after the valuation of any property. This is mainly due to the factor of uncertainty which exists in the market.
A particular amount achieved as a result of valuation might change to any unexpected changes in the market.
The real estate sector has remained volatile and the level oftransactions taking place in the market has remained on thedownside. Considering these conditions, the parameters used often of a historical nature and might not be up to date.
The client is advised that whilst all reasonable measures have been taken to supply as accurate a valuation as possible as at the Valuation date, this figure should be considered in the context of the volatility of today’s market place.
We have assumed the information provided by the client is up to date as on the valuation date.
www.insightss.co
54
Cost of debtCost of debt after Zakat taken to be 1.77% provided by the client.
Risk free rateRisk free rate is assumed to be assumed to be 2.42% based on 10 year yield of Saudi Government Sukuk as at 31st Dec 2019 quoted by SAMA.
BetaBeta is assumed to be 0.45 which is the unlevered beta from National Association of Real Estate Investment Trust.
Market risk premiumMarket risk premium is assumed to be 5.89% for Real EstateIndustry.
Target capital structureTarget capital structure is assumed to be 85.01% equity and 14.99% Debt.
Alpha valueAlpha value represents the Size & Location Risk and considerd 2% for all the properties under valuation.
Country risk premiumCountry risk premium is assumed to be 0.69% for cost of equity calculation.
Weighted Average Cost of Capital (WACC)
Valuation Assumptions
www.insightss.co
Exit YieldThe Yield is a capitalization rate which takes into account all of the risks associated with realizing the projected income.The Exit Yield for the Jeddah retail market normally vary between a range of 8% and 12% depending upon factors such as thelocation, financial strength of the tenant, specification and condition of the property. Reduced transactions in the market is an impediment for the exit value calculations. Owing to the factor reliance have been mainly on the anticipated market participants’ expectations from the historical propertyinvestments.
Discount rate reflects the opportunity cost of capital and the return required to mitigate the risk associated with a particular investment type.Discount Rate considers Market Risk and Property Specific Risk. Market Risk comes in the form of potential competition from existing as well as future supply and also considers the state of the property market. Property Specific Risk reflects the liquidity of the market for large assets as well as the additional costs in maintaining and operating the property.
Key Comments
55
Valuation Assumptions
www.insightss.co
Valuation Assumptions - Al Andalus Mall
Based on our understanding from the Al Andalus Mall Tenancy Schedule 2019, we conclude the level of rental income from Shops, Kiosks, ATM’s, Food Courts, Hyper and Warehousesprojected by the client is in line with market expectations for the Property.
It was assumed that the rents provided are inclusive of a service charge contribution for the maintenance and management of the common areas.
The revenue from the mall is currently SR 124 million and it is expected to grow at a rate of 2% in 2020 (due to opening of Empire Cinema and Entertainment) and 1% in 2023.
The occupancy of the mall is expected to be remain 95% in the all the projected years under consideration.
Revenue Assumptions
Based on information and further clarifications provided by the client, we have assumed Operational Expenditure as % of gross rental revenue would gradually increase in 5 years. It isexpected to start from 22.15% of the revenue in 2020,increasing from 23.40% in 2021 to 23.50% between 2022-2024.
This percentage reflects the OPEX levels applicable to similar properties in similar conditions.
Operational cost taken in consideration includes General & Admin Expenses, Insurance, Marketing, Management Fees, Professional and Legal Fees alongwith Tadawul and Utilities Cost.
Operational Cost Assumptions
The basic assumptions for Al Andalus Mall consisted of the following:
2023 20242019 A2018 A 2020 2021 2022
126,913
(29,698)
97,215
126,913
(29,824)
97,088
128,182
(30,123)
1,089,545
1,187,604
128,182
(30,123)
98,059
56
Valuation Results
www.insightss.co
As per the valuation conducted by the Insights, NPV comes out to be approximately SR 1.185 Billion.
Discount rate has been calculated by WACC approach and has been taken as 6.85%.
Target’s capital structure has been assumed at 14.99% debt and 85.01% equity.
Terminal Capitalization rate has been assumed to be around 9.0%.
