July 28, 2010
Is CCT saving cash hoard for Market Street Car Park?
By KALPANA RASHIWALA
CAPITACOMMERCIAL Trust (CCT) reiterated last week that it will not distribute a special payout to unit-holders when it completes its $380 million sale of StarHub Centre in September. Likewise, it did not return proceeds to shareholders when it completed the sale of Robinson Point in April.
The trust has said it is setting aside the net cash proceeds from these two divestments - totalling about $577.5 million - for future acquisitions and to reduce debt.
On the debt front, CCT can choose to refinance debt when it falls due, given its current gearing ratio is relatively low at about 33 per cent.
As for acquisitions, the trust has thus far found it difficult to buy office blocks. In fact, it has been selling office blocks which it believes have reached the optimal stage of their life cycle as office assets - such as Robinson Point and StarHub Centre.
CCT's manager says it is keen to increase its exposure to the Singapore Grade A office sector. But buying such assets in today's market is not easy for a Reit, as owners of Grade A office buildings are pricing the recovery in rents into their asking prices. As a result, the yields on these properties are not high enough to generate accretion for a Reit if it were to buy such expensive assets.
Given this challenge, some analysts think that instead of keeping its cash for future acquisitions, CCT could be saving it for something else - perhaps to re-visit plans to redevelop Market Street Car Park into a Grade A office project.
It was in January 2008 that CCT first disclosed it had obtained outline planning permission (OPP) from the Urban Redevelopment Authority to redevelop Singapore's first multi-storey car park into a new office tower with gross floor area of about 850,000 sq ft and a maximum plot ratio of 14.49. It estimated the total cost then at $1-1.5 billion.
But the global financial crisis struck - and Singapore office rents started to slide. In January 2009, CCT's manager announced its decision to abort the redevelopment plan, citing the uncertain market outlook and tight credit conditions, as well as high development cost and significant project size.
Quizzed about the possibility of re-visiting the Market Street plan at CCT's second-quarter results briefing last week, CapitaCommercial Trust Management chief executive Lynette Leong said the OPP had lapsed, but added that the group continually reviews its assets. She also said that the Market Street property is generating an attractive net yield of more than 8 per cent based on its $47 million valuation as at June 30, 2010, thanks to a shortage of CBD parking lots. The yield surpasses that for office space.
However, some analysts think that the time could be right for CCT to make a fresh planning application to redevelop Market Street Car Park into offices. And approval from authorities should again be forthcoming. For one, there is concern among property consultants about a potential shortage of new prime Grade A office space post-2012. The redevelopment of Market Street Car Park into offices could help alleviate this to some extent.
Redeveloping the property will mean the loss of 704 CBD parking lots that provide season and hourly parking. But of course, the authorities could always require CCT to reinstate this supply in its new project. And some relief will come soon from 250 public parking lots - for hourly parking - that will be ready by October this year underneath the Lawn @ Marina Bay, which is part of the Marina Bay Financial Centre project.
Standard Chartered Equity Research estimates the cost of redeveloping Market Street Car Park has fallen from 2008, probably to $1 billion to $1.1 billion today, given lower construction costs and development charges now. 'If the Grade A office building (about 850,000 sq ft) conversion is completed by 2015 and rented for $10-14 per sq ft a month, the yield on cost would be about 6-8 per cent and development profit would be 6-25 cents per unit,' it said.
Given CCT's $6 billion asset size and the rule that development properties must make up no more than 10 per cent of a Reit's asset size, CCT will no doubt have to seek the appropriate structure to undertake the development, perhaps jointly with parent CapitaLand.
A cash hoard will come in handy for such a venture.
Martin Koh/ Sherry Tang