Is divestment of office assets on the cards for Alpha-CDL tie-up in '18?

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THE earlier-than-anticipated recovery in Singapore office rents last year helped to fuel investment interest in office properties on the island. The string of office investment deals in 2017 included Asia Square Tower 2 in Marina View, PwC Building in Cross Street and Chevron House in Raffles Place.

This flurry of activity has led some market observers to wonder if a portfolio of less high-profile office assets transacted a short while ago, might come onto the market this year.

What they are thinking about is Manulife Centre in Bras Basah Road, Central Mall (Office Tower) in Magazine Road and 7 & 9 Tampines Grande (comprising a pair of eight-storey office buildings).

Property group City Developments sold the trio in December 2015 for about S$1.1 billion to a joint venture between Alpha Investment Partners and the group under a "profit participation securities" exercise.

Manulife Centre is a 999-year leasehold property and Central Mall (Office Tower) is a freehold asset. What CDL sold two years ago with regard to each of these two assets was a 99-year leasehold tenure, with CDL having reversionary interest of each property at the expiry of the 99 years. For 7 & 9 Tampines Grande, which CDL developed on land bought at a state tender, what the property group sold under the PPS exercise was the remainder of the 99-year leasehold interest that started on Aug 20, 2007.

Will Alpha, a seasoned player in the property fund management business and a part of Keppel Capital, want to cash in on the prevailing positive office market sentiment and divest these three assets - or at least a couple of them? Talk in the market is that Alpha is setting up a new property fund; divesting the properties in the PPS portfolio it acquired just two years ago at a profit would boost Alpha's track record and help gain traction for the new fund.

Let's revisit the key terms of the PPS deal as disclosed in late-2015.

The Alpha Asia Macro Trends Fund (AAMTF) II holds 60 per cent of the JV company that acquired the three assets, with CDL owning the balance 40 per cent. The PPS was structured with a five-year life span, although this can be extended. So at the outset, the plan was for the AAMTF II-CDL joint venture to sell the three assets by the fifth year.

From the proceeds of the asset disposal, the first priority would be to repay bank borrowings, followed by repaying AAMTF II its capital, then a preferred return to AAMTF II amounting to a total internal rate of return of up to 12.6 per cent per annum. Only after this will CDL be repaid its capital investment. Thereafter, whatever cash flows remain will be split between CDL and AAMTF II 60:40. This is the reverse of the ratio of their respective capital outlay and was aimed at incentivising CDL to maximise returns.

Now let's look at how much the three properties were priced at in the PPS scheme. The 99-year leasehold interest which CDL carved out in Manulife Centre was sold for S$487.5 million, translating to S$2,018 per square foot on net lettable area (NLA). The price for the 99-year interest in Central Mall (Office Tower) was S$218 million or S$1,657 psf. The Tampines Grande property, which at the time had 91 years' remaining lease, was priced at S$366 million or S$1,273 psf.

An educated guess would be that if Alpha had to pick two of these assets for divestment, it would probably be the two bigger ones.

The 11-storey Manulife Centre has an attractive city-fringe location, flanked by two MRT stations: Bencoolen station on the Downtown Line and Bras Basah station on the Circle Line.

As for 7 & 9 Tampines Grande, well, they are in the heart of Tampines Regional Centre and a stone's throw from the recently opened Tampines Station on the Downtown Line.

One major drawback of Manulife Centre, from a typical investor's point of view, is the impending departure of anchor tenant Manulife, which occupies about 100,000 sq ft of the building's NLA of around 241,500 sq ft; the insurer will relocate to 8 Cross Street later this year.

That said, a well-located building, albeit not in a traditional office district, with a big vacancy coming up could suit a buyer looking for its own premises to house its corporate headquarters. It could potentially upgrade the building and plant its name on it.

Even an investor may be drawn to the building if it has in mind, say, a particular tenant profile - perhaps a company like US-based co-working giant WeWork, which has big expansion plans in Singapore.

While Alpha may be game to divest Manulife Centre and perhaps also 7 & 9 Tampines Grande, will its partner CDL be willing to go along with it?

The property group may stand to book a profit if the properties are sold at significantly higher prices than what the JV paid for them.

Let's just focus on Manulife Centre for a moment; some industry observers suggest it could fetch around S$2,300-2,400 psf - translating to S$556-580 million. They based this on the S$2,526 psf on existing NLA of 261,280 sq ft (or S$660 million in total) that Chevron House fetched last month. The thinking would be that Manulife Centre's longer balance leasehold tenure of about 97 years (against Chevron House's 71 years) would help offset the locational discount.

How much potential buyers are prepared to pay for the Bras Basah property would also depend on its net yield and other factors such as whether the transaction is a plain vanilla deal or structured, with things like a leaseback arrangement or rental guarantee.

Will the price be attractive enough for CDL to agree to a sale? Bear in mind it continues to retain the reversionary interest in the property after the expiry of the 99-year leasehold interest in the property carved out for the PPS deal.

Or will CDL take a longer term view, with an eye, for instance, on the potential to increase Manulife Centre's lettable area by scrapping excess car park lots? It could expand the retail space from just the ground floor currently to the second level or even the third level. Retail rents are typically higher than office rents, which means such a strategy would increase the value of the Bras Basah Road property.

If the price offers that Manulife Centre garners are not enticing for CDL, there is always the possibility it could match the highest offer and buy back the balance of the 99-year tenure it had carved out in the building - giving Alpha the exit it wants. Assuming it wants an exit.

Source: Business Times, 11 Jan 2018