Inmigrantes y naturales

CapitaCommercial Trust (CCT, or the Trust) is Singapore’s first listed commercial real estate investment trust (REIT) investing in quality income-producing properties predominantly used for commercial purposes. Listed on the Singapore Exchange Securities Trading Limited (SGX-ST) on May 11, 2004, CCT was created through a capital reduction exercise by CapitaLand Limited (CapitaLand), which was a distribution in specie to its existing shareholders.

Managed by CapitaCommercial Trust Management Limited (CCTML, or the Manager), an indirect wholly owned subsidiary of CapitaLand, CCT has grown to be the largest listed commercial REIT by asset size since inauguration. By constantly developing new ideas and approaches to real estate management, CCT will stand firmly rooted as one of Singapore’s premier commercial REITs.

CCT focuses on securing stable earnings via properties that are income-producing.

As such, CCT’s invested portfolio consists of 10 quality office buildings primarily situated in the prime location (Central Area) of Singapore. The properties are Capital Tower, Six Battery Road, One George Street, HSBC Building, Raffles City Singapore (60% interest through RCS Trust), Bugis Village, Wilkie Edge, Golden Shoe Car Park, CapitaGreen (40% interest in development through MSO Trust) and Twenty Anson.

In Malaysia, CCT holds 30% stake in Quill Capita Trust (QCT), a commercial REIT listed on the Bursa Malaysia Securities Berhad that owns commercial properties in Kuala Lumpur, Cyberjaya and Penang. CCT also has 7.4% stake in the Malaysia Commercial Development Fund — CapitaLand’s first and largest private real estate fund in Malaysia that focuses on real estate development properties in Kuala Lumpur and the Klang Valley.

[Source: CCT website]

INTERVIEW with LYNETTE LEONG, CEO, CAPITACOMMERCIAL TRUST MANAGEMENT LIMITED, the Manager of CAPITACOMMERCIAL TRUST, and HO MEI PENG, Head Investor Relations

Why do you think offices in Singapore trade at lower cap rates than retail malls given the much higher cyclicality of office space?

The risks of operating a mall are actually much higher than operating an office as it requires active involvement in running the mall (promotions, advertising, makeovers, etc.) and management of many small tenants. Malls thus typically have much higher arrears and turnover of tenants as compared to offices, especially those in prime buildings where the quality of tenants is much higher and does not require much active management. In Singapore, the malls have attained good performance and stability because of the quality of the mall operators but malls are inherently more risky to manage which is reflected in their valuations.

Let us take a look at the implied rentals based on replacement costs. In September 2011, during the height of the euro crisis, a URA tender for an office plot at Robinson Road next

to Capital Tower was sold for S$882 psf ppr. Assuming S$750 psf as development cost for a grade A building, the total cost works out to be S$1,630 psf. To get even a 4% net annual yield, the monthly rental has to be around S$7–S$7.50 psf. Do you think this can be considered a Grade A rental bottom across market cycles — barring temporary irrational behaviour during tough times when property owners rent out space just to get some cash flow irrespective of yield — given the need for owners to earn a minimum return on their capital?

Replacement cost is but only one of the ways to assess the office rental market, but we are not convinced that it will determine the rental bottom of the market, certainly not that of Grade A CBD office space. Given the small land plot size of the land next to Capital Tower and the location, it may not be able to generate a Grade A type of office space. Hence, the price of

$882 psf is reflective of the non-Grade A potential. Consequently, it will also not be a representative case for the assessment of Grade A rent levels.

We think the development cost for a Grade A building is closer to S$900 psf if you factor in financing cost, marketing cost, property tax and other costs, and also developer’s profit.

For example in the case of CCT’s Market Street development, the development cost excluding developer’s profit works out to about S$672 million or S$930 psf. This will mean higher breakeven costs than the S$1,630 psf you mentioned.

Other factors that will determine the developer’s replacement cost are availability and cost of funds, expertise in value engineering (to bring down construction costs), costs of building materials, inflation, etc.

For the rental bottom, the developer’s replacement cost is only one of the considerations.

The others are developer’s profit, costs of management and maintenance of the building, supply of and demand for office space, and other macro environmental factors.

In other words, there is no one-dimensional way of analysing the rental bottom.

Taking a trip down memory lane, it seems that in Singapore, even in the early 80s, rentals for prime office buildings were around S$6–S$7 psf pm. Given that both corporate profitability and productivity (in terms of earnings per square foot of space) are likely to have increased significantly since then, the rentals in relation to corporate operating profits (office occupancy cost) must be very low now, and hence very affordable for corporates from a historical perspective? What do you think?

It does seem so but unfortunately corporates do not look at it that way during negotiations and they do not reveal their occupancy costs.