Al Andalus Mall Valuation Results
Revenue
Operating Cost
Terminal Value
Net cash flow
NPV
126,913
(28,111)
98,801
1,185,009
124,424
(27,560)
123,722
(26,724)
SR in ’000
Source: Insights Analysis
Al Andalus Mall Valuation
57
Room RevenueThe level of rental income from rooms projected with regard to Occupancy and Average Daily Rate (ADR) taken is in line with market expectations for the Property.Taken in consideration several indicator like growing demand due to Saudi Vision 2030 in local market, the characteristics of the Property and management’s future strategy, we have grown the occupancy from 42.7% in 2019 to 71% in 2024 as indicated in the table. However, in 2019 there was a reported issue between the owner and the operator for 6 months (which will be resolved in Q1 2020) and the property was not able tooperate properly. Therefore, occupancy in 2019 reducedcompared to 2018.With regard to the Average Daily Rate (ADR) we have assumed SR 605 in 2020 increasing to SR 835 in 2024.Accordingly, the RevPAR will increase from SR 365 in 2020 to SR 593 in 2024.Total Numbers of Suites reflected to remain same at 164 with no expansion plan by the management.
Valuation Assumptions
www.insightss.co
Staybridge Suites (1/2)
Revenue Assumptions
The basic assumptions for Staybridge Suites consisted of thefollowing:
Food and Beverage (F&B) Revenue:The Uniform System of Accounts for Hotels defines foodrevenue as revenue derived from the sale of food, including coffee, milk, tea and soft drinks. Food revenue also includes cover charges, service charges and miscellaneous banqueting revenue, whilst beverage revenue is generated from the sale of drinks in restaurants and banqueting rooms.Based on the expected increase in room occupancy, Food and Beverage (F&B) Revenue will grow accordingly from 13.7% of Total Room Revenue in 2020 to 18% in 2024. However, 2020 assumed conservatively to be 13.7% pertaining to the hotel’s current operations.
Other Income It is driven mainly from auxiliary facilities and services available at hotel like laundry, dry cleaning and telephone services contributing small slice of revenue at a hotel.It is projected a total constant contribution of 1.7% of Total Room Revenue in all the projected years.
Other income assumptions
Year 2019 A
SR
SR
%
560
239
42.7%
605
365
60.3%
653
411
63.0%
725
471
65.0%
780
530
68.0%
835
593
71.0%
2020 2021 2022 2023 2024 Revenue Assumptions
ADR
RevPAR
Occupancy Assumptions
Occupancy
Source: Insights Analysis
58
Rooms Expenses: Room Expense comprise of cost of servicing the rooms and providing laundry and supplies. It is assumed to be 15% of Rooms Revenue in 2020 reducing till 14% in 2024.
Food and Beverage (F&B) Expenses: All items of expenditure needed to operate F&B outletsincluding salaries and cost of all supplies are taken inconsideration under F&B expenses. F&B Expenses taken to be 7.5% of Total Revenue in 2020 decreasing to 7% in 2024 due to management strategy to achieve economies of scale with respect to acquiring supplies pertaining to increased customers in future.
Minor Operating Departments Expenses:Minor Operating Departments assumed to remain persistent at 0.2% of Total Revenue in all projected years.
Valuation Assumptions
www.insightss.co
Staybridge Suites (2/2)
Departmental Expense Assumptions
The basic assumptions for Staybridge Suites consisted of thefollowing:
Administrative and General (A&G) Expenses:A&G costs assumed at 15% of Total Revenue in 2020 decreasing steadily to 12.3% in 2024.
Information & Telecommunications Systems Expense:This cost is anticipated to be 4.5% of Total Revenue in 2020 decreasing to 3.6% in 2024.
Sales and Marketing (S&M) Expenses: S&M costs presumed to be 6.0% of Total Revenue in 2020 decreasing to 5.0% 2024.
Property Operation & Maintenance Expense:Maintenance costs expected to be 5.0% of Total Revenue in 2020 increasing to 5.6% in 2024 pertaining to the aging of the building despite the annual replacement capex consideration of SR 506,700 in 2020 and an estimated amount of SR 615,000 in all remaining years under consideration.
Utilities Cost:Utilities expenses taken at 10% of Total Revenue in 2020 decreasing to 8.7% in 2024.
