CapitaLand China Retail REIT Expands into Offices with RMB 4.9B Acquisition

In announcing its third quarter results at the end of October, Capitaland Retail China Trust (CRCT) took care to single out the improved performance of its Rock Square mall in Guangzhou, while also highlighting an expansion of its investment remit to include industrial and business park properties.

Just one week later the $2.8 billion REIT followed through on those hints by acquiring the 49 percent stake in Rock Square that it didn’t already own, and picking up a set of mainland office properties in a RMB 4.9 billion ($741 million) deal which is the single largest acquisition ever by the trust.

In a statement to the Singapore exchange, The manager of CRCT, which is primarily buying the assets from its parent firm and the sponsor of the REIT, Capitaland, portrayed the deal as a bet on the ongoing growth of China’s economy, particularly the government-supported tech sector, in the wake of the COVID-19 pandemic.

“China’s strong recovery and economic direction are expected to boost the growth of various industries, including the demand for business park space,” said Soh Kim Soon, chairman of the trust’s manager. “Benefiting from strategic policy support, Chinese business park properties aligned with the government’s economic growth initiatives have demonstrated resilience and strong market performance over the years.”

Expanding a Mall REIT into Offices

CRCT is picking up its set of properties for a discount of 1.3 percent or 1.4 percent from the valuations set in separate appraisals of the portfolio by JLL and CBRE, with five of the six assets involved being suburban offices in second-tier cities across China. Together the assets cover 852,727 square metres (9.2 million square feet), and have an average committed occupancy of 91.6 percent, according to CRCT’s announcement.

Two of the properties are located in Xi’an, the capital of northwestern China’s Shanxi province, with the trust gaining a 100 percent stake in Ascendas Innovation Towers, a 118,495 square metre office complex comprised of two 23-storey towers and one standalone building. The agreed property value for the asset in the Xi’an Hi-Tech Industries Development Zone is RMB 759 million

Also in Xi’an is the Ascendas Innovation Hub, a 40,547 square metre property which the trust is acquiring an 80 percent stake in at a valuation of RMB 298 million.

In Hangzhou, the capital of Zhejiang province and home to e-commerce giant Alibaba, the REIT is acquiring 80 percent stakes in phases one and two of Singapore-Hangzhou Science & Technology Park, a pair of office complexes in the city’s Qiantang New Area. CRCT is making the purchase at a value of RMB 641 million for the 101,811 square metre first phase of the tech park project, and RMB 767 million for the 130,261 square metre second phase.

The last piece of CRCT’s office expansion is the Ascendas Xinsu Portfolio in Suzhou, which is comprised of 373,334 square metres of business park space spread across six buildings in Suzhou Industrial Park. The trust is acquiring a 51 percent stake in that complex, which was valued at RMB 2.3 billion.

Following the transaction, CapitaLand, which held a 23 percent stake in the Xinsu portfolio at the end of 2019, will hold the remaining 49 percent in the office complex.

For the other office properties, the stakes are being acquired entirely from CapitaLand, with the portfolio acquisition being made at an aggregate yield of 6.8 percent, based on net property income.

CapitaLand, which also operates the Raffles City China Investment Partners fund series to develop commercial projects on the mainland, had acquired its stakes in the office properties as part of its $8.2 billion merger with business park specialist Ascendas-Singbridge which was completed in June 2019.

“The proposed divestment of the five business park properties in China to CRCT is the latest illustration of the robust asset pipeline and value creation opportunities arising from CapitaLand’s combination with Ascendas-Singbridge last year,” CapitaLand Group CEO Lee Chee Koon said in a statement.

Stocking Up at Rock Square

In addition to its foray into office properties, CRCT is taking over CapitaLand’s 49 percent stake in the Rock Square mall in Guangzhou at a value of RMB 3.4 billion for the 88,279 square metre shopping centre.

“China is the first country to recover from the pandemic and is expected be the one of the few major economies in the world to show positive growth in 2020,” said Capitaland president for China Lucas Loh. He added that, “In our malls, third quarter 2020 shopper traffic and tenant sales had recovered to about 86 percent and 85 percent of last year’s levels respectively.

CapitaLand and CRCT had teamed up to buy Rock Square from a fund managed by Prudential affiliate PGIM for RMB 3.36 billion in late 2017.

In announcing its third quarter results on 30 October, CRCT had pointed out the success of asset enhancement initiatives at Rock Square, with a rental reversion of nearly 27 percent being achieved in 2018 and 23 percent in 2019, as the REIT squeezes more value from the existing asset.

This year, by reconfiguring two levels of the mall to accommodate smaller, higher-yielding F&B tenants, among other changes, the company expects to achieve still higher returns from the property in Guangzhou’s Haizhu district.