CapitaLand expands into multifamily homes with US$835m buy

Singapore

CAPITALAND is adding multifamily apartments as a new asset class to its portfolio with its maiden acquisition of 16 properties in the United States for US$835 million.

It plans to further bulk up this portfolio through more acquisitions - not just in the US but also in other fast-growing markets like China - and potentially spin off these assets into investment vehicles and partnerships such as funds or real estate investment trusts (Reits) in the medium term.

Newly installed president and group CEO Lee Chee Koon, in his first analyst and media briefing in his new role, and his second day on the job, reiterated that CapitaLand still has a target to achieve double-digit returns above its cost of equity.

CapitaLand plans to continue to step up its pace of recycling, having divested almost S$4 billion in assets this year, and also to maintain its trading and investment businesses in a 20:80 ratio. Trading - meaning building properties to sell - remains the group's strength and a segment that delivers higher return on equity (ROE), he said.

The group plans to plough about US$50 million to renovate at least two-thirds of the new portfolio, which comprises 3,787 apartment units located in the suburban communities of the metropolitan areas of Seattle, Portland, Greater Los Angeles and Denver.

Mr Lee said: "While we value add to this portfolio of freehold operating assets through asset enhancements post-acquisition, we will also be looking out for more opportunities to build up a sizeable platform and strengthen our expertise in this asset class...

"We have a decent track record in terms of private equity funds and Reit platforms, but for us to continue to build this fund management business, we need to go into new geographies and new asset classes."

CapitaLand currently has 16 real estate private equity funds and five Reits, worth over S$53 billion in assets under management.

Mr Lee added that the resilience, growth and depth of the multifamily property market was what appealed to CapitaLand in its latest portfolio acquisition.

"It's a US$3 trillion market," he said. The sector makes up 15 per cent of total housing stock in the US, and in the listed space, multifamily property Reits boast a combined market capitalisation of more than US$200 billion, five times the size of Singapore's entire Reit universe.

The properties in the new portfolio are operating at 94-95 per cent occupancy, with an average length of stay of about two years. These are unfurnished apartments with a typical lease term of one year, after which rentals can be repriced based on prevailing market rates. The renewal rate is about 50 to 60 per cent.

While the group cannot name the seller, bound by confidentiality, Gerald Yong, CEO of CapitaLand International, said that it is an unrelated party, but an active multifamily investor in the US, and he expected the relationship to continue.

The portfolio has a cap rate that is "in line" with the market benchmark of 5 to 5.5 per cent, while the historical organic growth rate for rentals in the wider market has been 7-8 per cent per annum.

According to real estate consultancy CBRE, multifamily properties have the highest average returns within the commercial real estate class, offering close to 10 per cent annually in the last three decades.

Analysts mostly cheered the move. Derek Tan, senior vice-president for DBS group equity research, feels that the company is buying into an asset class that still exhibits good growth momentum and runway.

"Cities that they bought in still have some room left to run. My preferred strategy is to put these assets into a Reit, which will make it more tax-efficient and not too much of a drag on the balance sheet."

RHB analyst Vijay Natarajan said the acquisition aligns with the group's capital recycling strategy thus far. "Its entry into a new market and asset class is positive from a diversification perspective, and this is a business which is immediately accretive to earnings, in line with what CapitaLand is doing to boost its ROE."

The potential of spinning off an enlarged portfolio into a Reit is also a boon. But, if there is one thing that concerns him, it is that the group may be "a bit late in entering the US market", especially with US-China tensions threatening the momentum of the bull run in the US market that has gone on for the last three to four years.

CapitaLand first entered the US market in August 2015, when it acquired five properties there through its subsidiary Ascott and Ascott Reit. Ascott also owns a majority stake in a corporate housing provider, Synergy Global Housing, which offers apartments for corporate lease.

In slightly different fashion from Synergy Global Housing, which holds "urban core" assets and caters to corporate clients, CapitaLand's latest acquired portfolio will be rented out to individuals, who may have less bargaining power, Mr Yong said.

The latest portfolio targets middle-income and skilled professionals working in the surrounding employment hubs.

The acquisition will diversify the group's business outside of its two core markets of Singapore and China. It also increases CapitaLand's investment in the US to more than US$1.5 billion and its presence in the market to more than 6,500 units. The transaction is expected to be completed in the fourth quarter of 2018.

Asked by an analyst how scalable a multifamily property platform would be outside the US, Mr Yong said that rental housing in China, Europe and Australia is still quite fragmented and nascent, and hardly as deep, liquid and institutional-class as in the US, but developments are rapidly picking up in China.

The demand drivers are the same in these countries: the increasing trend towards rentership due to increasing cost of home ownership and the millennial generation's preference for geographic mobility and community living in suburban markets.

CapitaLand shares closed a cent lower at S$3.27 on the stock market on Tuesday.