One bright spot in an otherwise dreary results reporting season for CapitaLand was its fund management business. Fee income from its REITs and private funds rose 44% y-o-y to $146.4 million in 1HFY2020 ended June. To put that in context, CapitaLand’s total fee income in 1HFY2020 was $307 million, up 11.6% y-o-y.
In 1HFY2020, the CapitaLand group reported revenue of $2.03 billion, down 4.9% y-o-y. It also reported Ebit of $596.8 million, down 71.1% y-o-y; operating profit after tax and minority interest of $261.2 million, down 27.7% y-o-y; and Patmi of $96.6 million, down 89% y-o-y. The drastic declines in Ebit and Patmi were caused by revaluation losses for CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT), announced in July.
Fees from fund management are a modest but growing part of CapitaLand’s business. Its fee income represents higher return on investment and return on equity as property investment is capital-intensive.
Fee income is an annuity-type business as it depends on AUMs, but tends to be relatively asset-light. Despite its modest size, most fee income goes to the bottomline and hence it is likely to be a larger portion of Ebit and operating Patmi.
According to the Fund Manager Survey jointly conducted by the Asian Association for Investors in Non-Listed Real Estate Vehicles, the European Association for Investors in Non-Listed Real Estate Vehicles and the National Council of Real Estate Investment Fiduciaries in the United States, CapitaLand is the largest fund manager in Asia Pacific and ranked 9th globally in 2019.
Total AUM at CapitaLand stood at around $134.7 billion as at June 30. Of this, $74.5 billion is from a combination of private funds ($24.8 billion) and REITs and business trusts ($49.7 billion). CapitaLand announced last year that it has a target of $100 billion in AUMs from its private funds and REITs to be attained in five years.
While fee income from CapitaLand’s REITs and funds remained resilient in 1HFY2020, it may be a challenge for 2HFY2020 to match the $191.5 million fee income recorded in 2HFY2019. In 2HFY2019, this included the merger of Ascendas Hospitality Trust with Ascott Residence Trust (ART), the largest transaction last year, not counting CapitaLand’s own merger with Ascendas Singbridge which was completed in 1HFY2019.
In addition, Ascendas REIT (A-REIT) acquired a US portfolio of 28 properties, Nucleos and FM Global which cost $1.8 billion and raised $1.32 billion through a rights issue to fund the acquisition in November.
CapitaLand China Retail Trust (CRCT) also raised around $273.4 million to partly fund the $505.4 million acquisition of three malls — CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin, Heilongjiang province, as well as CapitaMall Yuhuating in Changsha, Hunan province.
“We did $3.8 billion of equity fund raising of which $1.92 billion was by the REITs, CRCT, Ascendas India Trust, Ascendas REIT, and a placement by CapitaLand Commercial Trust,” recounts Jonathan Yap, president of CapitaLand Financial, in a recent interview.
CCT raised $220 million in a placement in July 2019 to partially pay for Frankfurt Main Airport Center. CCT’s acquisition of a 94.9% stake in the building cost EUR251.5 million or $387.1 million at that time. Ascendas India Trust (a-iTrust) raised $150 million to part-fund a business park in Bangalore.
In the face of Covid-19, real estate transactions have been muted in 1HFY2020. Similarly, CapitaLand has announced fewer deals. Ascendas REIT acquired a 25% stake in Galaxis for $103 million; CRCT divested CapitaMall Erqi in Zhengzhou for $151 million; and in January, CCT and CMT announced a merger. The deal is structured such that CMT acquires each CCT unit for 0.72 CMT units plus 25.9 cents to form CapitaLand Integrated Commercial Trust. The long stop date is Sept 30.
25 Private funds and counting
As at June 30, CapitaLand was managing 25 private funds with AUM of $15.9 billion. Last year, CapitaLand raised just under $1.9 billion through three private funds, CREDO I China, CapitaLand Asia Partners (CAP 1) and Ascendas China Commercial Fund 3. CREDO I, which raised US$750 million ($1.02 billion), is a debt fund which invests in offshore US dollar-denominated subordinated instruments for real estate in China’s first- and second-tier cities such as Beijing, Chengdu, Chongqing, Dong-guan, Guangzhou, Hangzhou, Hong Kong, Nanjing, Shanghai, Shenzhen, Suzhou, Tianjin, Wuhan, Wuxi, and Xi’an.
CAP I has a broader remit. Its mandate is to invest in selected developed market cities such as Osaka, Tokyo, Singapore, Beijing, Shanghai, Guangzhou and Shenzhen. So far, CAP I has acquired two buildings in Shanghai, Innov Center in Shanghai’s Yangpu District at a price that takes into account an agreed property value of RMB3.1 billion ($621 million), and Pufa Tower in Lujiazui CBD, Pudong.