Management Fees:Management fees (License Fee & Incentive Fee) assumed to be 3.5% of Total Revenue each projected year.
Undistributed Operating Expenses Assumptions
2023 20242019 A2018 A 2020 2021 2022
28,727
(6,521)
(12,352)
(615)
9,238
33,189
(7,202)
(13,939)
(615)
11,433
42,462
(9,002)
(16,433)
(615)
192,260
208,672
37,672
(8,175)
(14,918)
(615)
13,964
59
Valuation Results
www.insightss.co
As per the valuation conducted by the Insightss, NPV comes out to be approximately SR 185 Million.
Discount rate has been calculated by WACC approach and has been taken as 6.85%.
Target’s capital structure has been assumed at 14.99% debt and 85.01% equity.
Terminal Capitalization rate has been assumed to be around 8.75%.
Staybridge Suites Valuation Results
SR in ’000
Source: Insights Analysis
Staybridge Suites Valuation
Total Revenue
Departmental Expenses
Undistributed Operating Expenses
Replacement Capex
Terminal Value
Net cash flow (EBITDA after replacement CAPEX)
NPV
25,181
(5,716)
(11,080)
(507)
7,879
185,356
16,889
(5,194)
(9,979)
(507)
1,209
24,101
(5,613)
(10,914)
(482)
7,073
60
The level of rental income projected by the client is in line with market expec-tations for the Property.The revenue from the tower is expected to remain same in the next five years. Its five year master head lease contract for an annual triple net lease of SR 23,100,000 per annum (fixed).Upon Expiry of lease in August 2024, the office and retail NLA (i.e. 23,780 sqm of Office area and 5,710 sqm of Retail Area) will be sublet to multiple/in-dividual business with rental considered to be market competitive at 642 SR/sqm for Office and 1100 SR/sqm for Retail grown at 5% each alternate year from 2020.Additional Income from Telecommunications Tower considered SR 35,000 per annum in all year under consideration.Occupancy of the tower taken to be 100% for the years 2020-2023. However, due to the some potential parking problems and expiry of the lease in Aug 2024, there are chances of fall in tower occupancy. Therefore, 95%occupancy presumed in 2024 and 2025 projections.
Valuation Assumptions
www.insightss.co
Salama Tower
Revenue Assumptions:
The basic assumptions for Salama Tower consisted of the following:
Based on information and further clarifications provided by the client, we have assumed the operating cost expense to be comprised of only theinsurance cost of the property, which is expected to remain constant at SR 150,000 per annum in all the years under consideration.Operating cost of the property after the expiration of triple net lease contract in Aug 2024 considered to be 12% of the total Revenue.
Operating Expenses Assumptions
Salama Tower Valuation
2023 20252019 A 2020 2021 2022
23,100
35
(150)
22,985
23,100
35
(150)
22,985
24,944
35
(2,993)
23,100
35
(150)
22,985
23,195
35
(1,335)
244,288
266,183
61
Valuation Results
www.insightss.co
As per the valuation conducted by the Insightss, NPV comes out to be approximately SR 264 Million.
Discount rate has been calculated by WACC approach and has been taken as 6.85%.
Target’s capital structure has been assumed at 14.99% debt and 85.01% equity.
Terminal Capitalization rate has been assumed to be around 9.0%.
Salama Tower valuation results
Revenue
Other income – Telecom Tower
Direct Operating Cost
Terminal Value
Net cash flow
NPV
23,100
35
(150)
22,985
264,640
23,100
35
(150)
SR in ’000
2024
Source: Insights Analysis
62
www.insightss.co
Valuation Results
Total Value in UseValue in use for three segments of the projects is calculated as SR in ‘000.
Properties under consideration
Al Andalus Mall
Staybridge Suites
Salama Tower
Total Value in Use
1,185,009
185,356
264,640
1,635,005
In SR thousands
Source: Insights Analysis
Requirements of IAS – 36“Impairment of Assets”
64
Requirements of IAS – 36“Impairment of Assets”
www.insightss.co
Impairment of AssetsAn impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use.Useful life is either:
The period of time over which an asset is expected to be used by the entity; orThe number of production or similar units expected to be obtained from the asset by the entity.
A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Identifying an asset that may be impairedAn entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the followingindications:
External sources of informationThere are observable indications that the asset’s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use.
Significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in thetechnological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.Market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.The carrying amount of the net assets of the entity is more than its market capitalization.
Internal sources of informationEvidence is available of obsolescence or physical damage of an asset.Significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse thanexpected.
a)
a)
b)
b)
c)
d)
a)b)
c)
65
Requirements of IAS – 36“Impairment of Assets”
www.insightss.co
Fair value less costs of disposalFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date.Costs of disposal are incremental costs directly attributable to thedisposal of an asset or cash-generating unit, excluding finance costs and income tax expense.
Value in useThe following elements shall be reflected in the calculation of an asset’s value in use:
An estimate of the future cash flows the entity expects to derive from the asset;Expectations about possible variations in the amount or timing of those future cash flows;The time value of money, represented by the current market risk-free rate of interest;The price for bearing the uncertainty inherent in the asset; andOther factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.
In measuring value in use an entity shall:Base cash flow projections on reasonable and supportableassumptions that represent management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Base cash flow projections on the most recent financial budgets/forecasts approved by management.Estimate cash flow projections beyond the period covered by the most recent budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.
Identifying the cash-generating unit to which an asset belongsIf there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possibleto estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash-generating unit to which the asset belongs (the asset’s cash-generating unit).The carrying amount of a cash-generating unit shall be determinedon a basis consistent with the way the recoverable amount of the cash-generating unit is determined.
a)
b)
c)
d)e)
a)
b)
c)
66
Requirements of IAS – 36“Impairment of Assets”
www.insightss.co
Impairment loss for a cash-generating unitAn impairment loss shall be recognized for a cash-generating unit (the smallest group of cash-generating units to which goodwill or a corpo-rate asset has been allocated) if, and only if, the recoverable amount of the unit (group of units) is less than the carrying amount of the unit (group of units). The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units) inthe following order:
First, to reduce the carrying amount of any goodwill allocated to thecash-generating unit (group of units); andThen, to the other assets of the unit (group of units) pro rata on thebasis of the carrying amount of each asset in the unit (group of units).
These reductions in carrying amounts shall be treated as impairmentlosses on individual assets. In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset below the highest of:
Its fair value less costs of disposal (if measurable);Its value in use (if determinable); andZero.
The amount of the impairment loss that would otherwise have beenallocated to the asset shall be allocated pro rata to the other assets ofthe unit (group of units).
IAS 36 requires annual impairment tests for certain assets and for any non-financial asset where there is an indication ofimpairment.The principle of IAS 36 is that an entity’s assets are carried at no more than their recoverable amount. Recoverable amount is the higher of the amount to be realized through the asset's use or sale. Where the carrying value exceeds the recoverable amount, the asset is impaired and an impairment loss is required to be recognized.The standard also details the circumstances when animpairment loss should be reversed and lists the disclosures required for impaired assets, impairment losses, reversals of impairment losses and key estimates and assumptions used in measuring recoverable amounts of cash-generating units (CGUs) that contain goodwill or intangible assets with indefi-nite lives.The recoverable amount was calculated after a comparison between the: Fair value of the property and Value in useThe higher value between the value in use and the fair value of property will be considered as the recoverable amount as per the guidelines of IAS – 36 Impairment of Assets.
Calculation for Recoverable Amount
a)
b)
a)b)c)
Impairment Testing
For the calculation of fair value of Al Andalus Mall, Staybridge Suites and Salama Tower, external valuation experts were hired.
The total land area of property - Al Andalus Mall & Staybridge Suites was 159,133.96 sq. m and it is a commercial use property. While Salama Tower has total Net Leasable Area of 28,502 sqm.
Fair Value for all segments of the project is as follow:
68
Fair Value
A comparison between the fair value of property as mentioned at the start of report will be done with the value in use of both the properties. The higher amount among the both will be considered the recoverable amount as indicated below:
Key Consideration
Value in Use
Calculation for Recoverable Amount
Valuation Approach:
Al Andalus Mall , Staybridge Suites and Salama Tower: The valuation has been undertaken using the Investment Approach - Discounted Cash Flow (DCF).
