Higher interest costs, impairment impact CDL’s 1HFY2023 earnings
City Developments’ (CDL) 1HFY2023 net profit (for the six months to June 30) was impacted by higher interest cost, as well as $34 million in impairment for its two investment properties in London — 125 Old Broad Street and Aldgate House. The valuations were desktop valuations and were based on higher capitalisation rates.
“UK investment properties are going through a very rough time. We suffered 30–50 basis-point cap rate expansion. Occupancy and rents are strong. But with cap rate expansion there was a drop in valuation. Hopefully that’s temporary and we see bright prospects in future,” says Sherman Kwek, group CEO of CDL.
“All companies and REITs have been hit by higher financing costs. Despite our efforts to lock in our net financing costs, they have gone up 4x since this time last year but we see things stabilising,” Kwek adds.
On Aug 10, CDL reported a net profit of $66.5 million for 1HFY2023, 94.1% lower than the earnings of $1.12 billion in the same period the year before, due to the absence of substantial divestment gains recorded in 1HFY2022. The $1.12 billion was also restated as the proposed REIT listing from CDL’s two commercial properties in the UK did not happen.
As a result of a dividend payout in March and a modest foreign exchange loss, net asset value (NAV) declined by 1.6% y-o-y to $10 per share, and revalued NAV inched lower by 1.1% y-o-y to $16.79, compared to CDL’s share price of $6.94.
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“We are trading at a huge discount to RNAV and we are working to close this gap,” Kwek says, although he seems hesitant to commit to a buyback programme. Some investors believe that in the event of excess capital, CDL may choose a special dividend.
For now, CDL may continue to face higher finance costs. With just 42% of debt at fixed rates, its finance cost in 1H2023 more than doubled to $220.5 million, from $99 million in 1H2022. This is because its cost of debt in 1H2023 was around 4.1% compared to just 2.4% for FY2022.
Group CFO Yiong Yim Ming estimates that cost of debt for the whole of FY2023 could creep a tad higher to around 4.25%.
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“We were hoping 4% was the upper handle in 2023. Now we are projecting 4.25%. This year for land bids, we have catered for a higher interest rate,” Yiong says. CDL’s target gearing is a range. “For gearing, our upper limit is 65% and we are at 57%,” Yiong adds.
Chairman of CDL, Kwek Leng Beng, says: “We have journeyed through many ups and downs. Interest rates are not going to go up anymore, because there is no inflation and the world has reached the limit of interest rate hikes.”
Meanwhile, CDL is looking to recycle capital, and one of the assets for divestment may be a site in Richmond, the stylish London suburb. Back in 2015, CDL acquired the Stag Brewery for GBP158 million or $334.96 million at the time; and Teddington Studios for GBP80 million or $180 million.
“Once we were able to secure a planning consent, I think potentially that will be one that we want to sell off,” says Yiong, on plans for The Stag Brewery site.
Sherman is more focused on the private rental sector and purpose-built student accommodation. “We’ve embraced the living sector. This is a resilient and defensive sector. As housing prices rise, people turn to renting. Rental has been more of a Western lifestyle trend. But these days more people are turning to the rental market because buying a first property involves a huge payment,” he says. — Goola Warden
WeWork’s potential bankruptcy may spell bad news for REITs and SGX-listed companies
The news of WeWork’s potential bankruptcy may come as bad news to some of the Singapore-listed REITs and property groups. According to several media outlets including Bloomberg, WeWork warns that there is “substantial doubt” that it may be able to sustain its business due to its financial losses and cancelled memberships to its office spaces.
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For its 2QFY2023 ended June 30, WeWork incurred a net loss of US$397 million ($534.8 million), bringing its total net loss for the 1HFY2023 to US$696 million. As at June 30, WeWork’s consolidated physical occupancy stood at 72%.
In a Bloomberg article referencing WeWork’s Aug 8 statement, the company said that it will work on lowering its rental costs, negotiating “more favourable leases”, as well as raising revenue and capital.
According to a table posted by the Washington Post, in Singapore, WeWork has leased space in several of the buildings under CapitaLand Integrated Commercial Trust’s (CICT) portfolio, including the entire 21 Collyer Quay, which is the former HSBC building. WeWork is also a tenant at the REIT’s property at Funan.
