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CapitaLand rejigs China focus with mall disposals

It is selling 20 China malls for 8.37b yuan, generating net proceeds of S$660m and a net gain of S$75m

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CapitaMall Quanzhou in Fujian Province. The divestment allows CapitaLand to focus on its core city clusters of Beijing, Shanghai, Guangzhou, Shenzhen, Wuhan, Chongqing and Chengdu.

Singapore

CAPITALAND is divesting its stake in 20 China retail malls for 8.37 billion yuan (S$1.71 billion), in what analysts see as a timely move as the group reconstitutes its portfolio and rejigs its China focus.

The buyers of the assets are China Vanke, Vanke's subsidiary SCPG, and fund affiliate Triwater.

On top of this amount, the buyers will also pay US$220.4 million in outstanding shareholder loans on the books of the property holding companies that are being divested.

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At a Friday briefing, CapitaLand's management took pains to stress that it is by no means looking to reduce its footprint in China, but rather is refocusing its attention away from Tier-3 cities to its malls in Tier-1 and Tier-2 locations.

The malls it is disposing of are first-generation malls purchased more than a decade ago. They are small in size, averaging 40,000 sq m each, and many have long leases locked in with anchor tenant Walmart, an American hypermarket and department store operator, which limit the landlord's ability to reposition the malls.

It would also cost too much to rejuvenate the malls, president and group CEO Lim Ming Yan said. At the same time, better-quality malls are also springing up in the vicinity, although he qualified that the CapitaLand malls being disposed of are actually well-located in their respective micromarkets.

"Out of the 20 malls, 14 of them are single malls in single cities, so our presence isn't big enough to be able to enjoy enough market influence," he said. The disposal thus allows CapitaLand to focus on its core city clusters of Beijing, Shanghai, Guangzhou, Shenzhen, Wuhan, Chongqing and Chengdu.

The group projected that this transaction will generate net proceeds of about S$660 million and a net gain of about S$75 million.

It added that the loss of recurring income from this transaction will be limited, as these 20 malls accounted for only about 4 per cent and 7 per cent of the group's respective total and China shopping mall portfolio valuation as at end-June last year.

The transaction is targeted for completion in Q2 this year.

DBS senior vice-president for group equity research Derek Tan agreed with the management's view that there is "really limited upside" for the portfolio of malls and said this is "an opportune time for CapitaLand to exit".

The news however failed to lift CapitaLand's shares, which fell one Singapore cent or 0.3 per cent to S$3.65, but Mr Tan waved it off as a "weak market day". He said the price at which the assets were disposed of was attractive, at about 7 per cent above their latest valuation and substantially higher than the price CapitaLand acquired them at.

"What it means for CapitaLand is that in the future, it will reap some form of positive carry. It will earn a performance fee, a reward for delivering growth. I think over time, the market will also reward them for it," he said.

UOB Kay Hian analyst Vikrant Pandey also saw CapitaLand's move as freeing up capital from some of its older malls that are more challenging to do asset enhancements on. "There is a good rationale to sell, and the capital could potentially be used for better purposes," he said.

The management declined to share the exit yields of the properties, and in response to queries about whether it will be paying out divestment proceeds to shareholders, said it will "consider its options on how best to utilise the proceeds from the sale". This includes but is not limited to redeploying capital to other opportunities and returning capital to shareholders, it added.

When the disposal proceeds are repatriated back into the company, the property group will have some S$3.66 billion on hand to redeploy to investment opportunities.

Mr Lim said that the capital is "fungible" and can go into different asset classes other than retail malls. The group will also look at partnering other capital partners so as not to take full 100-per-cent stakes in assets, while still being able to beef up its overall operating platform.

The latest transaction was undertaken through CapitaLand's shopping mall business, CapitaLand Mall Asia (CMA). In all, CMA has acquired S$1.8 billion worth of assets since 2015 and divested some S$2.9 billion in assets over the same period.

As a group, CapitaLand has completed S$2.5 billion in divestments in 2017 and reinvested some S$5.5 billion in new properties.