Value in use for all segments of the project is as follow:
www.insightss.co
Avg Fair ValueFair Value
(Knight Frank)Fair Value(Valustrat)(SR ‘000)
Al Andalus Mall, Jeddah
Staybridge Suites, Jeddah
Salama Tower
Aggregate Value (SAR ‘000)
1,174,200
167,050
258,930
1,600,180
1,176,800
164,000
264,000
1,604,800
1,171,600
170,100
253,860
1,595,560
In SARs thousands
Property Name
Al Andalus Mall, Jeddah
Staybridge Suites, Jeddah
Salama Tower
Aggregate Value
1,185,009
185,356
264,640
1,635,005
Source: Insights Analysis
Al Andalus Mall, Jeddah Staybridge Suites, Jeddah Salama TowerRecoverable Amount (SR ‘000)
A. Fair Value
B. Value in Use
Recoverable Amount (higher of A vs. B)
1,174,200
1,185,356
1,185,356
167,050
185,356
185,356
258,930
264,640
264,640
Source: Insights Analysis
Properties - Fair Value
Insights was engaged by AlAhli REIT Fund (1) for the determination of the Value in Use as per the IAS – 36 (Impairment of Assets). The properties involved included Al Andalus Mall, Staybridge Suites &Salama Tower.IAS 36 requires annual impairment tests for certain assets and for any non-financial asset where there is an indication of impairment.
69
Impairment Testing
Carrying Amount: Carrying amount was obtained from the management of NCB Capital for Al Andalus Mall, Staybridge Suites & Salama Tower as indicated in the table below.Recoverable Amount: The recoverable amount as obtained after applying the IAS – 36 procedure asmentioned in the business valuation segment. A comparison between fair value and value in use of theproperties was carried out and the recoverable amount, being the higher of the two amounts, wasdetermined as indicated in table below.As per the details mentioned in the business valuation segment a final comparison between the carrying amount and recoverable amount was carried out. As per the requirements mentioned in the IAS – 36 (Impairment of Assets), if the recoverable amount of the subject property is lower than the carrying amount of the property the asset is considered as impaired.Based on the calculations after the analysis for impairment testing in above disclose that the none of the properties are subject to any impairment.
Comparison between Carrying Amount and Recoverable Amount
Impairment Testing
www.insightss.co
Salama TowerStaybridge SuitesJeddah
Al Andalus MallJeddahCalculation for Impairment (SR ‘000)
Lower of: (1 vs. 2)
1. Carrying amount as provided by the management
2. Recoverable amount
Impairment Amount
255,845
264,640
-
180,099
185,356
-
1,152,487
1,185,356
-
Source: Insights Analysis
Signature
Valuation Sign off
Signature
71
We have assumed that the information provided by the client in relation to revenues and operating expenses associated with the business is accurate and that we have been provided withinformation that has significant effect on the value of business.We believe that this report and valuation fulfills the requirements of your instructions. This report is issued without any prejudice and personal liability.Based on above we have concluded the value in use of business as at 31st December 2019 is:
Alaldalus Mall – SR 1,185,009,000Staybridge Suites – SR 185,356,000Salama Tower – SR 264,640,000
Total Value – SR 1,635,005,000
Truly,
Ibraheem Alzuhimeel
TAQEEM Membership No.2 2 1 0 0 0 0 0 1 3
Abdullah Alassaf
For and on behalf of OceanX Company jointly working with Insights Financial & Management Advisory and Research.
TAQEEM Membership No.2 2 1 0 0 0 0 0 1 4
www.insightss.co
Annexures
Al Andalus Mall
73
Property Pictures
www.insightss.co
Staybridge Suites
74
Property Pictures
www.insightss.co
Salama Tower
75
Property Pictures
www.insightss.co
Thank You !
Riyadh Office :P.O. Box 15343, Olaya Street,Riyadh 12211 - KSA.
Jeddah Office :Royal Plaza, Prince Sultan Street,Jeddah 23615 - KSA.
: + 966 11 2930 665: [email protected]: www.insightss.co
Dubai Office :17, The Iridium Building, Al Barsha,Dubai - UAE.
14, Wall Street, 20th Floor,New York 10005 - USA.
New York Office :
Adelaide Office :P.O. Box 6387, Halifax Street,Adelaide - South Australia 5000.
