Even if the price fetched is below the end-2023 valuation, it may be worthwhile for the Reit to strike a deal for its hotel and convention centre next to Expo MRT station

 

PROPERTY investors seem to have become more receptive to buying Singapore hospitality and commercial properties on short-land-tenure sites over the past year. This provides an opportune exit for the owners of such properties.

 

In late 2023, Viva Land sold the former SO/ Singapore hotel on a site in Robinson Road with about 47.5 years&rsquo balance lease. This was sold to a consortium that included the Tan family behind Sunray Woodcraft Construction and Mini Environment Service. Mingtiandi reported the price at around S$170 million to S$180 million.

 

This year, Paragon Real Estate Investment Trust (Reit) managed to sell The Rail Mall, in Upper Bukit Timah Road, on land with a balance lease of about 21 years and nine months. The Yong family behind Woh Hup Holdings picked up the single-storey strip mall for S$78.5 million.

 

Frasers Property sold the 313-room Capri by Fraser Changi City, near the Expo interchange MRT station, for about S$171.8 million to a consortium comprising family office Atelier Capital Partners Singapore, TPG Angelo Gordon, Heeton Holdings and Far East Consortium International (FEC). The hotel is part of an integrated project on a site with a balance term of about 45 years.

 

A similar situation may be under way at the integrated development next door, owned by ESR-Logos Reit : J91U -1.69%. ESR BizPark@Changi, formerly known as UE BizHub East, sits on a site zoned as Business Park-White, with up to 40 per cent of the overall gross floor area allowed for &ldquo white&rdquo uses including shop, restaurant, office or hotel.

 

ESR BizPark@Changi comprises two business park buildings (with some retail space), the 251-room Park Avenue Changi hotel, and a convention centre.

 

Word in the market is that last year, the ESR-Logos Reit appointed JLL to help it find a buyer for the hotel and convention centre. It makes sense for the Reit to dispose of the hospitality portion of the complex as the group&rsquo s focus is on industrial real estate assets.

 

A potential buyer is understood to be doing due diligence on the hotel and convention centre.

 

According to ESR-Logos Reit&rsquo s annual report, the hotel and convention centre in the complex were valued at S$155 million as at Dec 31, 2023. At the time, the remaining land tenure on the site was 44 years and two months.

 

Two key differences

There are at least two significant differences between the two developments in Changi Business Park.

 

The Changi City project, developed by the then Frasers Centrepoint and Ascendas Land (Singapore), is on a site awarded by JTC Corporation with a straight 60-year leasehold term from April 30, 2009.

 

ESR BizPark@Changi was developed by United Engineers (UE) on a site awarded by JTC with a 30-year leasehold term with an option to extend for a further 30 years.

 

The initial 30-year term kicked in on Feb 1, 2008 this leaves a balance of about 13 years and four months. The option to extend the lease for 30 years will take the lease expiry to Jan 31, 2068 this is expected to entail a substantial land premium payment to JTC.

 

To recap, UE BizHub East was completed in 2012 and sold by UE to Viva Industrial Trust as part of the stapled group&rsquo s flotation on the Singapore Exchange in 2013.

 

In 2018, Viva Industrial Trust was merged with ESR-Reit. In 2022, ESR-Reit merged with ARA Logos Logistics Trust to become ESR-Logos Reit.

 

The second difference between the two developments is that the Changi City project is strata titled, which facilitated the sale of the various components in separate deals: One@Changi City (business park), the Changi City Point mall and the Capri by Fraser Changi City hotel.

 

On the other hand, the whole of ESR BizPark@Changi is still held under a single property title. It is not strata subdivided the various components do not have their own strata titles.

 

So how can ESR-Logos Reit dispose of the hotel and convention centre, separately from the rest of the business park complex?

 

Strata subdivision or plot subdivision?

One possibility could be to propose a strata subdivision to carve out a strata unit for the hotel/convention centre component of the complex, and issue a long lease on the strata unit to match the lease expiry on the site.

 

There may be another solution: site subdivision.

 

ESR BizPark@Changi sits on two plots of land. The two business park buildings &ndash at 6 and 8 Changi Business Park Avenue 1 &ndash occupy the smaller plot of nearly 1.2 hectares (ha) and extend to part of the larger plot of 1.7 ha.

