SINGAPORE (Apr 22): Jewel Changi Airport — Singapore’s newest integrated development by CapitaLand and Changi Airport — is quite the talk of the town with its waterfall, jungle, shops, eateries and a YOTELAIR. It houses more than 2,000 trees and palms and over 100,000 shrubs. These plants comprise about 120 species and originate from countries such as Australia, China, Malaysia, Spain, Thailand and the US. There are two 100-year-old olive trees on Level 5. CapitaLand’s real estate investment trust (REIT) CapitaLand Commercial Trust’s CapitaGreen, a commercial office building in Raffles Place, also has a lush jungle that boasts a 100-year-old olive tree.
In an interview in February, CapitaLand group CEO Lee Chee Koon said Jewel brings the biophilic concept to Singapore. “If you [look at] human history, we spent a large part of our time on the farm [in the countryside], so people like to go hiking. Bringing greenery, like a miniature forest… tends to give a certain calmness.”
Biophilic design is the concept of bringing nature and greenery to the built environment. According to US press reports, biophilic design is becoming increasingly widespread, with aspects of it adopted in the offices of Google, Amazon.com and Facebook, and in leading hotel brands such as Starwood.
Of Jewel’s total gross floor area (GFA) of 135,700 sq m, retail comprises 90,000 sq m (with a net lettable area of 53,600 sq m). The other components are hotel (5,200 sq m), facilities for the airport (19,400 sq m), indoor gardens and attractions (21,100 sq m) and 2,500 car-park lots. The official figure for the total development cost of Jewel is $1.7 billion. The committed occupancy rate of the 576,945 sq ft of retail NLA is 100%, and with the exception of a couple of shops, they are more or less open.
In the first full year of operations, Jewel’s net property income yield is likely to be 4.8% to 4.9%. That would translate into NPI of $81.6 million to $83.3 million on a 100% basis. This compares with capitalisation rates for retail at 5% to 5.5%, depending on location and rental outlook.
One way to boost yields is to get areas sponsored. For instance, the forest is officially known as the Shiseido Forest Valley, the waterfall is known as the HSBC Rain Vortex and Manulife is the partner for the Sky Nets attraction, where adults and children can trampoline to their hearts’ content.
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Jewel, says CapitaLand’s management, is another example of the developer’s ability to develop an integrated or mixed-use development and one that is clearly different from its previous integrated developments. Although CapitaLand is not new to integrated developments, Jewel’s main attractions — which account for more than 15% of GFA — are a jungle and waterfall, which are new asset classes for CapitaLand.
Of course, CapitaLand does not shy away from new asset classes. One of the advantages of its size — it had assets under management of more than $100 billion before completing the merger with Ascendas-Singbridge (ASB) — is that it can dip its toes into new asset classes. CapitaLand is also the largest local developer.
Multifamily housing addresses millennials’ needs
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Last September, CapitaLand acquired a multifamily portfolio of 16 freehold properties with 3,787 units in the US. The properties are located on the West Coast and in the Mountain Region, in the suburban areas of Seattle, Portland, Greater Los Angeles and Denver. The price per unit of the portfolio is US$220,000 ($298,044).
In an interview in February, CapitaLand CEO Lee said, “In terms of market size, multifamily housing is US$3 trillion, so it’s big and liquid, and you get trades being done all the time. We got into the Class B portfolio, with rents at US$1,200 to US$1,700 a month. Across the cities we are in, we are targeting the working class.”
More than just for working families, renting is becoming a lifestyle choice for millennials, according to Joshua Kane, senior vice-president of Clarion Partners, a unit of Legg Mason. “The fabric of the economy has changed and [so has] the way people work. Home ownership is down because of the affordability issue and secular preferences change. [Millennials] no longer see residential property as a store of value and they’re quite happy to rent. Thus, tenants who choose to rent have increased,” Kane explains.