“It’s a discretionary fund. We bought two assets in Shanghai and one in Singapore at what we believe to be a good price,” Yap says. The Singapore commercial property was acquired at around $200 million he adds. “The asset needs work to be done on it, and it is not fully stable, hence it doesn’t make sense for a REIT. The investors like to be below the radar and that’s why they don’t buy REITs and we need to respect their desire to be below the radar,” Yap explains.
All in, CAP I raised over $700 million. Around $500 million was raised in the main fund, which holds the two Shanghai properties. “We have a sidecar arrangement,” Yap says. This is a “side” vehicle where some of the investors in the main CAP I fund put in more money into the sidecar where the Singapore asset is parked.
“Our first close was enough for the two Shanghai properties plus a small amount for the Singapore property. We are working on a second close for CAP I but held back because of Covid as prospective investors were not able to travel for due diligence. Nonetheless, sidecar arrangements remain possible for investors who are familiar with the markets they are investing into,” Yap elaborates.
Raffles City The Bund
In its 1HFY2020 results presentation, CapitaLand announced that increasing leasing activities are taking place at Raffles City The Bund and Raffles City Chongqing — both glamorous projects on or near famous sites. Raffles City The Bund is in the North Bund, which is across the Huangpu River from Oriental Pearl Tower and Lujiazui, and is the main asset in Raffles City China Investment Partners III (RCCIP III). RCCIP III has AUM of US$1.5 billion, and a life of eight years from 2016. Co-investors include Singapore’s GIC and the Canadian Pension Plan Investment Board.
How will CapitaLand get to AUM of $100 billion? “It’s about growing the existing REITs and private funds. The pool of capital is there and the platform is there; it’s also about raising new funds. Ultimately, when investors invest with us, it is for our execution capabilities. So we would start in sectors and geographies where we have a competitive advantage in capabilities and execution which means commercial offices, logistics assets, business parks, data centres,” Yap explains.
While CapitaLand will focus on its four key markets of Singapore, China, India and Vietnam, there is also a clear demand for markets like the UK, US, Australia and Japan. “It is matching what investors want and those markets where we have an on-the-ground presence.”
CapitaLand’s capital partners and investors in its private funds include sovereign wealth funds, pension funds, family offices, institutional investors, endowment funds. “These are possible co-investors we can partner with, on the private fund side,” Yap says.
Local precinct plans
On Nov 21, 2019, both CapitaLand and City Developments (CDL) announced redevelopment plans for the Liang Court site. In May last year, the duo formed a 50:50 joint venture to acquire the mall at the Liang Court site from PGIM Real Estate Asia Retail Fund for $400 million. The acquisition paved the way for the redevelopment of the entire plot.
The CDL-CapitaLand joint venture will be developing two residential towers comprising a total of 700 residential units, and an 11,530 sq m retail mall. Together, these two components should have a gross development value of more than $1 billion based on current residential prices and retail mall valuations. The rest of the commercial GFA will be made up of a hotel and a serviced residence block held under CDL Hospitality Trusts (CDL-HT) and ART respectively.
“We can play the precinct game a lot better because scale gives us the opportunity to see what is not the most obvious,” Yap suggests. Although Singapore is a small market, there are big opportunities, he adds. Other precinct plays could involve Bugis Junction, Bugis+ and Bugis Village. “They come as a Bugis precinct and we make sure the three properties are managed in a manner they are cohesive and exist as a single solution,” Yap says.
Elsewhere, he cites International Business Park and Jurong East as the next region that could offer re-development potential. “We need to engage the authorities before coming up with a plan,” he says. “We are trying to go beyond ownership and tenure to figure out what makes sense as a whole so that for all stakeholders there is mutual win across the board,” he adds.
During a results briefing in August, CapitaLand CEO Lee Chee Koon said the group is interested in further developing its data centre portfolio, which was acquired through its merger with Ascendas-Singbridge.
“The challenge around data centres is it’s highly regulated because of the power it consumes and it’s not so easy to grow rapidly. We have a team and newly appointed CEO responsible to look at this asset class and hope to be able to share more good news once we build up a more substantive asset class,” says Lee.
CapitaLand has four data centres in Singapore — three under Ascend-as REIT (Telepark, Kim Chuan Telecommunications Complex and 38A Kim Chuan Road) and one under CapitaLand’s balance sheet (9 Tai Seng Drive). 9 Tai Seng Drive also offers scalable solutions such as co-location (move-in ready white space with power, cooling and a 24/7 operations team) and built-to-suit that offers design customisation.
CapitaLand will stick with its strategy of finding value, creating value and unlocking value. “I don’t think our strategy changed with Cov-id-19. What may change is our approach,” Yap says. For instance, retail as a human requirement does not disappear but the approach is different. Harnessing offline and online opportunities, such as the implementation of eCapitaMalls, and implementing a larger precinct opportunity to meet the challenges including cross-selling services such as warehousing and retail space, is an example.
“Covid actually validates the strategy,” Yap concludes.
