Should low auction prices worry investors in City Developments’ PPS?

City Developments Limited (CDL) has been one of the best-performing components of The Straits Times Index this year.

Year-to-date, shares of the property developer are up 29%, compared to a 13% rise in the benchmark ST Index.

However, the secondary market price for a clutch of properties that CDL securitised two and a half years ago was tested at an auction last month. And the outcome might worry the investors that were tapped for the transaction.

On May 25, a unit at The Residences at W Singapore — Sentosa Cove was put up for auction by Colliers.

It was a mortgagee sale and the asking price for the 1,227 sf unit was $2.5 million, which works out to only $2,037 psf – far below the average of $2,700 psf that CDL had initially sold 25 residential units for.

In December 2014, 203 units at The Residences at W, as well as the hotel and retail space, were securitised at a valuation of $1.5 billion.

The transaction involved the sale of the cash flow that would be generated from the properties over a five-year period to a vehicle that raised $750 million debt and issued $750 million worth of so-called profit participating securities (PPS).

The investors in the PPS were promised 5% a year plus any upside from the sale of the properties. In projecting the future cash flow of the PPS structure, CDL assumed that the residential units would be sold at not less than $2,400 psf at the end of the five-year period.

According to Colliers, no bids were received for the unit that was put up for auction last month despite the relatively low asking price.

The unit is up for auction again on June 21, with the same guide price of $2.5 million.

Will investors in the PPS will reap a decent return if the realisable price for the residential units remains well below $2,400 psf for the next couple of years?

Find out the full story in “CDL shares up, but low asking price casts pall over assets in PPS structure” on page 10 of The Edge Singapore (week of June 12), available at newsstands now.

This article first appeared on The Edge Markets Singapore.