A-REIT – BT
A-Reit buys Shanghai property for 587.9m yuan
ASCENDAS Real Estate Investment Trust (A-Reit) has made its foray into China by buying a business park building in Shanghai for 587.9 million yuan (S$113.8 million).
The industrial Reit will continue looking for more investments in Singapore and beyond, including the major Tier One cities of China.
A-Reit announced its forward purchase in China yesterday, almost three months after it first unveiled plans to venture into the mainland.
The property’s location is in the Jinqiao export and processing zone in Pudong New District, with expected gross floor area of around 79,880 square metres.
A-Reit is buying the property from Hyday Holding and the latter’s parent Qingjian International (South Pacific) Group Development Co.
The sellers will provide A-Reit with a rental guarantee of 67.6 million yuan upon completion of the deal, which should happen in the second half of next year.
Assuming that A-Reit had held the property for the whole of FY2009/10, the DPU for that period could have been 0.07 cent higher, on an annualised pro forma basis, and after considering applicable taxes in China.
A-Reit plans to market the property through its network of existing tenants, and through its sponsor Ascendas’s operating platform in China.
Tan Ser Ping, CEO and executive director of A-Reit’s manager, said that A-Reit will continue searching for investment opportunities in Singapore and the region. In China, it will focus on major Tier One cities such as Shanghai.
Even as the Reit expands abroad, its portfolio will comprise largely ‘Singapore-based assets in the foreseeable future’, he said.
A-Reit lost four cents on the stock market yesterday to close at $2.06.
Office REITs – OCBC
Common Themes of FY10 results; Maintain OVERWEIGHT
Negative rental reversion bottoming out. After FY10 results, we found a few common themes in the guidance given by Office REITs managers. Firstly, most Office REITs with Grade-A office assets expect negative rental reversions to bottom out by end 2011. In FY10, negative rental reversions were still prevalent in some Grade-A properties such as Six Battery Road and One George Street. One Raffles Quay and Suntec City1 also saw YoY declines in gross revenue contribution, but this is expected to turn around in 2011-2012. According to CBRE, Grade-A rents averaged S$9.90 psf/month in 4Q10, reflecting an increase of 10% QoQ and 22.2% YoY. Grade-A rents bottomed at S$8 psf/month in 1Q10 and have since risen some 23.8%. We see room for more rental upside ahead and forecast Grade-A rents to hit S$10.50 psf./month in 2011, more than S$11 psf/month in 2012 and above S$12 psf/month in 2013. However, non-Grade-A properties will see more gradual recovery, where they will bottom out possibly only after 2012-2013.
Hollowing-out concerns a passé. Most Office REITs hold the view that earlier concerns of the “hollowing-out effect”, as the vacated space is readily being taken up by existing tenants wanting to expand or occupiers from other buildings. This is corroborated by CRBE findings which reported that that Grade-A vacancy dipped to 2.7% in 4Q10 from 2.8% in 3Q10 and a notable turnaround from 6.2% in 4Q09, despite the new supply including MBFC Tower 1 in 1Q10 and MBFC Tower 2 in 3Q10.
40% leverage is the new norm. On the back of the low interest rate environment and mega acquisitions completed in 2010 (MBFC Phase 1), we are seeing more Office REITs shoring up their aggregate leverage ratios, with Suntec leading the pack with 40.4% on end-Dec 2010 from 33% on end-Sep 2010. K-REIT’s gearing also increased from 15.1% to 37%, while FCOT’s leverage remains flat at 39.8%. With the exception of CCT2 which had pared down its debt in 4Q10, most of the Office REITs seem comfortable reverting back to the pre-crisis target gearing levels of 40-45%. We think the 40% will be the new norm for FY2011. Debt headroom of S$1.18b in for the local Office REITs subsector indicates that sizeable debt-funded acquisitions are still possible.
Valuations. The four local Office-REITs, namely CCT [BUY, FV: S$1.61], Suntec [HOLD, FV: S$1.60], K-REIT [NOT RATED] and FCOT [BUY, FV: S$0.90] trade at an averageprice-to-book of 0.81x, which compares favourably to the broader S-REIT sector of 0.93x. We remain upbeat on the office sector recovery; and maintain OVERWEIGHT for the local Office REITs subsector.
CCT – BT
CCT still mulling Market Street Car Park project despite official nod
CAPITACOMMERCIAL Trust (CCT) confirmed yesterday that it has obtained provisional permission for the redevelopment of Market Street Car Park, but stressed that it has not decided if it would embark on the project.
CCT was responding to a BT report last Saturday, which said that the commercial real estate investment trust received provisional permission in November last year to turn Market Street Car Park into an office tower.
Market Street Car Park is located at 146 Market Street and its lease expires in 2073. The new office building could have a gross floor area of around 854,400 square feet.
CCT said that its manager was evaluating the redevelopment and ‘has not arrived at any decision at this point’. It advised unitholders to exercise caution in trading CCT units as there is no certainty that the proposed project would materialise.
Back in January 2008, CCT announced that it had obtained outline planning permission (OPP) to redevelop Market Street Car Park into a Grade A office tower.
The authorities granted the OPP on two conditions: there would be no extension of the present lease, and CCT would have to pay a development premium equal to 100 per cent of the enhancement in land value. CCT estimated then that the total project cost would be $1 billion to $1.5 billion.
Later in 2009, CCT dropped the project, citing its significant size, the high redevelopment cost, an uncertain market outlook and tight credit conditions as reasons. The OPP was allowed to lapse.
CCT said yesterday that its manager submitted a new application and obtained provisional permission for the redevelopment of Market Street Car Park as part of a portfolio evaluation exercise.
