Thursday, July 31, 2008

Is CMT Morphing From Pure Retail Play Into A Mixed Reit?

Source : The Business Times, July 31, 2008

CAPITAMALL TRUST (CMT), Singapore's first real estate investment trust when it listed in 2002, has enduring appeal.

Six years since its flotation and with another 20 contenders in the Singapore Reit (S-Reit) market today, CMT remains Singapore's biggest Reit with an asset size of $7.2 billion.

The market has rewarded the trust's consistent ability to deliver total returns by according it one of the lowest costs of capital for any Singapore Reit. That is, CMT trades at one of the lowest distribution yields among S-Reits. The market demands a lower risk premium from CMT than it does for just about any other S-Reit. CMT is also trading above its net asset value. This has to do with CMT's track record in managing retail properties.

However, lately some institutional investors have been concerned that the shopping centre trust could be morphing into a mixed development trust. In 2006, CMT bought a 40 per cent stake in Raffles City, which comprises a mall, office tower, convention space and two hotels.

In May this year, CMT announced it was buying Atrium @ Orchard - a predominantly office asset - for $839.8 million.

Is CMT being forced to buy mixed developments because of the challenge of sourcing for pure-retail assets in Singapore as more shopping centres are already owned by Reits and private property funds?

Some investors would prefer CMT to be a pure retail play. If CMT dilutes its portfolio by acquiring mixed developments with office and other components, investors may demand a higher risk premium, that is, CMT may have to trade at a higher distribution yield, putting pressure on its unit price.

Not only that, there may be potential conflict of interest within the CapitaLand stable of Reits, since CMT's sister Reit CapitaCommercial Trust (CCT) owns mostly offices.

It may be timely to revisit some of the reasons behind CMT's acquisitions of Atrium and Raffles City.

Offices make up nearly 96 per cent of Atrium's existing net lettable area (NLA) of 373,446 sq ft. CMT's attraction to the property, however, is due to its strategic location next to the trust's existing mall, Plaza Singapura. By drawing synergies between the two properties, CMT can extract more value out of Plaza Singapura. Atrium is directly linked to Dhoby Ghaut MRT Station, which will be the interchange station for three lines. By integrating Atrium with Plaza Singapura, the latter will have improved MRT connectivity. CMT plans to boost Atrium's retail NLA from about 16,100 sq ft now to 172,100 sq ft by converting the first three levels into full-retail use. It also plans to create retail space on state land that it hopes to buy in front of Plaza Singapura.

CMT could also potentially move some big tenants from Plaza Singapura's upper floors to Atrium's upper levels and subdivide the vacated space at Plaza Singapura into smaller units that will hopefully fetch higher rents. Another possibility is to attract fitness centres and signature restaurants to Atrium's upper levels as office leases expire.

Given CMT's impressive track record at asset enhancement plans and its ability to create new retail space in its properties, it's possible to imagine Atrium transformed into a predominantly retail asset in future.

So too at Raffles City, asset enhancements have boosted the retail net lettable area by 12.5 per cent. These initiatives required the close cooperation of CCT, which owns the remaining 60 per cent in Raffles City. Had CMT bought only the mall in Raffles City, leaving the office tower to CCT, the two Reits might have had sibling arguments during the mall's refurbishment as many common areas were involved. Instead, by taking stakes in the entire development, the two Reits worked in unison.

When Raffles City's asset enhancement potential has been substantially realised, CMT and CCT could neaten their ownership - with CCT holding the office tower and CMT the mall. This will sharpen the two Reits' respective foci and give investors clearer choice to invest in their preferred asset class. Likewise, when CMT is done transforming Atrium and creating more retail space, it could sell the remaining office space to CCT. After all, CMT should not be competing with CCT - a big office landlord - for office tenants at Atrium.

There will also be office space when CMT builds four more floors on top of Funan DigitaLife Mall to tap the site's unutilised development potential. CMT has all approvals in place but will begin work only after the new office space has been substantially leased; this should make it easier for CMT to dispose of the office space and once more stick to its core strength in retail.

Moving ahead, CMT is unlikely to shy away from mixed assets as long as there are strategic reasons and where such assets have a retail component that it can add value to.

CMT will have to hope that investors will still find this defining strength endearing.

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