Is CMT morphing from pure retail play into a mixed Reit?

July 31, 2008
Is CMT morphing from pure retail play into a mixed Reit?
By KALPANA RASHIWALA

CAPITAMALL TRUST (CMT), Singapore's first real estate investment
trust when it listed in 2002, has enduring appeal.

Six years since its flotation and with another 20 contenders in the
Singapore Reit (S-Reit) market today, CMT remains Singapore's biggest
Reit with an asset size of $7.2 billion.

The market has rewarded the trust's consistent ability to deliver
total returns by according it one of the lowest costs of capital for
any Singapore Reit. That is, CMT trades at one of the lowest
distribution yields among S-Reits. The market demands a lower risk
premium from CMT than it does for just about any other S-Reit. CMT is
also trading above its net asset value. This has to do with CMT's
track record in managing retail properties.

However, lately some institutional investors have been concerned that
the shopping centre trust could be morphing into a mixed development
trust. In 2006, CMT bought a 40 per cent stake in Raffles City, which
comprises a mall, office tower, convention space and two hotels.

In May this year, CMT announced it was buying Atrium @ Orchard - a
predominantly office asset - for $839.8 million.

Is CMT being forced to buy mixed developments because of the
challenge of sourcing for pure-retail assets in Singapore as more
shopping centres are already owned by Reits and private property
funds?

Some investors would prefer CMT to be a pure retail play. If CMT
dilutes its portfolio by acquiring mixed developments with office and
other components, investors may demand a higher risk premium, that
is, CMT may have to trade at a higher distribution yield, putting
pressure on its unit price.

Not only that, there may be potential conflict of interest within the
CapitaLand stable of Reits, since CMT's sister Reit CapitaCommercial
Trust (CCT) owns mostly offices.

It may be timely to revisit some of the reasons behind CMT's
acquisitions of Atrium and Raffles City.

Offices make up nearly 96 per cent of Atrium's existing net lettable
area (NLA) of 373,446 sq ft. CMT's attraction to the property,
however, is due to its strategic location next to the trust's
existing mall, Plaza Singapura. By drawing synergies between the two
properties, CMT can extract more value out of Plaza Singapura. Atrium
is directly linked to Dhoby Ghaut MRT Station, which will be the
interchange station for three lines. By integrating Atrium with Plaza
Singapura, the latter will have improved MRT connectivity. CMT plans
to boost Atrium's retail NLA from about 16,100 sq ft now to 172,100
sq ft by converting the first three levels into full-retail use. It
also plans to create retail space on state land that it hopes to buy
in front of Plaza Singapura.

CMT could also potentially move some big tenants from Plaza
Singapura's upper floors to Atrium's upper levels and subdivide the
vacated space at Plaza Singapura into smaller units that will
hopefully fetch higher rents. Another possibility is to attract
fitness centres and signature restaurants to Atrium's upper levels as
office leases expire.

Given CMT's impressive track record at asset enhancement plans and
its ability to create new retail space in its properties, it's
possible to imagine Atrium transformed into a predominantly retail
asset in future.

So too at Raffles City, asset enhancements have boosted the retail
net lettable area by 12.5 per cent. These initiatives required the
close cooperation of CCT, which owns the remaining 60 per cent in
Raffles City. Had CMT bought only the mall in Raffles City, leaving
the office tower to CCT, the two Reits might have had sibling
arguments during the mall's refurbishment as many common areas were
involved. Instead, by taking stakes in the entire development, the
two Reits worked in unison.

When Raffles City's asset enhancement potential has been
substantially realised, CMT and CCT could neaten their ownership -
with CCT holding the office tower and CMT the mall. This will sharpen
the two Reits' respective foci and give investors clearer choice to
invest in their preferred asset class. Likewise, when CMT is done
transforming Atrium and creating more retail space, it could sell the
remaining office space to CCT. After all, CMT should not be competing
with CCT - a big office landlord - for office tenants at Atrium.

There will also be office space when CMT builds four more floors on
top of Funan DigitaLife Mall to tap the site's unutilised development
potential. CMT has all approvals in place but will begin work only
after the new office space has been substantially leased; this should
make it easier for CMT to dispose of the office space and once more
stick to its core strength in retail.

Moving ahead, CMT is unlikely to shy away from mixed assets as long
as there are strategic reasons and where such assets have a retail
component that it can add value to.

CMT will have to hope that investors will still find this defining
strength endearing.