According to CBRE, the home ownership rate in the US is likely to inch up half a point to 65% in 2019, largely owing to the size of the millennial cohort and its age demographics. “Yet, even with moderate movement into home ownership, most millennials will remain in rental housing in 2019,” CBRE says.
CapitaLand acquired its multifamily housing portfolio at capitalisation rates of more than 5%, and has started asset enhancement initiatives to drive rents. “Even if interest rates were to go up and people would not buy homes, they will still rent, as they need a place to stay,” CEO Lee reasons. CapitaLand has said that it remains on the lookout for more acquisition opportunities to bulk up the multifamily portfolio and “to strengthen our expertise in this asset class”. Eventually, the portfolio could be securitised into a private-equity fund or REIT.
According to CBRE, lifestyle trends favouring multifamily housing in recent years should sustain demand this year. “These include delayed marriage, delayed child-bearing and the preference for renting versus owning for financial flexibility and mobility,” the consultant says.
ASB merger approved
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Since CapitaLand announced its proposed merger with ASB on Jan 14, its share price has risen 12% to 13%. Ascendas’ REITs have also risen since the announcement. Ascendas REIT is up 9%, Ascendas India Trust is up 12% and Ascendas Hospitality Trust, the smallest REIT, is up 12.5%.
“When we signed the agreement, we locked in the acquisition price for the stakes in Ascendas’ REITs. As Ascendas’ REITs have gone up in value, shareholders get to capture the upside,” notes Andrew Lim, chief financial officer of CapitaLand, in a statement. “Market sentiment is an important indicator of how the general market feels about the proposed transaction. CapitaLand’s share price is up 12% since the last trading day prior to the announcement of the transaction. The market has responded favourably.”
Both CEO Lee and CFO Lim met an array of investors, local and foreign, institutional and retail, in the days and weeks leading up to CapitaLand’s extraordinary general meeting on April 12. No surprise, then, that CapitaLand’s minority shareholders voted overwhelmingly in favour of the three interconditional resolutions for the ASB acquisition at the EGM.
ASB has a crucial part to play in CapitaLand’s plan to be a global real estate developer. CapitaLand now has the entire real estate value chain, as developer, owner, operator and manager of real estate classes such as retail; commercial; industrial, including logistics, business parks and data centres; lodging (with serviced residences and multifamily); and residential. The enlarged CapitaLand will have a deeper presence in Singapore and China, an expanded presence in Vietnam, the US and Europe, and a new market in India.
But not without risks
Of course, the merger is not without risks, and these were well flagged in the 129-page circular issued on March 22. Integration, for starters, could be tricky. In addition, CapitaLand relies on capital, capital markets and economic cycles for the growth of its fund management business, so a financial crisis will obviously have a negative impact on the availability of capital.
With an expanded geographic presence, the vagaries of the foreign exchange market will also need to be carefully managed.
Property is a local business, so the saying goes. Developers have to be mindful of the rules and regulations in the jurisdictions they have a presence in — and this will include local taxes, compulsory land acquisition and natural disasters.
Interestingly, during the results briefing in February, there was a question of the treatment of goodwill, as CapitaLand is paying between 16 and 18 times for ASB’s fund management earnings (see Table 1). “Under the Singapore Financial Reporting Standards (International), impairment reviews of goodwill are required annually or more frequently if there is any indication that the goodwill might be impaired. There is no assurance that the enlarged group will not incur impairment charges in the future, and any such impairment charges on goodwill required may affect the enlarged group’s financial results for future financial periods,” the circular warns.
Acquiring at a discount
According to independent financial adviser Rothschild & Co, “the proposed consideration of $6,035.9 million [for ASB] reflects a discount of approximately 9% to the mid-point of the valuation range derived from sum-of-the-parts of $6,617 million to $6,704 million [see Table 2]”. To recap, CapitaLand is paying $6,035.86 million to Temasek for ASB, 50% of which will be paid in cash and 50% with 862.25 million new shares issued at $3.50.
