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Singapore Property | Asia Square could sharpen CCT's edge

Singapore Property | Office

By Kalpana

Capitaland Group, including its office real estate investment trust CapitaLand Commercial Trust (CCT), was one of the earliest to eye Asia Square, a completed Grade A office development owned by a BlackRock-managed fund.


Apr 6, 20165:50 AM

CAPITALAND Group, including its office real estate investment trust CapitaLand Commercial Trust (CCT), was one of the earliest to eye Asia Square, a completed Grade A office development owned by a BlackRock-managed fund.

Following the close of an expression of interest (EOI) exercise for the development's 43-storey Tower 1 last August, a consortium that included CapitaLand Group and the manager of Norway's sovereign wealth fund was shortlisted as the preferred bidder. In early November, however, CapitaLand announced that it had ceased negotiations with BlackRock "for now". CapitaLand implied that it exited the negotiations because Asia Square did not fit in with its strategy, and its yields did not meet requirements.

The group has also stressed the importance of staying disciplined in pursuing opportunities.

CapitaLand is right to adopt this approach, especially since CCT can be expected to be in the picture for a potential acquisition of Asia Square.

Well-managed Reits make acquisitions that are yield accretive to unit-holders. Overpaying for an asset and then coming up with mechanisms to prop up entry yields, will not go down well with investors.

That said, purchasing Asia Square Tower 1 at the right price, would be a welcome acquisition for CCT.

CCT lacks assets in Marina Bay - Singapore's new CBD - unlike its closest rival in the Temasek stable, Keppel Reit, the portfolio of which predominantly comprises five office towers in Marina Bay. The trust owns one-third stakes in Marina Bay Financial Centre (MBFC) Towers 1, 2 and 3 as well as the North and South Towers of One Raffles Quay (ORQ).

Keppel Reit acquired one-third stakes in the MBFC and ORQ projects from its sponsor Keppel Land, which developed these two projects jointly with Hongkong Land and Cheung Kong Holdings.

Keppel Reit also owns a 99.9 per cent interest in Ocean Financial Centre along Collyer Quay - a stone's throw from Marina Bay. The trust acquired most of this stake from KepLand.

CCT too can boast a new property in its portfolio - CapitaGreen, a Grade A office tower completed in late 2014 that the trust developed jointly with CapitaLand and Mitsubishi Estate Asia (MEA) on CCT's former Market Street Car Park site. CCT owns 40 per cent of CapitaGreen.

Other than this, however, CCT's portfolio comprises mostly "legacy assets" - although to its credit, CCT has been been rejuvenating them. That said, none of these properties are in Marina Bay.

Based on end-2015 valuations, each of the two Reits' Singapore properties are worth around S$7.5 billion.

At this rate, CCT risks being dwarfed by Keppel Reit as Singapore's pre-eminent office Reit unless it makes a major investment.

CCT could enhance its portfolio profile by venturing into Marina Bay. And that means buying into Asia Square, which is the only ready office development there available for sale.

Of course, CCT could take a stab at triggering the release of the Central Boulevard site from the government's reserve list. Most observers expect the site, which is next to Asia Square, to fetch over S$1,100 per square foot per plot ratio (psf ppr). This would translate to a breakeven cost of about S$2,200 psf. Instead of taking the risks of developing a new project, it may make more sense for CCT to buy a completed, fairly new office asset like Asia Square Tower 1 if the price is not too different.

Initially, Asia Square Tower 1's price tag was touted as S$4 billion or around S$3,200 psf on net lettable area of 1.2 million sq ft of offices and 40,000 sq ft of retail space, when its EOI was launched in June last year.

These days, the price being bandied is lower at $2,700-2,800 psf. And based on the current occupancy in the tower of slightly above 90 per cent, the net yield is around 3 per cent. This is expected to come down.

Google, which occupies 130,000 sq ft, is slated to exit. Its lease ends late this year. While BlackRock is trying to find replacement tenants for this space, negative rental reversion is expected amid the high volumes of new office space completion.

Asia Square Tower 1's price needs to come down further to give an investor a decent yield. If this happens, it could be more practical for CCT, in partnership with its parent, to buy this ready asset and start reaping immediate returns, instead of investing in a greenfield site.

Here's another reason why CCT should pick up Asia Square Tower 1. The trust is believed to be mulling a sale, partial or full, of One George Street (OGS). An EOI is understood to have closed earlier this year and a couple of parties shortlisted.

If CCT decides to sell OGS, it would have to reinvest the proceeds in another property soon to try and offset the drop in rental income from OGS' sale. Sure, it could consider buying out its partners in CapitaGreen. Or it could take advantage of the current weak office market conditions to purchase its maiden asset at Marina Bay.

Moreover, getting its hands on Asia Square Tower 1 will also allow CCT/Capita-Land to negotiate for the first rights to buy Asia Square Tower 2, which the BlackRock-managed fund will want to exit in due course.

That will help to create more distance between CCT and the competition.

In short, an acquisition of Asia Square makes a lot of sense for CCT - at the right price of course.

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