It’s time for CICT divestments to continue
Some property observers have noticed that CapitaLand Integrated Commercial Trust – C38U +0.51% seems to be in a rush to sell some assets.
Last week, The Business Times reported that an expression-of-interest (EOI) exercise closed in the fourth quarter of 2023 for the 299-unit Citadines Raffles Place, which is in the CapitaSpring building at Market Street that was completed a couple of years ago.
The market has heard that a low-key EOI will close next week on Bukit Panjang Plaza. This suburban mall is owned by the real estate trust (Reit).
In the last year, 21 Collyer Quay was sold at S$3,600 – S$3,700 per square foot on net lettable areas.
CICT received an interest late last year in the 21 Collyer Quay Office Building, which has been described as a trophy property, due to its unobstructed views of Marina Bay, and a coveted 999 years leasehold tenure.
Citadines is not a specialist in serviced apartments, so selling the property makes sense.
Bukit Panjang and 21 Collyer Quay, owned by former CapitaMall Trusts (CMT) & CapitaCommercial Trusts (CCT), were purchased long before the renaming and merger of these two trusts in late 2020.
Singapore’s largest Reit might have determined that it has optimized these assets. CICT has the chance to sell these assets at a handsome price that is significantly higher than the current valuations. This will unlock value for the company and allow it to use the sale proceeds in a more efficient manner.
Rather than take on all of this uncertainty and risk CICT could divest 21 Collyer Road for a premium over its valuation.
In the current environment of high interest rates, the Reit can use some of the proceeds from divestment to reduce its debt.
As of Sep 30, 2023, the aggregate leverage for CICT was 40.8 percent. It is a little lower than the 41,2 per cent at Sep 30, 2022. However, some analysts consider this gearing to be too high and want it reduced below 40%.
Dropped interest coverage ratio
The Reit’s Interest Coverage Ratio – that is the ratio of earnings versus interest expenses – has steadily declined from 3.9 to 3.1 to Sep 30 2023.
The three properties are examined in greater detail to give a better idea of the potential sale proceeds if the properties were sold.
CICT owns a 45 percent stake in a joint-venture that owns Citadines Raffles Place. CapitaLand Development holds 45 percent, while Mitsubishi Estate Co owns the remaining 10%.
The CapitaSpring, where the serviced residences are located, has a 99-year tenure, which began on February 1, 1982. This lease is still about 57 years old. Although parties have shown interest, a buyer is still to be found. Market watchers anticipate the owner to ask for at least S$1m per room.
Bukit Panjang Plaza has a 99-year leasehold tenure, which began on Dec 1, 1994. There are still nearly 70 years remaining on the lease. The shopping centre is located near the Bukit Panjang MRT/LRT station and bus interchange.
The property’s value was S$344m at the end of 2022. This is based on a capitalisation rate of 4.8 percent. The valuation is based on 163,998 square feet of net lettable space (NLA). This would be about S$2,098 a square foot.
The four-storey shopping center is home to FairPrice Finest, Harvey Norman Gadget Hub, Kopitiam, and Gadget Hub.
JLL is currently conducting an EOI exercise for Bukit Panjang, which has a price of approximately S$470,000,000.
CICT acquired it in two phases, 2003 and 2007. The company has done significant asset enhancements on this asset in the past and may not see any further value-adding potential in the future. The competition for customers and patrons of this retail property increased after the opening of Hillion Mall, a neighbouring shopping mall in 2017.
A few agents quietly assessed the demand for 21 Collyer Quay late last year. Market talk indicated that the NLA was likely to fetch between S$3,600 and S$3,700 per square foot.
CICT, however, is said to be aiming for a higher price between S$830 and S$852 millions, which translates to S$3,900 – S$4,000 psf. The building’s value was S$634m at the end of 2022, based on a cap rate of 3.45 percent. The valuation came out to S$2,977 per square foot on a NLA of 213,000 square feet.
WeWork has leased the entire 21-storey structure.
CICT purchased the property from HSBC in 2005 under a “sale-and-leaseback” arrangement. CICT found WeWork to replace HSBC before the lease expired in April 2020. After a S$45-million renovation, the flexible workspace provider began its seven-year contract in December 2021.
Analysts claim that the development potential of 21 Collyer Quay has been fully exploited. The existing gross floor space of the building is slightly higher than the maximum permitted based on the plot ratio of 15,0 designated for the site zoned commercially under the latest Urban Redevelopment Authority Master Plan.
WeWork is reported to have paid its rent on time to its Singapore landlords, despite its US parent filing for Chapter 11 bankruptcy in November 2023.
Observers believe that CICT could still lease 21 Collyer Quay to a flexible space operator if WeWork leaves the building. The Reit can extract higher rents if it finds multiple tenants for the building. It may need to spend money to renovate again the property, but this time for the purpose of re-adapting the building to the typical office tenant.
CapitaSpring
CICT could sell 21 Collyer Road for a higher price than its valuation, rather than take on all the uncertainty and risk. The 999-year tenure of the property is attractive, but it’s not something the trust needs. CICT can invest the proceeds of the sale into CapitaSpring where they still have a 5-year period in which to call in and acquire their partners’ stakes on the commercial component, or about 673,000 square feet in the building. Office rents at the newly built CapitaSpring will be higher on a as-is basis than 21 Collyer Quay.
CICT can extract a greater net property yield if it takes full ownership of all the retail and office space in the building.
If this strategy works out, CICT will have implemented one of the classic Reit strategies – switching from a low-yielding to a high-yielding asset.
