SINGAPORE (Apr 29): On April 19, EdgeProp reported that two adjoining eight-storey Grade-A office buildings at 7 and 9 Tampines Grande were sold to a joint venture between Evia Real Estate and Metro Holdings for $395 million. The purchase price translates into $1,373.45 psf, based on net lettable area (NLA). The buildings have a remainder lease of 87 years, and tenants include AIA, Hitachi Asia and BNP Paribas.
The deal was brokered on behalf of the sellers — a fund under Alpha Investment Partners (AIP) known as the Alpha Asia Macro Trends Fund II and Singapore-listed property group City Developments (CDL) — by Cushman & Wakefield.
The property was part of a second round of Profit Participation Securities (PPS2) issued by CDL in a joint venture with a fund managed by AIP — a unit of Keppel Corp — in December 2015. The other buildings in PPS2 were Central Mall (Office Tower) and Manulife Centre.
In January 2019, Manulife Centre was sold to a joint venture between ARA Asset Management and British property group Chelsfield Asia for $555.5 million, or $2,305 psf, based on NLA. Last December, CDL bought back 60% of Central Mall (Office Tower) at a price that valued it at $383.3 million.
A quick glance at the table shows that the best-performing property was Central Mall (Office Tower), which registered absolute gains of 75.8%.
Dissecting PPS2
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Property investors are cognisant of the fact that debt can enhance returns. The total value of PPS2 was “approximately” $1.1 billion. However, the actual equity CDL and the AIP fund put into the PPS was just $333.5 million, giving the PPS a loan-to-value ratio of 69%.
When the three buildings were sold, the total return ($312.7 million) for the PPS was 29%, but the return on equity (ROE) for CDL and the AIP fund was 93.7%.
Both CDL and the AIP fund receive a fixed-rate interest of 5% a year for a period of five years. The payouts at the end of PPS2’s life (in the table, PPS2’s holding period is assumed to be three years) would be in the form of a distribution waterfall such that the AIP fund will enjoy a preferred return of up to 12.6% a year, following which CDL and the AIP fund will then receive all cash flows until its capital is fully repaid. Subsequently, the AIP fund and CDL will share the remaining gains in the ratio of 40:60 respectively.
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Outsized gain for AIP fund
The AIP fund’s total return is likely to approximate 81%, translating into a yearly ROE of 22%. CDL would have received an even higher total return, but it paid $230 million for a 60% stake in Central Mall -(Office Tower) in December 2018, resulting in a net outflow. CDL’s management says Central Mall (Office Tower) has redevelopment potential because of unutilised plot ratio.
Earlier this year, a CDL spokeswoman said the divestment of Manulife Centre was completed in January 2019. The pre-tax gain of $144.3 million, which relates to the deferred gain on the sale of the property by CDL in 2015 (which is the 40% that CDL had held under the PPS2), will be recognised in 1Q2019.
All in, CDL formed three PPS. PPS1 was formed by the securitisation of Quayside Collection at $1.5 billion, with partners Blackstone Group and CIMB Bank. The mixed-use Quayside Collection on Sentosa Island comprises a 240-room luxury hotel (The W Singapore — Sentosa Cove), retail space (Quayside Isle) of 44,121 sq ft and 228 residential units at Residences at W Singapore — Sentosa Cove. Of the $1.5 billion, $1 billion was ascribed to the Residences at W Singapore, as the PPS assumes a price of $2,400 psf.
PPS3 comprises the securitisation of Novel 18, a luxury condominium, for $977 million. In July 2016, Savills Valuation and Professional Services valued Nouvel 18 at $965.4 million, or $2,750 psf.
In February this year, CDL group CEO Sherman Kwek said he planned to unwind the PPS and implement a Growth Enhancement Transformation strategy. CDL’s share price — which is trading at 0.83 times its net asset value of $11.07 — is up 15.2% this year, outperforming the Straits Times Index, which is up 9.5% year to date.
