CICT’s Tony Tan on Singapore’s office and retail future

This interview is an extract from senior correspondent Leslie Yee’s PropertyBT Podcast. The transcript has been edited for length and clarity.

Leslie Yee: While technology enables remote working, Singapore’s office buildings are hardly white elephants. Why are Singapore offices doing well despite the remote-work shift? What trends are interesting in Singapore office property? What worries you?

Tony Tan: To a large extent, you can cut down to a few fundamental things that make Singapore as an office location very attractive.

First, the supply dynamics are pretty much in an environment where they are more predictable. With office stock, particularly in the CBD (Central Business District), it was also quite clearly spelt out that (the authorities) wanted to curtail the (supply of) new land sites in the CBD for commercial use.

On the demand side, Singapore over the years has been standing quite tall, recognised around the world as a major financial centre, a transportation hub, with a business-friendly environment.

One thing that really catalysed that interest further is how Singapore responded to the Covid crisis, which gave a lot of confidence to many business owners, and to top management looking at where they want to locate their presence in this part of the world.

Those demand dynamics will be affected by economic circumstances and companies’ business planning. But if you take away the potential supply issues that asset owners have to worry about, we have fundamentally a strong base driving demand.

Hence, most of the asset owners in the office space would have a high level of confidence that (they) can ride through different economic cycles.

Second is the fact that Singapore is a small nation. Commuting is convenient, supported by a very robust transportation network. End to end (of the) CBD – whether you’re coming from the east, west, north, south – we’re talking about a radius of perhaps 15 km at most. And if you take public transportation, we’re talking about half an hour at most in commute time.

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There are efforts being made to develop decentralised office locations. But then, the big white site at Jurong Lake District, which has a large office component, was not awarded. In your view, how do decentralised office locations, and Jurong in particular, compare with the CBD?

There are two key themes that are spelt out clearly by the master plan. One is looking at more and more centralisation of people living downtown. We’re creating more residential projects in a downtown location, including public housing.

A second major trend is decentralisation, potentially moving some of the commercial activity out of the traditional CBD location. It’s actually quite a clever plan. If you are talking about the longer-term perspective and having more optimised use of very limited land resources in Singapore, to increase capacity, we just have to rejig some of the urban planning.

Jurong Lake District is one of the important locations where the planner was hoping to catalyse and bring some commercial activity over there.

How would that pan out? It depends. The economic cycle is one key driver for Singapore’s ability to continue to attract even more types of services and production, and cluster out some of the locations that they have planned out across the island. That will take some time.

The question is how the economic dynamics between (rents in the) central CBD location and the outer ring part of Singapore – where the other commercial centres are – will play out.

Retailers here often complain about high rent and manpower costs. Various food and beverage, or F&B, outlets have stopped operating. Singapore residents actively shop online and abroad, including across the Causeway. How have Singapore malls been performing, and what are the key risks in this segment?

It’s no easy job to own and manage a retail asset. It’s quite management-intensive. We have lived through cycles where consumption patterns change. We were looking at a lot of decentralisation of retail activity – over the last two decades, there’ve been so many malls sprouting up around the different residential precincts.

Today, Singapore is a lot more mature from a retail-offering perspective. But the consumer is constantly evolving. Demography is changing. That’s where, as owners, we have to be always on our toes, ensuring that every asset is pitched correctly.

Annually, we look at our individual assets, at how they should be positioned in the short, mid and longer term given how trends are changing, whether it’s e-commerce, shopping across the border, Singaporeans travelling, centralisation of population, decentralisation of commercial activity.

You may already have seen what we have rolled out, including upgrading Clarke Quay with a full revamp to make it more “day and night”, and intensifying our presence in the outlet space, upgrading IMM.

For our downtown offerings, tourism trends, (greater) influx of residents, and the profile of residents coming in will shape the way we look at the asset plan.

The challenges are there, but it’s also exciting. We would have to respond quite agilely, taking both the shorter-term needs of our investors (and) at the same time looking at the action plan for the mid to longer term.

F&B is a top rental contributor for many malls, but many F&B players suffer from high costs and intense competition. The other issue, longer term, is that we have an ageing population. By 2030, roughly one in four Singaporeans will be aged 65 or above. More elderly people may find visiting malls a bit challenging. Will F&B continue to be a growing contributor to your malls? Are there challenges in attracting elderly shoppers to malls?