‘However, material issues, such as the determination of the differential premium payable to the Singapore Land Authority for the lifting of the title restriction of the property and other matters, are still being evaluated,’ CCT added.
‘It is premature to make any definitive conclusion regarding the feasibility of the proposed redevelopment.’
On the stock market yesterday, CCT lost three cents to close at $1.43.
FCOT – Phillip
1QFY11 Results
•1Q11 revenue of $29.0 million, NPI of $22.9 million, distributable income of $7.9 million
•1Q11 DPU of 0.25 cents
•Divestment of Cosmo Plaza a positive
•Maintain Hold, target price $0.18
1Q11 results came in without much fanfare. Revenue was $29.0 million (-1.1% q-q, -2.3% yy), net property income was $22.9 million (-1.2% q-q, -2.4% y-y) and distributable income of $7.9 million (-16.9% q-q, +6.7% y-y). DPU for the quarter was 0.25 cents (+4.2% y-y). Cosmo Plaza continued to be the drag in the quarter, contributing an operating loss to net property income. Distributable income and DPU improved y-y due to an absence of realized loss on derivative instruments a year ago. Operationally, the rest of the portfolio performed in-line with expectations. Portfolio occupancy showed slight improvement from the last quarter from 90.8% to 91.8%, but dropped 1.1% from the same period a year ago. Singapore portfolio experienced improvement in occupancy rate, however negative reversion was seen at 55 Market street, this corroborates with our view that the office sector might still be experiencing negative reversion from renewal of leases signed in pre crisis days. At the other Singapore property, Keypoint, management effort in asset enhancement and repositioning is seeing results. Occupancy rate has risen almost 10ppt from a year ago. The Australia and Japan portfolio delivered stable results, excluding Cosmo Plaza.
Painful but necessary decision
Subsequent to the 1QFY2011 quarter, FCOT finally sold Cosmo Plaza in Jan 2011. This is an almost cashless transaction whereby the sale consideration is simply JPY4 (S$0.06). In return, FCOT lightens its balance sheet with the transfer of JPY3.8 billion in loans to the buyer. In retrospect, the building was acquired in 2007 for JPY6.5 billion. Current valuation is JPY3.1 billion. Over the years, Cosmo Plaza contributed $7.7 million in net property income. We may be off in our numbers, but Cosmo Plaza represents substantial value destruction. We think the building is a bad piece of legacy which the present management inherited from its predecessor. With the divestment, gearing is lowered to 38% with total debt of $775.2 million.
One down, one to go
With Cosmo gone, there is just one white elephant left on the balance sheet. FCOT has not received dividends from AWPF since 3Q08. Latest valuation is AUD24.9 million (S$32.5 million). In the event of a successful recycling of this capital to reduce debt, gearing could be lowered further to 37%. Again we feel that management has delivered on its strategy. We are slowly witnessing results of the transformation. Core portfolio is delivering stable performance. FCOT has secured higher committed occupancy commencing in the coming quarters which should helped to bolster the forthcoming results. FCOT currently trades at 0.6x book value. We are maintaining our Hold recommendation and target price of $0.18.
CCT – BT
CCT gets provisional nod to redevelop Market Street Car Park
Opportune time to revisit office project as rents recover
PLANS to redevelop Market Street Car Park into an office building could be back on track, now that its owner CapitaCommercial Trust (CCT) has obtained provisional permission for the project.
The Urban Redevelopment Authority (URA) gave the tentative nod in November last year. The new office building could have a gross floor area of around 854,400 square feet. There are no details on the number of car park lots that it may have.
Market Street Car Park, at 146 Market Street, has 704 car park lots. It also has retail and food and beverage outlets on the ground floor. Its lease expires in 2073. A number of industry watchers have been expecting CCT to trigger redevelopment plans for Market Street Car Park again, as it looks for ways to deploy capital this year.
Back in January 2008, the commercial real estate investment trust (Reit) said that it had gotten outline planning permission (OPP) to redevelop Market Street Car Park into a Grade A office tower.
The authorities granted the OPP on two conditions: there would be no extension of the present lease, and CCT would have to pay a development premium equal to 100 per cent of the enhancement in land value. CCT estimated then that the total project cost would be $1 billion to $1.5 billion.
The global financial crisis foiled CCT’s plans. In January 2009, it said that it would drop the project because of its significant size, the high redevelopment cost, an uncertain market outlook and tight credit conditions.
CCT later divested two office buildings and prepaid a secured term loan. With the recovery of the office market, and an investment capacity of up to $1.6 billion, it is back looking for investment opportunities this year.
Several analysts have flagged the redevelopment of Market Street Car Park as a possible venture, given the difficulties of making yield accretive acquisitions in today’s market.
Lower construction costs – compared with levels before the financial crisis – could also make the project more attractive.
‘We continue to expect the redevelopment of Market Street into a Grade A office building,’ said Standard Chartered research analysts in a Jan 20 report. ‘We calculate that the project is likely to cost $1-1.07 billion, including $500-600 million of development charges.’
CCT might have to undertake the redevelopment with a joint venture partner as development projects cannot exceed 10 per cent of a Reit’s asset size, said Macquarie Equities Research analysts in a Jan 19 note.
Cushman & Wakefield Singapore vice-chairman Donald Han said that he believes that it is an opportune time to revisit the project. Office rents have been recovering, and if redevelopment takes place in the next 12 months, the new building could be ready in 2013 or 2014 when the office market would be in ‘full swing’, he said.
However, ‘a lot of the new buildings are now being built with tighter car park ratios’, he said, adding that the potential removal of car park lots would affect the parking situation in the central business district.