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.
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