 

The larger plot could be split into two, to separate the hotel/convention centre (at 2 and 4 Changi Business Park Avenue 1) from the business park buildings.

 

All of these will require approval from the authorities.

 

Market observers expect ESR-Logos Reit to hold discussions with JTC, the Singapore Land Authority and other government agencies on how to structure a sale, even as due diligence by the potential buyer is ongoing.

 

ESR BizPark@Changi took its present name following the completion of asset enhancement works in the first quarter of 2021.

 

Although UE divested UE BizHub East in 2013, it continues to operate the hotel &ndash besides the 251 guest rooms, there are some serviced office suites &ndash and the convention centre under its Park Avenue hospitality brand.

 

The convention centre has a seating capacity of about 650 people the single-level facility is suitable for wedding banquets, concerts, conferences, corporate meetings and other events.

 

Depending on the profile of the buyer, there could be a change in operator. For instance, if the buyer is a co-living operator, it is almost certain to want to manage the hospitality asset itself.

 

Investment appeal of short-tenure assets with strong cashflow

Despite their relatively short balance site leases, such assets have their appeal to investors. For a start, the absolute price quantum is smaller than if the asset had a much longer or freehold tenure.

 

This pushes up rental yield.

 

Investors may be willing to buy a retail or hospitality asset in a prime location with connectivity and generating strong rental cashflow, even if it is on a site with a short balance leasehold tenure.

 

Some may be looking at holding the property for about five years. Others could be prepared to hold on to the asset for much longer, if their calculations show they can recoup their investment and make a decent return, before the site lease runs out.

 

Some businesses may also be eyeing a property with a shorter balance site lease to use for their own operations. Or to manage it. A case in point would be Hong Kong-listed FEC&rsquo s subsidiary Dorsett Hospitality International (DHI), which took a stake in the consortium that bought the Capri by Fraser Changi City. DHI has been appointed by the consortium to operate the hotel, which has been rebranded Dorsett Changi City Singapore.

 

For ESR-Logos Reit, it remains to be seen if it can seal a deal to sell the hotel/convention centre of its business park project next to Expo MRT station, the Singapore Expo and in proximity to Changi Airport. Even if the price is below the end-2023 valuation, it would be worthwhile for the Reit to strike a deal and focus on its core industrial property business.

ESR-LOGOS REIT (E-LOG) has entered into a contract of sale to divest 81 Tuas Bay Drive for $35 million.

 

The consideration represents a premium of 16.7% above the property&rsquo s valuation of $30 million as at Aug 16.

 

The property is a general industrial building within the Tuas Industrial Estate and is zoned for &ldquo Business 2&rdquo under the master plan in 2019. The property has a nettable area of 9,993 sqm (107,563.8 sq ft). 

 

Upon the completion of the divestment, E-LOG&rsquo s portfolio will consist of 70 properties (excluding 48 Pandan Road) located across Singapore, Japan and Australia, as well as investments in three property funds in Australia. 

 

The divestment is expected to be completed in 4Q2024.

CAPITALAND India Trust& rsquo s (Clint) trustee-manager announced on Thursday (Aug 22) that it has priced S$150 million notes at 3.7 per cent per annum.

The interest on the notes, which are due in 2027, will be payable semi-annually in arrear. The notes are expected to be rated & ldquo BBB-& rdquo by Fitch Ratings.

The trustee-manager added that DBS has been appointed as sole global coordinator and sole ratings adviser, while DBS and UOB have been appointed as joint lead managers for the notes.

The net proceeds from the issue of the notes will be used to refinance existing borrowings or repay loans and finance the business activities, acquisitions and general working capital of Clint, it said. The notes are expected to be issued on Aug 30 and listed on the Singapore Exchange on Sep 2.

It is part of the trust&rsquo s S$750 million multicurrency debt issuance programme

 

ESR-Logos Real Estate Investment Trust (Reit) priced S$100 million perpetual capital securities at 6 per cent, said its manager on Tuesday (Aug 13).

 

This is in addition to S$74.8 million in perpetual securities that the trust earlier this month offered to issue in exchange for an outstanding S$150 million in Series 006 perps. The exchange consideration comprised a principal amount of S$250,000 in new securities, accrued distribution and an amount in cash at 1 per cent of existing securities.

