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Deal comes with income support from seller CapitaLand till 2013

Big office investment sales deals have not ground to a complete halt. CapitaCommercial Trust announced yesterday that it has an option from sponsor CapitaLand to buy 1 George Street for $1.165 billion or $2,600 psf of net lettable area, showing that income support may be the way to make acquisitions palatable to Reits.

This is especially so when it comes to office blocks with a substantial portion of leases signed a few years ago when rentals were weak. Never mind that income support for such deals may once have been frowned upon.

The deal for 1 George Street involves a five-year rental guarantee, with seller CapitaLand ensuring a minimum net property income of $49.5 million per annum, translating to a net property yield of 4.25 per cent per annum on the purchase price till 2013.

This means that CapitaLand will top up any shortfall in net property income to ensure that the $49.5 million floor is achieved every year for the period. The acquisition will be funded entirely through debt; there will be no equity raising.

1 George Street is a 23-storey Grade A commercial building that was completed three years ago. It is fully leased and its tenants include The Royal Bank of Scotland, WongPartnership and Lloyd’s of London (Asia).)

Most of the leases were signed around 2004/2005, when office rents were weak, which is why CapitaLand is providing yield protection for the asset’s acquisition by CCT. The $49.5 million annual minimum net property income implies gross monthly rentals of $10.50 psf. Given that the current average market rental in the Raffles Place area is about $16.30 psf, this spells upside for 1 George St as leases are renewed, CapitaCommercial Trust Management CEO Lynette Leong said.

Leases for about 50 per cent of the net lettable area in the property will come up for renewal in 2008 and 2009. Recently, a new lease for a small space in the building was signed for $19 psf, Ms Leong revealed.

‘With the yield-protection given by CapitaLand, CCT will be able to attain minimum returns from this asset. The five-year yield protection eliminates all the downside risk and whatever upside there is from the asset, it will all flow through to CCT. That’s a pretty compelling offer,’ Ms Leong said.

The deal drew an inevitable comparison with K-Reit Asia’s acquisition of a one-third stake in One Raffles Quay from its parent, Keppel Land. The two deals have similarities - they involve income support and are at prices seen as lower than market.

However, Ms Leong, at a media and analyst briefing yesterday, argued that there were important differences between the two deals.

For one, CCT will get 100 per cent direct ownership of 1 George Street, and the asset will enjoy full tax transparency as a result of being owned by a Reit. This means that CCT would not have to pay tax on income from this asset, unlike K-Reit Asia’s acquisition of a one-third stake in ORQ which is being effected through the purchase of shares in the company that owns ORQ. Hence, the income that K-Reit will receive from the asset would be net of 18 per cent corporate tax.

Another difference is that KepLand will provide income support only till 2011 whereas CapitaLand is doing so till 2013, beyond the 2011/2012 timeframe when a spike in Grade A office space is expected.

CapitaLand Commercial CEO Wen Khai Meng explained that the reason for ‘providing the floor for five years is to address the view that there will be a huge supply in 2011/2012′.

Another difference: CCT has secured 100 per cent committed debt funding for its proposed acquisition of 1 George Street and will not have any equity raising exercise. K-Reit, on the other hand, is seeking unitholders’ approval for a rights issue to help partly refinance a bridging loan taken from Keppel Corp to complete the acquisition of the one-third stake in ORQ.

The $2,600 psf of net lettable area at which CapitaLand is proposing to sell 1 George St to CCT is lower than the $2,700 psf at which the asset was valued at in a deal last August when CapitaLand bought the remaining half share in the asset to gain full ownership of the award-winning property.

CapitaLand expects to book a gain of about $47.1 million after taking into account the yield protection and the company’s 30.5 per cent interest in CCT.

Mr Wen said that the group had to pay $2,700 psf in last August’s deal for control premium. ‘We feel $2,600 psf, plus income support, is a good deal given that CapitaLand still has about 30 per cent stake in CCT and given that we are the manager of the Reit and have a certain responsibility to help our sponsored-Reit to grow.

‘I personally dislike income support, because it conjures up all sorts of wrong impressions. But it would be challenging for a Reit to justify non-yield accretion for the first few years in an acquisition. Based on current rental rates at 1 George Street, the yield would be below 4.25 per cent, but we are seeing very strong rental reversion,’ he said

‘The yield-protection arrangement of 4.25 per cent pa for five years makes the acquisition compelling, given the current blended yield of CCT’s Grade A office assets is 3.2 per cent,’ Ms Leong said.

Even with 100 per cent debt funding for the acquisition, CCT’s gearing will rise to only about 40 per cent from the current 27 per cent, the trust’s manager highlighted.

The deal will be subject to CCT unitholders’ approval at an extraordinary general meeting to be held by June 30, as it is deemed an interested party transaction. CapitaLand is not allowed to vote. The acquisition is slated for completion by end-July.