F&B overall will be a very important component in our asset plan for individual properties. Everyone needs to eat, and the F&B spectrum is pretty wide, whether it’s a sit-down restaurant, casual dining, fast food, convenient takeaways. So we have an array of different offerings that... cater to (each precinct that we) serve.

In the face of competition from e-commerce and social media, attracting people to the mall is critical. Filling the stomach – that’s, in a way, low-hanging fruit. The question is how you’re going to bring them in, and bring in new concepts.

Our F&B retailers are not working on a single concept. Typically, they have multiple concepts. Some downtown, some suburban, with different price points.

When consumers trade up, trade down, they have the flexibility to adjust. But they like to work with us because we have that presence in both downtown and suburban that would give that immediate penetration in the market that they want to be in.

The other trend that we’ve seen a lot of, of late, is Chinese operators starting to be very interested in the Singapore market.

A lot of them use the Singapore market as a springboard. We are not a big market here. (A population of) six million. That’s probably a mid-sized city in China. And they’ll naturally be constrained by issues we mentioned – manpower, right? And a high cost base. But a high cost base can also mean a high selling point. So from a financial angle, sometimes the return may not be so bad.

We had an interesting dialogue with a Chinese operator. They are very successful in their own city or province. But in the current climate, operating there has been very challenging. So, Singapore is a respite – (they are) getting into Singapore as a springboard, to make their name known, but their plans are far wider.

Singapore has become a strategic location for them to brand themselves. We have a fairly wide demography and (a diverse) ethnic make-up. We can be very international, or very Asian, or cater to halal offerings. So for them, it’s a very good test bed before they venture away (to other markets).

Ion Orchard is a trophy asset, right in the heart of Orchard Road. It has many luxury boutiques and is a prominent landmark. What is really exciting about your new acquisition?

Ion is definitely a crown jewel in our portfolio. But beyond Ion, we look at where we are present now in the downtown precinct. Along Orchard Road, before Ion, we have Plaza Singapura Atrium at one end... Now, with Ion, we are securing ourselves another major... position in Orchard Road. This gives us a very good overview of how we should be playing in the landscape.

Ion, no doubt, is very well-known as a luxury mall. Actually, it’s also a very universal mall. Residents know that if you go to Ion, you don’t have to just buy your Cartier or your Patek Philippe or Rolex. You have your Uniqlo. You have your food court. Different offerings (for) all walks of life.

Given the location, it is probably the No 1 spot for most of the retailers who want to have their presence in Orchard Road. It’s definitely giving us quite good reach into some of the (market) space that we had not been able to reach, particularly the luxury space.

Are you trying to make it more luxury or more “man in the street”? What can you do to drive better performance and improve the customer experience?

I can’t imagine it would be very different, (in terms of) the split between where the luxe space is positioned and where the rest of the offerings are positioned. It’s the details – what would be the relevant product type?

We will be working quite closely with our joint venture partner to look at the overall trends. Interestingly, some of the sort of out-of-favour brands are beginning to come back again. What I can see is: Fine-tuning (some of the) brands’ offerings may happen in the next one to two years, and fine-tuning of some of the space that is offered for certain trades.

There’s little doubt that Singapore can be an expensive city. Will office jobs relocate to hungry and cheaper locations nearby? Does Singapore offer good value for office-space users? Might international visitors find shopping and dining in Singapore way too pricey? Locals may get much better value for money from travelling abroad.

The office space definitely is going to get more interesting, given what we understand about how things are panning out around the world with a new US administration... There’ll be a lot of risk-management thinking behind how and where they want to position their business in this part of the world.

I still feel we will be in a good position, even three to five years down the road. Along the way, (we) may face headwinds. It depends on how the world economic environment plays out. Hopefully, we are on a good footing now – things sort of normalised post-Covid, interest rates seem to be peaking.

Those are the two key things that will affect market position in a Reit (real estate investment trust) space, which leads to a second question. The Reit as a product is very interest rate-sensitive. The valuation of a Reit is almost instantly affected by the outlook of how the interest rate environment will be like. And that has been pretty volatile over the last one year or so.