 

Both the S$74.8 million and S$100 million perps will be issued as part of the trust&rsquo s S$750 million multicurrency debt issuance programme.

 

OCBC has been appointed as the sole lead manager for the issue.

 

Holders will receive distributions in arrears and may redeem the perps on the first reset date on Aug 20, 2029, or any distribution payment date falling every five years after the first reset date.

 

If the perps are not redeemed on the first reset date, the distribution rate will be reset on that date and every five years thereafter. This will be at a per-annum fixed rate equal to the aggregate of the prevailing five-year Singapore Overnight Rate Average Overnight Indexed Swap &ndash and the initial spread of 3.548 per cent.

 

Part of the net proceeds from the issue will be used to finance the acquisition of two facilities in Japan and Singapore.

 

In July, the manager announced its plan to purchase 100 per cent of ESR Yatomi Kisosaki Distribution Centre in Nagoya, and 51 per cent of 20 Tuas South Avenue 14. They will be acquired for about 38.7 billion yen (S$340.1 million) and S$444.6 million, respectively.

 

The manager had planned to fund the acquisition by debt financing, the issuance of new units to existing unitholders to raise up to S$194 million, and consideration units of up to S$60.3 million.

 

However, it highlighted that with the S$100 million perps raised, the preferential offering size would be reduced to S$94 million.

 

Assuming that the acquisitions were completed on Jan 1, 2023, and funded by the net proceeds from its equity fundraising and perps, the Reit&rsquo s FY2023 pro-forma distribution per unit will rise 3 per cent to S$0.02641 from S$0.02564.

 

Meanwhile, its pro-forma aggregate leverage will rise to 41 per cent, from 35.7 per cent as at Dec 31, 2023, assuming the acquisitions had been completed in end-December.

 

ESR-LOGOS REIT (E-LOG) announced the proposed acquisition of 100% of ESR Yatomi Kisosaki Distribution Centre, Nagoya, Japan, for JPY38 billion ($338 million) and 51% of 20 Tuas South Avenue 14 (20TSA). The agreed value for (100%) of 20TSA based on a net property income yield of 6.1% is $840 million.

 

Both properties are being acquired at a 2.3% discount to the valuation. For ESR Kisosaki, the acquisition price is also 5.9% below the valuation of comparable properties in Nagoya. The total acquisition cost is approximately $772.6 million and the acquisitions are expected to be +1.8% DPU accretive. 

 

ESR Kisosaki comprises a land area of 79,096 sq m, with a weighted average lease expiry (WALE) of 2.71 years as of June 30. The property was completed on April 28, 2022 and has one of the highest sustainability ratings in Japan. Its committed occupancy is 89.4%. 

 

&ldquo We are in advanced negotiations with a tenant to take up space and we hope the occupancy will go up to 93%. The NPI yield is 4%, and we are acquiring the property at a 2.3% discount on the valuation,&rdquo says Adrian Chui, CEO of E-LOG&rsquo s manager.  

 

ESR Kisosaki will be E-LOG&rsquo s second property in Japan. In 2023, E-LOG acquired the ESR Sakura Distribution Centre in Chiba, Greater Tokyo, for $183.5 million, including rental support. Acquiring ESR Kisosaki DC will boost E-LOG&rsquo s logistics assets in Japan from 3.7% to 8.9% and provide E-LOG with exposure to the Nagoya logistics market. This move will enhance E-LOG&rsquo s geographical diversification, strengthen its network within Japan and increase its scalability in the Japanese logistics sector.

 

The Japanese property is located in northeastern Mie Prefecture, in the Bay Area of Greater Nagoya. It offers good road connectivity to the Nagoya Container Terminal (Port of Nagoya) and the Ise-Wangan Expressway. Greater Nagoya, situated in central Japan, is a key hub connecting Greater Tokyo and Greater Osaka, making it crucial for the movement of people and goods. According to an E-LOG press release, the property&rsquo s strategic location enhances Greater Nagoya&rsquo s transportation and logistics capabilities and provides excellent access to both domestic and international markets.