Source : Business Times - 28 Mar 2008

It’ll hold 60% stake in US$500m project in Ho Chi Minh City

CAPITALAND said yesterday that it will build a US$500 million project in Ho Chi Minh City with a Vietnamese partner.

CapitaLand will take a 60 per cent stake in the proposed joint venture. Thien Duc, one of CapitaLand’s strategic partners in Vietnam, will hold the other 40 per cent.

Thien Duc is a shareholder of CapitaLand’s The Vista condominium in Ho Chi Minh City.

For the latest project, CapitaLand, as lead development manager, will build a 28-storey condo with about 1,400 apartments and commercial and retail space on a 6.7 hectare site.

Most of the apartments will enjoy sweeping views of the Saigon River and skyline, CapitaLand said. It aims to launch the first phase of the project by the second quarter of 2009.

‘Ho Chi Minh City continues to be a key focus for our residential and other investments in Vietnam,’ said Lui Chong Chee, chief executive of CapitaLand Residential.

‘For residential, given the rapid growth in population, increased affordability and tight supply, we are confident of strong sales, especially for well-designed homes.’

CapitaLand will continue to look for prime development sites in Ho Chi Minh City and Hanoi to build quality homes, he said.

Including the newest project, CapitaLand will be building more than 4,200 homes in Ho Chi Minh City.

Vietnam’s residential property market is booming, with queues of buyers in 2007 for CapitaLand’s The Vista and Keppel Land and Tien Phuoc’s The Estella, property firm CB Richard Ellis (CBRE) said in a recent report.

But buyers are becoming more discriminating. CBRE said: ‘Increased development in some sectors will relieve the supply crunch in the future. (But) well-priced quality developments are, and will remain, the top sellers.’

CapitaLand’s shares closed 14 cents higher at $6.40 yesterday. The stock has climbed 2.1 per cent this year.

Source : Business Times - 28 Mar 2008

Sale of 1 George Street to CCT comes with arrangement guaranteeing yields

CAPITACOMMERCIAL Trust (CCT) plans to buy a three-year-old office block - the building was completed in 2004 - in the Central Business District (CBD) for $1.17 billion from its biggest shareholder, CapitaLand.

The purchase of the 1 George Street building will augment the property trust’s other prime blocks at a time of tight office supply and rising rents.

CCT’s portfolio includes Capital Tower in Robinson Road, 6 Battery Road, the HSBC Building in Raffles Place and a majority stake in Raffles City.

The 1 George Street transaction works out to $2,600 per sq ft (psf) of net lettable area.

The deal comes with a form of yield protection. CapitaLand will ensure a minimum net property income of $49.5 million a year for five years from the day the sale is completed.

This translates into a net yield of 4.25 per cent a year on the purchase price, CCT said in a statement, and implies a rental rate of about $10.50 psf.

The yield protection arrangement makes the acquisition compelling, as CCT’s current Grade A office assets have an average yield of 3.2 per cent per annum, said CCT’s chief executive, Ms Lynette Leong.

Ms Leong said buying 1 George Street would increase CCT’s net property income contribution from such assets from 43 per cent to about 55 per cent.

‘The 4.25 per cent yield is reflective of the current office market,’ said Cushman & Wakefield managing director Donald Han.

‘Prime office acquisitions last year were done at average yields of between 3 per cent and 3.5 per cent.’

The yield protection arrangement will also shield the trust from any potential oversupply situation in the office market from 2010 and beyond, he said.

CCT’s Grade A office buildings have done well. Asking rents at 6 Battery Road in Raffles Place, for example, have risen to $22.50 psf, with rent deals done above $20 psf.

The 23-storey 1 George Street is well sited to benefit from high CBD rents, being near the Raffles Place and Clarke Quay MRT stations, said CCT.

There is good upside for rents, as it was completed in 2004, when the office leasing market was sluggish.

The building is fully occupied, but about half the rental leases will be up for revision over the next two years, said Ms Leong.

Tenants at 1 George Street include The Royal Bank of Scotland, WongPartnership and the Canadian High Commission.

CapitaLand said it expected a gain of about $47 million from the sale. This is after taking into account the yield protection and its 30.5 per cent interest in CCT.

It said the divestment was in line with its strategy of unlocking value from commercial properties at the appropriate time to recycle capital.

CapitaLand gained full ownership of 1 George Street last year, when it bought German insurer Ergo’s 50 per cent stake in the building at $2,700 psf of net lettable area.

CCT will seek unitholder approval for the deal at an extraordinary general meeting before June 30, so the deal can be completed before July 31.

As CCT has secured committed funding for the entire purchase price, it does not need to do a placement of CCT units or a rights issue to raise cash.

