CapitaLand, US fund jostle for The Atrium

Business Times - 14 May 2008

CapitaLand, US fund jostle for The Atrium

Price will be over $800m; CMT eyeing synergies with Plaza Singapura: sources

By KALPANA RASHIWALA

(SINGAPORE) The race to snap up The Atrium @ Orchard is said to have narrowed to two parties: a US fund, and a unit of CapitaLand group, possibly CapitaMall Trust (CMT), which owns Plaza Singapura next door. The price is understood to be in the region of $2,200-$2,300 per square foot of net lettable area (NLA). Based on the property's total NLA of around 370,000 sq ft, the asset would be priced at over $800 million.

The property is being sold by Singapore Land Authority (SLA).

BT understands a deal is in the process of being sewn up.

While some analysts questioned the rationale behind CMT's interest in a predominantly office development, seasoned property investors said CapitaLand or CMT would be the most logical buyer of the asset, given the synergies that can be drawn from owning the Plaza Singapura mall.

It can also reposition The Atrium, which is a predominantly office development, to have a bigger retail component, given its Orchard Road frontage.

The expression-of-interest exercise for the Grade A office property closed on Feb 22 and is believed to have attracted a number of offers. The two highest bidders - the US fund and CMT/CapitaLand - were selected to proceed with due diligence. Industry players do not seem to know much about the US fund or its plans for the property.

SLA will issue a fresh 99-year leasehold tenure for the property from mid-2008, according to earlier reports. The Atrium comprises two office towers, seven and 10 storeys high, with ground-floor retail space.

Currently, The Atrium's retail component is confined to only about 10,000 sq ft out of the total 370,000 sq ft NLA.

Some feel that the eventual buyer of The Atrium may introduce more shop/ restaurant space into the development given its location in Singapore's main shopping belt. One way would be to decant space from the upper floors and create higher-value retail/ restaurant space on the lower levels - a tried-and-tested CMT asset enhancement formula. 'Another way would be to punch an atrium into the development and install escalators to bring shoppers up to the first few levels of the property. There may also be scope to introduce retail space in the basement,' a market watcher suggested.

However, it may take a while before such plans are executed due to the current office crunch and ongoing leases in the property.

'If CapitaLand Retail/ CMT end up with The Atrium, there'll also be scope to better connect it with the group's Plaza Singapura mall. Perhaps they could buy/lease state land between the two properties and build low-rise facilities suitable for, say, alfresco dining. Extending retail activities closer to Orchard Road would also help to draw more shoppers to Plaza Singapura,' an industry observer said.

Completed in 2002, The Atrium's current average monthly rent (based on existing leases) is understood to be below $6 psf - translating to a passing net property yield of just over 2 per cent. However, BT understands this could go up to more than 3 per cent within the next 12 months.

CMT is currently trading at about 4 per cent distribution yield on the stock market. Some suggested using a significant debt component to fund the acquisition. As at March 31, 2008, CMT had an asset size of about $5.9 billion and a gearing ratio of 35.3 per cent. CMT could fund the acquisition of The Atrium entirely through debt and still not exceed 45 per cent gearing at trust level. 'If the cost of funding is sufficiently below The Atrium's net property yield, the acquisition could still be immediately yield accretive to CMT. If not, there's always the possibility of the property being initially acquired by CapitaLand Retail and warehoused for asset enhancement and other yield- boosting exercises before being offered to CMT,' an analyst suggests.

The $2,200-2,300 psf price currently being negotiated is lower than the 'above $2,700 psf' price tag indicated at the start of the property's marketing campaign in January. However, sentiment in the office investment market has weakened, because of difficulty in securing debt funding, and concerns of surging supply post-2011.

The asset is said to be stuck with some long leases locked at pretty low rental rates. Tenants include Temasek Holdings, Barclays and MTV Asia.