 

Rent stability

 

The Tuas property stands out in Singapore due to its 44-year lease tenure. It also boasts a committed occupancy rate of 99.7% and is near Tuas Megaport. The high-specification space, which accounts for 60% of the net lettable area, is 100% leased to REC Solar as an anchor tenant on a long-term lease of approximately 19 years with an option to renew for a further 20-year lease. This provides long-term rent stability and sustained organic growth through annual contracted rent escalations averaging 1.15% annually. 

 

The multi-tenanted ramp-up logistics warehouses comprise 40% of 20TSA and are leased to prominent companies like Schneider Electric Asia, Maersk Logistics and Services Singapore and DSV Solutions. With current rents below market rates, there is potential for rental growth.

 

Chui also defends E-LOG&rsquo s move to expand internationally. &ldquo Singapore will be 75% of our portfolio after the acquisition. For Singapore industrial property, there is a challenge in terms of the underlying land leases of 30 years. You will not see us suddenly become less than 50% in Singapore.&rdquo  

 

He acknowledges that Singapore is seen as a safe haven due to its rule of law, transparent regulations, stable currency and reliable government. &ldquo While we plan to acquire overseas assets, if there is a good opportunity here from the sponsor with a long land lease, we will consider that.&rdquo  

 

The 1.8% DPU accretion is based on the funding structure for the acquisition. For Japan, E-LOG has arranged and confirmed the financing and the equity fundraising for the properties. 

 

Since E-LOG&rsquo s portfolio is largely unsecured, E-LOG will fund 100% of ESR Kisosaki with yen debt. &ldquo We can get onshore debt for 60% of the property value,&rdquo Chui says, with the remaining 40% of yen debt obtained offshore. Offshore, we can still get a loan based on our unsecured portfolio. So, in effect, we are using 100% Japanese yen borrowing on the asset, which is similar to Sakura,&rdquo Chui says.

 

This form of capital hedge worked for ESR Sakura. Even though the yen has depreciated, the asset&rsquo s capital value has not changed. &ldquo Not only is yen debt cheaper, but the sector allows us to hedge capital. There is no risk of NAV declining,&rdquo Chui adds. 

 

However, loan-to-value in Australia is capped at 50%, exposing the capital values to risk. On the other hand, fluctuations between the Australian dollar and the Singapore dollar are less volatile. E-LOG has four-year loans for both ESR Kisosaki and ESR Sakura. Distributions coming back to Singapore will be hedged on a 12-month basis. 

 

Equity fundraising

 

E-LOG has announced an equity fundraising (EFR) comprising a fully underwritten preferential offer to unitholders to raise $194 million. ESR Group has committed to subscribe for $140 million of E-LOG units priced at 30.5 cents, which is the REIT&rsquo s NAV. 

 

Ivanhoé Cambridge, a unit of   Caisse de dé pô t et placement du Qué bec (CDPQ), which manages the Qué bec Pension Plan, is an investor in the private equity fund that owns 20TSA. Ivanhoé Cambridge has committed to subscribing to $54 million units worth at 30.5 cents apiece. 

 

Chui says the 30.5 cents pricing is higher than the market price at the end of July. &ldquo If we used the market price, it would be NAV and DPU dilutive and doesn&rsquo t help our ability to transform ourselves. Our share price is undervalued. Our sponsor is paying 30.5 cents to demonstrate a clear alignment of interest as they believe our share price is undervalued.&rdquo  

 

Since ESR Group manages the funds that own ESR Kisosaki and 20TSA, the transaction is an interested party transaction that requires an EGM in which ESR can&rsquo t vote. Ivanhoé Cambridge owns 3% of E-LOG and can&rsquo t vote for the 20TSA acquisition. 

 

&ldquo The EGM is in mid-October and if approved, we will launch the preferential offer. There is a long time to decide,&rdquo Chui adds. The fund that owns 20TSA has five investors, including ESR. Although the transaction is likely to raise E-LOG&rsquo s aggregate leverage to 41%, it will likely keep its average cost of debt at 4.03%. In 1HFY2024, for the six months to the end of June, E-LOG&rsquo s average cost of debt crept up to 4.03% from 3.91% as of the end of December 2023. 