Despite bearish forecasts for the office sector, the market continues to see good prices for office assets such as the February 2012 Robinson Centre purchase by a Taiwanese investor for S$2,250 psf at a cap rate of close to 3%. This is in contrast to the 6%+ yields at which office REITs such as CCT are trading at. How do you explain this?

Good quality office assets in Singapore don’t often come to market as there are simply not that many of them so there is a scarcity value. The other factor is simply that the pool of investors is very different. Office asset investors understand the long-term investment potential of prime assets whereas REIT investors look at different returns, hence the discrepancy.

You recently acquired Twenty Anson at around S$2,121 psf. However, given the discount to book that your shares are trading at, the market is valuing prime assets such as Six Battery Road at below S$2,000 psf. In such a situation, would it not have been better use of your cash hoard to simply buy back your own shares and cancel them to increase DPUs for unit holders?

That is an option but we want to create long-term value for unit holders through acquiring a strong portfolio of properties with a sustainable income stream. Buy-backs are more short-term in nature and a capital market type of activity. I also don’t think we have a mandate for acquiring shares from the market… [post-note: CCT obtained unit holders’ approval for a unit buy-back mandate for up to 2.5% of total units on issue as at 27 April, 2012.]

The cash stabilisation fund of S$17.1 million for Twenty Anson can be considered a part return of the cash to unit holders, right? What led to this acquisition? Were you under pressure from investors to use your cash hoard?

Yes, our investors did want us to use the cash productively. We had been in negotiations for Twenty Anson for a long time and we closed only when we were satisfied that the pricing was right. The building is just two years old and it is 100%-occupied with diversified tenants. The average rentals have been signed around S$6.18 psf. How much lower can the price go? What is the downside? We are quite sure the rental market will get better as there is not a lot of new supply around the time the leases expire. Of course we realise that we are not buying at distressed valuations but the seller would not have sold to us if the price was not fair. The S$17.1 million stabilisation amount was paid to the seller who in turn put it in the special purpose vehicle which owns 100% of the property to stabilise the property yield over 3.5 years.

There are some fundamental changes happening in the financial services sector such as the decline of the derivatives business and lower profitability of investment banking. Will this lead to much lower levels of future staffing and impact demand for prime CBD space?

What is your view?

Overall, we believe that Singapore is a very competitive location as a hub. In Hong Kong, office space is much more expensive and there are also complaints about pollution. Singapore has a pro-business environment, which has always attracted investors. There will be short-term blips but over the long short-term, Singapore will retain its attractiveness. If there is an oversupply of office space, the older CBD buildings will likely be redeveloped into condos or hotels, depending on the demand, subject to the relevant authorities’ approval. It also works to Singapore’s advantage that we are not as dependent on the financial sector as Hong Kong is. We are far more diversified with sectors such as oil and gas, commodities trading and professional services firms taking up a large chunk of space in the CBD. More specific to CCT, we see office demand from medium-size tenants who prefer smaller office towers.

Are you seeing increased demand from Indian, Chinese and other Asian companies as these companies internationalise their operations? Will suburban offices and business parks benefit more given the cost-conscious nature of these companies?

Anecdotally, we have seen Chinese and Indian companies setting up offices in the CBD. We

understand that one of the companies that recently leased a property at Marina Bay at a high rent is a Chinese energy-related company. One of our tenants which is one of the top Chinese financial institutions recently expanded its office space requirement. Definitely we see MNCs, including Indian and Chinese companies, using Singapore as a regional base for their businesses in Southeast Asia, India and even China. We think that their site location criteria, whether CBD or suburban areas, are driven more by their nature of business.

Your occupancies have always been higher than URA office occupancies. Why is that?

We now benchmark ourselves against the CBRE CBD occupancy index as the URA numbers includes all of Singapore and is not a fair benchmark. We are also higher than the CBRE index primarily because of our strong and proactive leasing team. It helps that the location and quality of our properties is good and this makes it easier to lease out. By the way, an easy way to check the quality of a property is to check the car park of the building; if that is well maintained, so will be the rest of the building!

Is your strategy now to hold only prime CBD buildings? What led you to buy Wilkie Edge in 2007, a non-prime building?

Yes, prime buildings are much easier to rent out during weak markets. For example we had great challenges filling up StarHub Centre during the 2008–2009 recession as its location in Orchard caters to the retail and residential properties. We obtained the approval to change StarHub Centre’s use from 100% commercial to maximum 80% residential and 20%

commercial.

As an office REIT, we didn’t want to go into residential development and hence, sold it off in a private tender. Similarly, we decided to exit Robinson Point as it is an old building between two MRT stations, which makes its location less than perfect. We were quite sure that the rentals would go down, hence we decided to divest it and recycle the proceeds into other assets. As for Wilkie Edge, this was bought during a time when CBD space was at a premium rental and we wanted to take advantage of the strong market. Wilkie Edge also has its own micro market and we have been able to achieve good occupancy for this property.