Hence, you see increased volatility in the Reit pricing. It’s just portfolio managers doing their portfolio adjustments, according to how the outlook for the interest rate would look like.

The economic environment may change over time. That may constrain a little bit of demand if you are going (into) a downcycle – companies look at slower expansion or even outright reduction in space requirement. But it doesn’t take away the strong attributes that Singapore has.

Second, if you look at this part of the world, we probably have one of the most highly rated green buildings. That will fit into (several) needs for occupiers, given where they are in the sustainability journey.

You’ve expressed very strong confidence in the Singapore market and CICT is predominantly exposed to the Singapore market. Do you see your trust continuing to increase its Singapore exposure even more, or are there any thoughts towards perhaps lowering the Singapore weightage and getting a bit more overseas exposure?

We’re going to stay predominantly (in) Singapore for the long haul. That’s for sure. This is our home market, we know the market, we have better resources to be able to manage the assets through different cycles. So, as far as we can, we would want to continue to invest in Singapore.

Investing could come in the form of new acquisitions if there are opportunities available. We are also looking at scaling up existing assets, where an asset is primed for an upgrade. Some assets may be redeveloped. The two major themes that we talked about, centralisation and decentralisation, open up opportunities for us to look at increasing presence as well.

But we also always think that it’s good to have a little bit of an outpost out there – not too big. We have two properties in Germany, three in Australia. We learn along the way. There are mistakes made, obviously, but certainly I think (they’re good eye-openers).

And given the twin objectives of the Reit from the investor angle – (distribution per unit and) distribution growth, and hopefully capital gain growth from the share price – we want to marry that carefully, from a cash-flow perspective.

From asset-enhancement work to a full-scale redevelopment, (there will be) a short-term or mid-term cash-flow implication. So we want to show that while we execute our plan in Singapore, we have other avenues where you can bring additional cash-flow stream to our unitholders.

While you have great assets, there are numerous Reits that trade at much lower price-to-book ratios and offer higher distribution yields than CICT. Is your trust fully priced, and how should investors with a long time horizon view Singapore Reits?

We are trading slightly below our book value. I think it’s probably about 5 to 6 per cent below book. So the market will have a voice on whether it’s rightly priced, what attributes it has to offer. Our track record has been stability and growth in the distribution over the few years post-pandemic, and high-level liquidity.

We have investors who are in for quick bucks – in and out. But we also have investors who stay with us. And we fit into their profiling, their portfolio construct, in different ways.

We do see hedge funds, and hedge funds tend to be quite short term. But we also see hedge funds taking long-term positions on CICT. That says a lot. Liquidity is there. Stability is there.

Whether it’s rightly priced, I can’t say. Only that interest rates will change all the time. We can manage our capital structure to respond.

For Reits, other than the real estate that you own underneath, the other component is how it’s been financed. Your capital structure becomes very important, and risk management behind that has to be very agile. So we’ll be adjusting our capital structure.

The more recent divestment of 21 Collyer Quay is one action plan that allows us a good balance-sheet position as we enter 2025. Today, I would quite comfortably say that we are quite prepared.

In your portfolio, which assets do you consider super core and not for sale? Which assets are you more open to selling?

Some of the bigger assets will naturally be very core. Given the size and contribution, any shift would have quite a material impact on the overall financial impact.

Some of the smaller assets, we’ll think about optimisation. Earlier, I talked about intensification – whether we can look at an upgrade, upscaling. If that’s possible, then we may continue to hold. Otherwise, it could be an asset that, at an appropriate time, we can look at redeployment from the capital angle.

Your recent moves have increased your weightage in retail and decreased your weightage in office space. Is this a deliberate move and do you expect to continue to go down this direction?

We shouldn’t read too much into that. We don’t look at that split defined that clearly. No, there’s no magic number. Should it be at 40 per cent, 50 per cent retail? It so happened that the opportunity was available for us to acquire Ion. The retail space goes up.

But as a product type, generally we like a mixed-use integrated product, whether you have office, retail or other relevant components – serviced residences, or even residences. They tend to be able to withstand different cycles. So we own a few (mixed products), including Raffles City, Funan, Plaza Singapura Atrium.

We’ll continue to explore opportunities for that, whether we are acquiring from a third party or... we redevelop ourselves.