FRASERS Commercial Trust (FCOT) on Monday signed an agreement for a Frasers Centrepoint Limited (FCL) entity to build a 16-storey hotel at its China Square Central site. The hotel, which will take three to four years to build, will be run by Frasers Hospitality under the "Capri by Fraser" brand.
This comes amid market chatter that FCOT is likely to do something about the site since obtaining provisional permission for the hotel project two years ago. This will unlock an additional gross floor area (GFA) of 16,000 square metres at China Square.
"Essentially, we have this additional GFA that can only be used for hotel, but we are not a hotel Reit, we're a commercial and office Reit," CEO of the manager Low Chee Wah said at a media briefing. A long lease of the hotel until February 2096 will be granted to the FCL entity upon the hotel's completion. The FCL entity will pay FCOT S$44.8 million in return.
Such an arrangement also minimises the Reit's exposure to development risks. The FCL entity will bear the costs and expenses of building the hotel, certain works, as well as the differential premium, including the goods and services tax and stamp duty, which can well add up to "a hundred over million" dollars, Mr Low said.
FCOT will pay the rest of the commercial project costs, being S$7 million, using internal resources. It will use the S$44.4 million in net proceeds for bank loan repayments, asset enhancement initiatives and working capital.
A handful of tenants located at the basement of the retail podium may have to be relocated, Mr Low said.
DBS equity research analyst Derek Tan expects the performance of the retail podium to "see a bit of downside" in the near term due to construction works, albeit not to a big extent given that the retail podium was not performing well to begin with. The shophouses and office segment will remain unaffected, however, he said.
Additionally, FCOT also announced a deal to buy 357 Collins Street, an office building in Melbourne, for A$222.5 million (S$231 million) - its first acquisition from Australand Property Holdings since FCL acquired the property group late last year.
This is the Reit's first Melbourne property; it has one office complex in Canberra and another in Perth.
The 25-storey freehold Melbourne property is located in the CBD, with Grade A specifications and a net lettable area of 31,920 sq m (30,095 sq m of office space plus 1,825 sq m of retail). It will expand FCOT's portfolio size by 14 per cent from S$1.8 billion to S$2 billion as at end-March 2015. It is also expected to boost distributions to unitholders.
The acquisition will be funded with a combination of equity and debt financing to ensure that DPU improves while gearing stays at an optimum level. Mr Low said he would want to have as much Australian debt as possible, although it will likely be a mix of Singapore and Australian debt, depending on borrowing terms. Details of the financing will be set out in the circular to unitholders "in the next month or so".
Melbourne CBD offices are currently generating a net property income yield of 6-6.5 per cent. Grade A offices face rents of A$440 per sq m per annum. Mr Low said 357 Collins Street is performing in line with these market conditions. Asked if more injections of Australand office properties will follow, Mr Low said: "If its ties in with both our strategies."
DBS analyst Mr Tan said FCOT seems to be a "natural vehicle for Australand to recycle its capital", so more injections could follow after 357 Collins Street. "My only concern is the portfolio's increased Australian exposure to about 40 per cent, but I think they are compensated by their very proactive hedging, and I think the long-term strategy for FCOT will still be in Singapore."
His wariness of the Australian market stems from the weaker Australian dollar and the dependence of office demand on the commodity sector and China's economy, both of which are not doing well and affecting its Perth office. But unlike Perth, Melbourne is not particularly beholden to any sector for office demand. The major tenants in 357 Collins Street are also more financial in nature.
FCOT's units rose one cent to close at S$1.54 on the stock market on the news on Monday.
Source: Straits Times, 28 Apr 2015