The merger was given an overwhelmingly “yes” vote by independent shareholders. So, CapitaLand begins the next phase of its journey — as a global real estate company. The advantages (or otherwise) of the merger may not be felt immediately, but CFO Lim has assured the investing public that CapitaLand will reduce its elevated gearing from the acquisition of 0.72 times down to 0.64 times by end-FY2020.
Analysts have said that CapitaLand can monetise its assets, including those acquired under ASB. And, it has its Raffles City portfolio in China, which is stabilising. Monetising assets — including divesting assets to its eight REITs — could help CapitaLand realise monies from the somewhat conservative valuations for both CapitaLand’s and ASB’s properties.
The enlarged group’s net tangible assets per share are likely to fall on a pro forma basis from $4.40 to $4.04, according to the circular, but if assets are divested at premium to book value, the NTA dilution should be reduced.
As investors touring Jewel Changi Airport are soothed by its biophilic design, they may also be similarly comforted that CapitaLand is moving in the right direction, with its share price up more than 19% this year.
Getting up close with multifamily housing
SINGAPORE (Apr 22): In the US, multifamily housing is a type of residential structure with more than one dwelling residence in the same building. It can be high-rise and urban, low-rise and suburban, or even mixed use.
As with other real estate segments, multifamily comprises core or stabilised properties, which have the lowest yields; core-plus properties, which trade at higher yields than core and to which investors can “value-add”; value-add properties, which are older assets that require varying degrees of renovation; and opportunistic properties, which require repositioning or redevelopment.
Within each segment, Class A properties are the best situated and the most expensive to rent. Class B are in less prime locations such as suburban areas, have higher yields and may require renovation or asset enhancement initiatives. Class C have the highest yields, but are largely inferior in terms of quality and location.
Institutional ownership of multifamily assets has been rising over the past few decades, and this trend is expected to continue, says CBRE in its multifamily primer. For example, 25 years ago, multifamily assets represented only 11% of the NCREIF Property Index, while retail, office and industrial had substantially higher market shares. Currently, the multifamily sector represents 24% of NCREIF Property Index and is second only to office for total market value.
The majority of multifamily assets in the US are owned by domestic privately held companies. Currently, only about 4% of multifamily holdings are owned by non-US companies. Increasingly, though, direct investment by offshore investors of all types (from large sovereign wealth funds to high-net-worth individuals) has averaged 6% of the total, CBRE says. International investors are active in the sector indirectly through investment funds, REIT (real estate investment trust) stock purchases and equity investment in companies.
Unlike in Singapore, many people rent homes in the US, the Federal Home Loan Mortgage Corp, or Freddie Mac, says, citing data in the US that renter-occupied households increased 320,000 annually as at 3Q2018 ‒ a reversal in trend compared with the prior few quarters, which reported annual declines in renter-occupied households. “RealPage data shows consistently healthy apartment absorptions at the national level in the past several years, averaging 310,000 units annually in the past year,” Freddie Mac says (see chart).
“[For] a multifamily landlord in a well-located sub-market, long-term prospects are strong. Americans spend on average 30% to 35% of their annual income on rents. But in certain markets such as New York, Los Angeles and San Francisco, it’s 40% to 50%,” says Joshua Kane, senior vice-president at Clarion Partners.
“For multifamily housing, 2018 was a peak supply year, stretching into the beginning of 2019, with a slight drop-off. [In 2018,] 1.8% of total stock was new supply, and in 2019, 1.7% is new supply. After that, permits for new construction drop off significantly,” Kane adds.
Since demand for rental housing for working families remains robust, investing in multifamily housing (through funds and REITs) is an attractive strategy, CBRE says. Furthermore, it points out that capital will continue to flow into multifamily housing this year from both buyers and debt providers.
“Multifamily housing has given the best risk-adjusted return over the last 30 years and this should continue because people need a place to live. In a recession, you can lower rents and keep the building occupied and it’s the best proposition,” Kane says.
This story appears in The Edge Singapore (Issue 878, week of Apr 22) which is on sale now. Subscribe here
