CapitaLand China Trust (CLCT) is selling an underperforming Beijing shopping mall to an investor from Inner Mongolia for RMB 849.2 million ($120 million) in the latest example of domestic capital buying up discounted assets as China’s real estate market slows.
CLCT’s manager informed the Singapore bourse on Tuesday that it has agreed to divest the 49,463 square metre (532,415 square foot) CapitaMall Shuangjing in Beijing’s Chaoyang district to an unrelated third party, with the aging mall having less than 20 years remaining on its land use rights.
The manager of the listed trust said it is offloading the asset to avoid significant capital outlay which would be required to repurpose what has been an underperforming asset. Market sources identified the buyer as an investor from Inner Mongolia backed by a state-owned enterprise, with the company planning to renovate the property after having secured a major tenant for the space.
“This divestment presents a good opportunity to unlock value and enhance total returns for unitholders,” Tan Tze Wooi, chief executive officer of the manager, said. “Proceeds from the divestment will strengthen CLCT’s balance sheet and provide greater financial flexibility to pursue capital recycling and portfolio reconstitution initiatives.”
Located at 31 Guangqu Road near Beijing’s East Third Ring Road, CapitaMall Shuangjing was part of CLCT’s initial portfolio when it launched on the Singapore stock exchange in 2006. It was fully occupied as of October, anchored by British home improvement specialist B&Q as well as the sole remaining China location for French retailer Carrefour.
“Domestic capital now is more aggressive in buying assets in tier 1 cities when the price is right,” said Stephen Qiu, a managing director with the capital markets team at Cushman & Wakefield in China. He added that, “Offshore institutional investors and fund managers are now more willing to lower their price expectations than before.”
Qiu said that, with the shift in market expectations, his team has seen an uptick in market interest and expects a rebound in transactions in the coming year.
CLCT is divesting CapitaMall Shuangjing at a price 37 percent higher than its RMB 621 million valuation as of end-October, with the transaction taking place at an exit yield of 2.8 percent, according to the manager.
The citywide vacancy rate (for Beijing mall space) has been falling in recent quarters to 6.9 percent from a peak of 8.5 percent in the first quarter of 2023,” James MacDonald, head of China research at Savills told Mingtiandi. He added that, “Rents have also started to pick up in recent quarters, rising 1.0 percent in the third quarter.”
At the stated compensation, the four-storey mall is changing hands at RMB 17,168 per square metre, with a market analyst indicating that the price reflects the short remaining duration on the property’s land use rights. CLCT’s manager said it may use the RMB 690.7 million net proceeds of the sale to pare down debt, undertake a unit buyback, support new acquisitions, or potentially finance general working capital requirements, once the deal closes in the first quarter of 2024.
Divesting the asset will leave the China-focused property trust with 10 shopping malls, five business parks and four logistics parks across 12 mainland cities.
Beijing’s retail property market saw vacancy rates across the city fall to 6.9 percent in the third quarter on the back of strong demand, although rents of first-floor retail spaces still slipped by 0.2 percent last quarter after four new malls were opened, according to Savills data.
Tuning the Portfolio
Selling off CapitaMall Shuangjing rids CLCT of an asset which dragged down its portfolio performance in the third quarter, according to the REIT’s latest business update.
From July through September gross retail revenue for the trust dipped by 1.9 percent to RMB 479 million from RMB 488.3 million in the same period a year ago. The REIT’s manager attributed that slide largely to rent provisions made at the Shuangjing mall as well as to the closure of its CapitaMall Qibao in Shanghai.
Excluding those two assets, CLCT’s net property income (NPI) for its retail portfolio would have registered year on year growth of 13.4 percent in the third quarter, the REIT’s manager said. That adjusted growth rate would have been more than three times the actual year on year NPI growth of 4.7 percent for the REIT’s full retail portfolio in those three months.
Including business and logistics parks, CLCT saw its NPI grow 1.2 percent in local currentcy terms in the third quarter, compared to the same period last year, to reach RMB 316.4 million.
Due to deprecation in the Chinese renminbi, however, in Singapore dollar terms, the trust’s overall NPI fell 8.4 percent to S$58.9 million in the third quarter from S$64.3 million a year ago.
CLCT’s manager expects a gradual rebound in China’s retail sector to continue on the back of improving consumer spending on essentials and lifestyle goods.
“CLCT is positioned to ride recovery of domestic consumption with well-staggered AEIs (asset enhancement initiatives) across multiple assets,” its manager said in the business update. “[The property trust will] strengthen weaker malls that are typically smaller in size and contribution, while seeking divestment of mature retail assets.”