 

When asked about divesting ESR BizPark @ Changi, Chui stated that no assets are off-limits and that he will evaluate all options. &ldquo We are not opening ourselves to brokers this is not an invitation.&rdquo However, Chui is open to divesting the asset if he receives an irresistible offer.

 

In the meantime, Chui has guided analysts that rental reversions for the portfolio are expected to be in the high single digits, closer to 10% than 8% for the year, following an 11.2% increase in 1H2024.

 

Despite the growing supply of logistics properties in 2025, supply chain disruptions will drive demand. Businesses will also need to consider interest rates. &ldquo If interest rates come down in 4Q2024, business costs will be lower. People will be more confident about business expansion once the cost of doing business comes down. I&rsquo m still cautious because we don&rsquo t know what will happen in the US elections,&rdquo he adds. 

Its NPI drops 9.2 per cent to S$127.8 million from S$140.8 million in H1 2023

 

ESR-LOGOS Real Estate Investment Trust (ESR-Logos Reit) posted an 18.6 per cent drop in distribution per unit (DPU) to S$0.01122 for the first half ended Jun 30, from S$0.01378 in the previous corresponding period.

 

It also announced acquisitions of two facilities in Japan and Singapore for S$772.6 million.

 

On Wednesday (Jul 31), the manager attributed the decline to the divestment of 11 non-core assets and lower distribution capital gains from the sale of investment properties in prior years.

 

The distribution will be paid out on Sep 17, after the record date of Aug 8.

 

ESR-Logos Reit&rsquo s net property income (NPI) fell 9.2 per cent to S$127.8 million from S$140.8 million in H1 2023.

 

Revenue for the half-year period declined 8.1 per cent to S$180.9 million from S$196.8 million.

 

The lower NPI and top-line growth came mainly from the loss of income from the sale of an Australian non-core asset in the second quarter of 2024 and properties amounting to S$440.6 million.

 

The decommissioning of 2 Fishery Port Road also contributed to the fall, said its manager. But it noted that the declines were partially offset by additional income contributions from two assets &ndash 7002 Ang Mo Kio Avenue 5 and 21B Senoko Loop &ndash which completed their asset enhancement initiatives in the third quarter of 2023 and the first quarter of 2024, respectively.

 

The amount available for distribution tumbled 15 per cent year on year to S$86.3 million, mainly due to lower NPI and distribution of capital gains. This was partially offset by lower borrowing costs, said the manager.

 

New acquisitions

Separately, the Reit manager said that it plans to acquire a 100 per cent interest in a logistics facility in Japan, as well as a 51 per cent interest in a high-spec manufacturing plant in Singapore.

 

The total purchase outlay is about S$772.6 million. The proposed acquisitions are expected to be 1.8 per cent accretive to its DPU on a pro-forma basis, assuming that the purchase was completed on Jan 1, 2023.

 

The two properties are ESR Yatomi Kisosaki Distribution Centre in Nagoya, and 20 Tuas South Avenue 14. They will be purchased for about 38.7 million yen (S$340.1 million) and S$444.6 million, respectively.

 

The freehold asset in Japan has a total land area of 79,096 sqm and a net lettable area of 134,863 sqm. It has a Wale of 2.7 years as at Jun 30. It will be acquired at a 2.3 per cent discount to valuation and 4 per cent NPI yield.

 

Meanwhile, the Singapore asset has a total land area of 252,733 sqm and a net lettable area of 247,063 sqm. It has a Wale of 11.2 years, as at end-June. It will be acquired at a 2.3 per cent discount to valuation and a NPI yield of 6.1 per cent.

 

Adrian Chui, chief executive and executive director of the manager, said at the briefing of the Reit&rsquo s financial results on Wednesday that these two acquisitions are &ldquo on-strategy&rdquo assets, meaning they are new, freehold assets which are in demand and have green sustainability features.

 

The acquisitions will be funded by debt financing, the issuance of new units to existing unitholders to raise up to S$194 million, and consideration units of up to S$60.3 million.

 

Pro forma gearing will stay low, at 41 per cent.

 

Chui said that the deal could improve the trust&rsquo s logistics and high-specs industrial portfolios, as well as extend underlying land leases to create a resilient and future-ready portfolio.