“As the largest landlord of commercial space in Singapore’s CBD, CICT maintains close engagements with an extensive network of prospects and existing tenants to understand their business space requirements and remain attuned to prevailing market trends. Singapore remains a vibrant hub for a diverse range of business sectors, continually attracting leasing interest from various industries,” says a spokesperson for the REIT.
“In cases where a tenant defaults on its lease agreement, CICT will follow established procedures to regain possession of the space including retention of the security deposit. Depending on the circumstances, CICT may explore options such as re-letting the space or collaborating with other operators to continue operations smoothly,” adds the spokesperson.
Other REITs such as Suntec REIT and Mapletree Pan Asia Commercial Trust (MPACT) are also exposed, with WeWork offices present at Suntec City’s Tower 5 and Mapletree Anson at 60 Anson Road. United Engineers, which is a part of Yanlord Land Group, has a WeWork office at UE Square too.
Another key property firm with exposure to WeWork is City Developments (CDL). WeWork is a “substantial” tenant at CDL’s City House along Robinson Road, contributing around 2%–3% of gross rental income (GRI) to CDL’s Singapore office portfolio, while its rental income at St Katharine Docks contributes about 9% of the total revenue of CDL’s UK commercial portfolio.
Kwek Eik Sheng, CDL’s group chief operating officer, notes that the news from WeWork “has to do with its US operations”, with the country’s office sector facing a “challenging time” from the current work-from-home trend. Meanwhile, the WeWork offices in City House and St Katharine Docks have “strong” occupancies and that the local markets are “pretty good”, says Kwek, adding that WeWork has been prompt in paying its rentals so far. “But of course with the news, we’ll continue to monitor them closely.”
As for Suntec REIT, WeWork accounts for about 1.9% of Suntec REIT’s office GRI as at Dec 31, 2022. “We understand that WeWork’s offices at Suntec have very high utilisation and are performing well. We will continue to watch closely their future developments,” says the REIT’s spokesperson.
A spokesperson from MPACT said that WeWork at Mapletree Anson does not rank among the REIT’s top 10 tenants. MPACT renewed and re-let over 2.4 million sq ft of lettable area in its last financial year. “In 1QFY2023/2024, we continued to make good leasing progress by renewing and reletting close to 690,000 sq ft of lettable area,” adds the spokesperson.— Felicia Tan
Government to adjust HDB’s housing schemes to ensure accessible and affordable housing: PM Lee
The government is looking to adjust the HDB’s housing schemes to ensure that public housing is “accessible and affordable” for Singaporeans across all income groups, said Prime Minister Lee Hsien Loong in his National Day Message on Aug 8.
Lee was referring to the higher prices of flats in mature estates such as Queenstown, which are in “higher demand and so generally cost more” due to their better amenities and locations. He added that existing non-mature estates are also steadily maturing as their transport links and amenities improve.
“So in time to come, more and more new HDB flats will be built in existing estates, like here in Dawson. Such flats will naturally be in greater demand. Their launch prices and resale prices will reflect that,” he said.
“But even amidst this changing landscape, we must still ensure public housing is accessible and affordable for Singaporeans of all income groups. We must also keep our housing schemes fair and inclusive for all. This is how we keep our national housing story going strong for current and future generations,” he added.
In the 2Q2023, HDB resale prices grew to 1.5%, faster than the 1% growth seen in the 1Q2023. This marks the 13th straight quarter of growth, although it remains lower than the average of 2.5% in 2022.
Lee also mentioned the rapidly ageing population in Singapore where nearly one in five Singaporeans is a senior aged 65 years or older. Come 2030, this proportion will increase to one in four Singaporeans being defined as a senior citizen.
Beyond making the country’s estates and homes more liveable for seniors as well as improving community spaces, Lee said that the government will be providing some older workers, now in their 50s and early 60s and who have not amassed enough savings for their retirement, with “some extra help”. Both points — on public housing prices and CPF savings — will be elaborated at the National Day Rally. — Felicia Tan
