K-REIT – BT

K-Reit deal comes with 5.2% guaranteed yield

Trust’s aggregate leverage to rise to 31.1% from 27.6%

K-REIT Asia’s acquisition of six floors at Prudential Tower for about $106.29 million comes with income support from the seller that will translate to a guaranteed 5.2 per cent net property yield. The acquisition, which will be funded entirely by debt, will be yield accretive to K-Reit, the trust’s manager said yesterday.

The trust’s aggregate leverage will increase from 27.6 per cent to 31.1 per cent. The purchase will also boost K-Reit’s share of Prudential Tower’s strata area from about 44 per cent to 73 per cent.

APF Property Investments, which sold the space to K-Reit under the latest deal, has agreed to provide K-Reit up to $5 million in rental income support over a five-year period. The FY2008 proforma net property income (NPI) attributable to the acquisition is $5.5 million, inclusive of the income support. If the actual NPI is less than the guaranteed NPI, the seller shall pay the difference to K-Reit’s trustee.

‘The 5.2 per cent per annum property income yield is within the market norm and would provide accretive distributable income,’ K-Reit said.

The trust is buying levels 20 to 25 of Prudential Tower. The acquisition cost works out to $1,579 per square foot based on the net lettable area of about 67,300 sq ft. K-Reit said the $106.29 million purchase price is at a 14.6 per cent discount to the $124.5 million valuation of the property by Colliers International.

The valuation, which would reflect about $1,850 psf of net lettable area, took into account the rental income support by the seller, and was done using the market comparison, investment and discounted cash flow methods. Colliers was commissioned by K-Reit’s manager.

Prudential Tower is a 30-storey office block at the corner of Church and Cecil streets on a site with about 85 years’ remaining lease.

The six floors are leased to six tenants – including Prudential Fund Management Services, Prudential Asset Management (Singapore) and Korea Exchange Bank.

BT understands the space was sold through a private treaty deal brokered by Jones Lang LaSalle.

Market watchers say the latest transaction shows improvement in sentiment in the office investment market. ‘It also provides a badly needed transaction for valuers to use as a data point in arriving at investment-grade office capital values,’ a property consultant added.

APF Property Investments is linked to the Asia Property Fund, sponsored by LaSalle Investment Management and PruPIM, which is part of Prudential UK group.

K-Reit highlighted that the provision of rental income support will limit downside risks and provide certainty of income for the next few years.