10 questions with Lendlease Global Commercial REIT

The Sponsor, Lendlease Group, has participated in Singapore’s growth story over the past 46 years and has delivered over 400 projects across various sectors since it won the first international tender by HDB in 1973. In line with the Group’s vision, we have delivered on our promise to create better places for people in Singapore and across the world by leveraging on our integrated delivery model. We believe that Lendlease has a strong presence in Singapore through assets such as 313@somerset under the REIT, and others like Jem, Parkway Parade and Paya Lebar Quarter – the Group’s headquarters in Asia which opened in October 2019.

What were the considerations in selecting the initial IPO portfolio for the REIT? How does the REIT differentiate itself from peers or the competition?

Through careful selection of assets owned by our sponsor, we have put together a diversified portfolio of income producing real estate assets for the REIT. With a mix of quality retail and office properties in the key gateway cities of Singapore and Milan, the REIT enjoys stability from the long-term lease of the office asset, while the retail asset provides a stable and growing rental income stream. The REIT’s portfolio comprises assets that are well located, well managed and well positioned, with visible growth potential backed by favourable market dynamics, a high committed occupancy, balanced lease expiry profile, built in portfolio rental escalation, and a high quality, well diversified tenant base.

What are your views on Singapore’s commitment to rejuvenate the Orchard Road belt into a vibrant lifestyle destination? How will 313@somerset benefit from this?

We are excited about the government’s commitment. In particular, the Somerset sub-precinct is set to undergo a rejuvenation exercise to include more youth-oriented offerings, which will augur well for the mall. We believe in differentiating our retail malls as lifestyle destinations and our Singapore asset, 313@ somerset, is a successful example, effectively tapping mass discretionary spending by tourists and millennials. 313@somerset features brands that appeal to the younger generation such as online retailer Love, Bonito. Riding on the success in bridging the online to offline trend, 313@somerset has also attracted new-to-market online brands like Pomelo and StyleTheory, which opened their first stores in 2019.

The Milan asset is about a third of the IPO portfolio based on its appraised value. What is the outlook for the Italian office market?

Sky Complex is 100% leased to Sky Italia, owned by Sky Ltd, which is in turn part of Comcast Corp, the largest broadcasting and cable television company in the world by revenue. The asset consists of three Grade-A, freehold office buildings strategically located in one of the city’s newest and most vibrant office precincts, Milano Santa Giulia. The Italian National Institute of Statistics projected the Italian economy to grow 0.6% for 2020 mainly driven by domestic demand.

Labour market conditions are expected to improve at a moderate pace with employment growth to remain unchanged at 0.7% in 2020. Solid demand and take-up of office space in Milan has led to tightening of vacancy in 2019. The supply pipeline remains limited with sizeable new additions expected over the next two years. The investment market over 2019 has remained active with robust interest both from domestic and foreign investors for office assets.

How often do the REIT’s assets undergo asset enhancement initiatives? Are there any upcoming ones?

313@somerset was completed in 2009 and we do not see any immediate need for asset enhancements. Sky Complex, comprising three buildings, was completed in 2008 and 2015.

There is no asset enhancement required for Sky Complex as the asset is under a triple net lease. We will continue to explore any enhancement when necessary. However, given the age of our assets, we do not expect much enhancement at this point.

What is unique about Lendlease Global Commercial REIT in order to sustain its operating metrics and grow its distribution per unit (DPU)?

The leases in 313@somerset are typically structured with three-year tenures, comprising base rent and turnover rent, which is calculated as a percentage of tenants’ gross turnover, with an average rental escalation of 3.0%. Sky Complex is under a single, longterm lease until 2032, with a rental rate stepup clause that tracks the Italian National Institute of Statistics’ consumer price index variation. It also features a triple net lease structure, under which the tenant is generally responsible for the operating expenses of the property. This minimises operational costs and risks for the REIT. Our Sponsor has a secured development pipeline of approximately A$112 billion ($102 billion) by end value and current funds under management of A$36.9 billion, each of which includes retail and office assets. This may present future acquisition opportunities for the REIT. We will distribute 100% of the REIT’s adjusted net cash flow from operations for the period from the listing date to the end of projection year 2021.

What is the REIT’s tax structure and how is it for investors?

For the Singapore property, the REIT has been accorded tax transparency treatment by the Inland Revenue Authority of Singapore. As for the Milan Property, a ruling has been obtained from the Italian tax authority which confirms that distributions derived by Lendlease Global Commercial (IT) from Lendlease Global Commercial Italy Fund qualify for withholding tax exemption in Italy. As such, distributions made to individual unitholders by the REIT out of its income originating from such specified exempt income should not be subject to any further tax in Singapore.

Can you elaborate on the REIT’s acquisition strategy? Any plans to expand your portfolio?

We will seek to achieve portfolio growth through acquisition of attractive income-producing properties that fit the REIT’s investment strategy, with a focus on properties that enhance diversification by location and tenant profile; optimisation of risk-adjusted returns to unitholders, leveraging on our team’s extensive experience and strong track record. With a global mandate, we will look for opportunities to source, acquire and finance real estate assets in Singapore, Italy and other gateway cities which the sponsor has a presence in, and take a prudent approach in deciding whether the REIT should explore these opportunities.

What role does the sponsor play in the REIT’s business in the global commercial property market?

Our sponsor is a leading international property and infrastructure group with a portfolio of urbanisation projects across Australia, Asia, Europe and the Americas. It is one of the largest developer groups in the world and has a strong development pipeline; Lendlease Global Commercial REIT will consider increasing its exposure to other gateway cities in the future through the Lendlease Group’s secured development pipeline, either through right of first refusal provided by the sponsor, or through other potential opportunities which may be sourced from the sponsor from time to time.

What is Lendlease Global Commercial REIT’s value proposition to shareholders and potential investors?

We believe the REIT presents investors with a strong investment proposition, given its attractive yield, global mandate and potential to tap Lendlease Group’s development pipeline to grow its portfolio. The REIT may also seek growth opportunities through third-party acquisitions, focusing on attractive properties that fit the REIT’s investment strategy and ensure a resilient, stable income.

Emelia Tan is a research analyst at SGX.