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MGCCT's Sandhill Plaza acquisition will enhance portfolio diversification: Moody's

[SINGAPORE] Moody's Investors Service says that Mapletree Greater China Commercial Trust's (MGCCT) proposed acquisition of Sandhill Plaza in Shanghai will enhance portfolio diversification and reduce revenue concentration from its asset in Hong Kong. The trust remains well-positioned at its Baa1 issuer rating with a stable outlook.

On June 15, MGCCT announced that it will acquire Sandhill Plaza, a business park situated within Zhangjian Hi-tech Park in Shanghai, for a total purchase consideration of 1,888.1 million yuan (S$412.2 million). The Shanghai asset will add to the trust's existing portfolio which comprises a shopping mall in Hong Kong and an office building in Beijing.

"The Shanghai acquisition will add a third income-generating asset to MGCCT's portfolio, thereby reducing its reliance on its largest property, Festival Walk in Hong Kong," says Jacintha Poh, a Moody's Assistant Vice-President and Analyst, "The trust will also benefit from greater geographical diversification within China."

Once the acquisition completes, its reliance on Festival Walk - which accounted for 76 per cent of total investment property value at March 31, 2015 - will fall to 71 per cent.

Post-acquisition, Moody's expects gross rental income contribution from Festival Walk will fall below 70 per cent, from 76 per cent at March 31, 2015.

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Moody's believes that the trust's proposed purchase of Sandhill Plaza, which is located in one of Shanghai's largest business parks and also designated as a free trade zone, reflects MGCCT's risk-prudent expansion approach.

MGCCT plans to fund the proposed acquisition fully with debt.

"We expect MGCCT's leverage as measured by adjusted debt to deposited assets will increase to 40.6 per cent from 36.2 per cent at March 31, 2015. As the trust continues to expand its portfolio, we also expect it to remain prudent in its funding approach such that its leverage stays within our threshold of 45 per cent," says Rachel Chua, a Moody's Associate Analyst.

The rating outlook is stable, reflecting our expectation of continued predictable cash generation from MGCCT's current portfolio, driven by steady occupancy levels and strong organic growth from positive rental reversions and potential asset enhancement initiatives.

The rating could be upgraded if MGCCT's credit metrics improve, such that debt/total deposited assets falls below 35 per cent and the EBITDA interest coverage is maintained above 4x. However, upward rating pressure is likely to be limited, given MGCCT's high revenue concentration.

MGCCT's rating could be pressured downwards if:

(1) the operating environment deteriorates, leading to higher vacancy levels and declines in operating cash flows, and/or

(2) the trust's financial metrics deteriorate, with debt/total deposited assets exceeding 45 per cent and EBITDA/interest coverage falling below 3x on a consistent basis.

In addition, any material change to MGCCT's business risk profile from a more accelerated expansion into second-tier cities in China could also put the trust's rating under pressure.

Sandhill Plaza is a premium quality business park located in ZhangjiangHi-tech Park in Shanghai with total gross floor area of 83,801 sqm. The property comprises one 20-storey tower, seven blocks of 3-storey buildings and two basement levels of car park. The 50-year leasehold title on the building commenced on February 4, 2010.

As of March 31, 2015, Sandhill Plaza had a high occupancy rate of 96.2 per cent and a diversified tenant base across mobile chipsets, chemicals and information technology.

Mapletree Greater China Commercial Trust (MGCCT), headquartered in Singapore, is the first Greater China-focused Real Estate Investment Trust (REIT), listed on the Singapore Exchange Securities Trading Limited on March 7, 2013.

Its portfolio consists of two properties, Festival Walk, a retail and office building in Hong Kong, and Gateway Plaza, a Grade A office development with a retail atrium in Beijing. The properties' appraised value totaled S$5.35 billion at March 31, 2015.

The trust's sponsor is Mapletree Investments Pte Ltd, a wholly owned subsidiary of Temasek Holdings (Private) Limited (Aaa stable), which in turn is a Singapore government-owned investment company.


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