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IT was, in the words of Lynette Leong, CEO of the manager of CapitaLand Commercial Trust (CCT), "the moment we have all been waiting for". CapitaLand, CCT and Mitsubishi Estate on Thursday said that they were redeveloping Golden Shoe Carpark into a mixed-use project for about S$1.82 billion before acquisition costs.
The market has been waiting for the announcement since the trust first announced its intention last October, pending the authorities' approval. The redevelopment follows in the footsteps of the nearby CapitaGreen which was redeveloped from the former Market Street Carpark in 2014. In many ways, the deal was structured similarly to CapitaGreen. The three parties involved are the same. For Golden Shoe, they will set up two single-purpose sub-trusts - Glory Office Trust for the commercial portions of the development, and Glory SR Trust for the serviced residence portion. CapitaLand and CCT will each hold 45 per cent in each of the trusts, while Mitsubishi will hold the remaining 10 per cent. The joint venture will acquire the car park from CCT for S$161.1 million - 10 per cent above the average of two valuations.
CCT will hold a five-year call option (versus three years for CapitaGreen) from occupation to acquire its partners' stakes in the commercial component of the development at market valuation. This will be subject to a minimum price based on the total development cost less net property income, compounded at 6.3 per cent per annum.
Additionally, CapitaLand and CCT will also have a drag-along right over Mitsubishi's stake in the serviced residence component.
THIS is over five years at an agreed value, subject to a minimum price calculated the same way but compounded at 5 per cent per annum.
The structuring of the development into two sub-trusts is deliberate to allow the flexibility of divesting the serviced residence portion easily.
Ms Leong said: "At the moment, we want to see through the stabilisation of the serviced residence, and it is actually a good part of an integrated development, just like for Raffles City where the two hotels (Fairmont and Swissotel The Stamford) are also part of the integrated development.
"But of course, we always structure this with a flexibility in mind . . . so that in the future, if there is a need to delink it from the office, we can exit very easily. And also because it is a trust structure, it will be appealing to potential Reits that require tax transparency, and because it is managed by the reputable Ascott, it should be attractive to other kinds of hotel owners."
The total development cost is S$1.82 billion, of which more than half, or S$957.8 million, went towards land-related costs and the differential premium to change the land use from "transport facilities" to "commercial".
The redevelopment is expected to generate a yield-on-cost of about 5 per cent each year when the project is completed and stabilised, assuming office rentals of S$12-14 per square foot and a revenue per available room of S$255-270 for the serviced residence.
CCT is funding its share of the redevelopment through divestment proceeds and debt. It recently sold One George Street for S$1.18 billion into a partnership which it will own 50 per cent of, and is in the midst of selling Wilkie Edge to Lian Beng for S$280 million.
There are some analysts that would have preferred for CCT to take a bigger stake in the consortium, given that the development limit for Reits has been raised from 10 per cent previously to 25 per cent of their deposited property now. To this, Ms Leong said that she preferred not to take undue excessive development risks since a Reit is supposed to deliver stable income to unitholders.
"We feel that (a development limit of) 10 per cent is good enough. We also did an analysis where we stretched all the way to a 100 per cent (stake). Our gearing would be 43 per cent, and that's too high for comfort," she said. The trust's gearing will remain low at 35 per cent following the deal.
Ms Leong added that the trust manager has not decided whether to distribute the divestment proceeds to unitholders or retain it for potential future acquisitions, but it is keeping in mind the loss of income that will result from some of the Reit's disposals.
Derek Tan, DBS vice-president for group equity research, is one of those who would have preferred CCT to have more stake in the game. This is because acquisition yields in the market are currently low, with income-producing assets such as Asia Square Tower 1 and Straits Trading Building recently transacted at yields of around 3 per cent, he said.
"But this is a 5 per cent yield. You can't get a deal that's 5 per cent now. By undertaking a little bit of development risk, you are coming in at a lower entry price, but this is probably a better return on capital."
Meanwhile, CapitaLand is reported to be in exclusive talks to acquire Asia Square Tower 2 from BlackRock.
The current redevelopment plan is for a one million square foot, 51-storey development reaching 280 metres, matching the tallest buildings in Raffles Place such as One Raffles Place, Republic Plaza, and UOB Plaza One.
It will have 29 floors of Grade A office space on the top floors spanning 635,000 sq ft of net lettable area; an eight-storey, 299-unit serviced residence run by CapitaLand's The Ascott; and 12,000 sq ft of retail space.
The second and third levels will be a food centre that will house the former stallholders of the Market Street Food Centre that now sits within the property. The Ministry of the Environment and Water Resources will own the food centre.
From August this year until the development's estimated completion in 2021, those stallholders will operate from an interim food centre next to Telok Ayer MRT Station.