Something’s brewing at City Developments Ltd (CDL), and it may not be what some had been expecting since the developer’s S$1.5 billion monetisation of its Quayside Collection assets in December.
While market observers have tipped the South Beach mixed development project as the next big monetisation target for CDL, what’s more likely to emerge is the group’s exit from the industrial market.
Here’s why. Industrial properties are not core to the property and hotel group; CDL has not developed an industrial project here in a long time and Singapore’s industrial property landscape has also changed a lot in the past decade or so. Rentals from the group’s industrial properties may also be muted in light of the massive oversupply of industrial space.
For the past few years, the group has been disposing its industrial properties in a piecemeal fashion. These include a nearly 500,000 square foot freehold tract of industrial land along Jalan Lam Huat off Kranji Road, 100F and 100G Pasir Panjang Road and strata units in Citimac Industrial Complex and Elite Industrial Buildings I and II.
In late 2010, CDL’s 42.8 per cent unit Branbury Investments sold a 45-year lease for the 999-year leasehold New Tech Park in Lorong Chuan to Sabana Reit. The group has reversionary interest of the property at the expiry of the 45-year lease.
Based on CDL’s latest annual report, its remaining industrial property portfolio includes Citilink Warehouse Complex along Pasir Panjang Road, where it owns 62 strata units adding up to 103,300 sq ft. The group also owns about 133,860 sq ft at Cideco Industrial Complex, an eight-storey industrial building in Genting Lane, and some 127,400 sq ft at the 11-storey City Industrial Building at Tannery Lane.
In Tagore Lane, CDL owns the four-storey Tagore 23 Warehouse, with nearly 130,000 sq ft. All four properties are freehold.
BT understands that the property giant could be in the advanced stages of hammering out a deal to sell its industrial properties to the tune of S$300-350 million.
Originally, CDL was said to be looking at selling a leasehold interest in the industrial properties – which would translate to a lower price and hence higher yield, thus appealing to a potential buyer such as a real estate investment trust (Reit).
However, the potential buyer that is said to have performed due diligence and with whom CDL is negotiating a sale, may well not be a Reit; and the freehold interest in the properties may be for sale.
By selling its industrial buildings, CDL would stand to book a nice profit – since their book values would be low as CDL does not revalue its investment properties; instead it states them at cost less accumulated depreciation and impairment losses. Moreover, the group will be in a position to allocate the cashflow released from the divestment to a new growth area.
Back to the South Beach mixed development project and why it’s not likely to be monetised just yet.
While South Beach Tower, the 34-storey office component, received Temporary Occupation Permit in February, the opening of the hotel has been delayed. The project also includes a residential component.
One issue, however, is that CDL has a partner in the project, Malaysia’s IOI Group, which may have a first right of refusal on CDL’s stake in the development.
It is also noteworthy that CDL is still a significant office landord; it owns the likes of Republic Plaza in the prime Raffles Place financial district, City House along Robinson Road, Fuji Xerox Towers in Anson Road, and not forgetting the spanking new South Beach Tower.
One may recall that a decade ago, the group did try to sell a chunk of its commercial portfolio. These included four entire buildings of mostly office space – Fuji Xerox Towers, Plaza By The Park (now known as Manulife Centre) along Bras Basah Road, City House and Central Mall Office Tower in Magazine Road – along with strata units in other buildings including The Arcade at Collyer Quay and Katong Shopping Centre.
However, the deal fell through due to regulatory hurdles faced by the prospective buyer, Suntec Reit, as its acquisition was to have involved an element of deferred payment entailing holding back the issue of units in Suntec Reit for part of the payment for the purchase of the assets. A deferred payment would have reduced dilution and hence propped up the distribution per unit (DPU) post-acquisition but posed the danger of a potential slide in DPU later on when the new units would have to be issued to meet the deferred payment.
Most market watchers reckon that CDL would probably still be open to selling some of its older office properties – at the right price.
CDL is also said to have received bulk purchase offers for some of its new condo projects in prime districts. However, potential buyers would probably be looking for a bargain and CDL may be unwilling to take a big haircut. After all, it will not be easy to get replacement land as en bloc sale owners – the chief source of freehold residential development sites in the prime districts – are not prepared to accept developers’ offers based on current market parameters for the luxury housing market.
For now, it would be wise for CDL to strike while the iron is hot – assuming that it has a buyer at the negotiating table for its industrial properties – in what is generally a slow Singapore property market.