Its gearing, however, will rise to 40 per cent from 27 per cent.

ITS OFFER

CapitaLand will ensure a minimum property income of $49.5m a year, making the acquisition compelling, says CCT chief executive Lynette Leong.

ITS GAIN

CapitaLand expects a gain of about $47m from the sale.

Source : Straits Times - 28 Mar 2008

$20,000 subsidy for singles who buy resale flat to live with parents

SINGLE Singaporeans who opt to buy an HDB resale flat in order to live with their parents can now get a housing subsidy of $20,000.

The subsidy aims to encourage children to look after their parents while helping them get a bit further up the property ladder.

It is a variation of an existing programme - the Single Singapore Citizen Scheme, which allows single people aged 35 and above to apply for a $11,000 CPF housing grant to buy a resale flat to live on their own.

The $20,000 subsidy - called the higher-tier Singles Grant - starts on Tuesday and comes with a number of conditions.

Applicants must be aged 35 and above, be first-time HDB buyers and must not earn more than $3,000 a month if they are buying alone.

They must also commit to living with their parents in the flat for at least five years.

Parents have obligations as well. They cannot buy or own another HDB flat or invest in private property within this period.

This means they will have to dispose of any property they own before they can qualify as co-occupiers in the subsidy application.

The $20,000 grant is also subject to other HDB policies such as resale levy liability, but it can be used by singles buying flats under the Design, Build and Sell Scheme.

The subsidy, which was announced in Parliament on March 5, is not a cash grant and can be used only for initial payment on the flat or to reduce the mortgage.

Singles buying resale flats under the joint singles scheme can also apply for the new grant.

‘It’s not something that will make all singles jump for joy as most want an opportunity to buy a flat to live on their own,’ said MP Charles Chong, chairman of the Government Parliamentary Committee for National Development and Environment.

But it will benefit a small group who prefer to live with their parents.

The HDB said about 270 people applied each year, between 2003 and 2007, for a singles grant to buy a resale flat with their parents.

Mr Chong felt the new subsidy does not go far enough.

He said feedback he has received suggests that singles want to be treated the same as married people, including the right to buy a new flat direct from the HDB.

He added: ‘If the purpose (of the higher grant) is to encourage children to look after their parents, then the grant should also be given to married children living with their parents.’

Source : Straits Times - 28 Mar 2008

Board should do more to weed out insincere applicants

Letter from Samuel Lee

My fiancee and I are young executives who are looking for a place to live after we get married.

We have applied for a Housing and Development Board (HDB) flat under the Design, Build and Sell Scheme (DBSS) and the Build-To-Order (BTO) schemes several times, but have repeatedly drawn very high queue numbers.

The application fee of $10 should be raised to help filter out people who apply “just for fun”, as well as fence-sitters whose final decision on purchasing a flat depends on a favourable queue number.

Even though they were over-subscribed, the take-up rates for recent BTO projects in Sengkang and DBSS projects - Premiere@Tampines and City View@Boon Keng - were eventually low.

Some applicants were also turned down because their combined monthly family income exceeded the $8,000 limit.

This is precisely the point: Discounting the cash-rich, affordable public housing should be just that - affordable.

DBSS flats are far from affordable - many 4-room flats at City View@Boon Keng were priced between $500,000 to $700,000.

The HDB should step in with pricing guidelines for future DBSS and Executive Condominium (EC) projects. There also seems to be little differentiation between EC and DBSS units.

I also understand that there are plans to privatise both Premiere and City View in 10 years. Why the need to wait so long?

My fiancee and I have been eagerly anticipating the launch of the DBSS site in Simei since it was announced late last year.

The tender of land for this site was slated for last month, and from past trends for the earlier two projects, it should have taken place at the end of February. But there is still no sign of of the tender being called.

Is the HDB delaying it in view of cooling property prices?

There has been no official statement on this, but a simple explanation on the HDB website explaining the delay would be a nice gesture.

The HDB should bear in mind their objective of providing affordable, subsidised public housing and not ride on market trends like a corporate entity.

Back to the issue of the $10 application fee: Many Singaporeans are kiasu - when they read of developments being over-subscribed, they perpetuate the vicious cycle of over-subscription by “applying for fun” for every project, since the application fee is low.

It does not take a rocket scientist to figure out how much money is then collected from these fees, given the number of applications for each project.

How does the HDB justify this?

The Board should consider alternatives such as charging a $100 application fee that is fully or partially refundable upon successful booking of a unit in the development.

Another option could be an upfront application deposit of 1 per cent of the average selling price of a unit in the project.

This amount could later be converted to part of the option fee.

Such steps would help weed out non-genuine “buyers”, especially for developments in attractive locations.

Source : Today - 28 Mar 2008