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Monday, November 5, 2007

Can Frasers Centrepoint Trust grow faster?

When officials at Frasers Centrepoint Trust (FCT) met with repor­ters and analysts recently to deliver the results of the real estate investment trust (REIT) for the financial year to September 2007, they were asked the usual question: When will FCT acquire The Centrepoint Shopping Centre? And, they gave their usual answer. "We've not worked out a timeline yet," FCT's CEO Christopher Tang told reporters.

Amid the redevelopment of the Orchard Road shopping belt, rentals have been rising strongly and property prices have soared over the last couple of years.

The Centrepoint Shopping Centre is one of the oldest malls on Orchard Road

One of the oldest shopping malls on Orchard Road, The Centrepoint Shopping Centre itself recently completed a S$56.4 million (RM129.5 million) enhancement programme that included the addition of a new eight-floor wing and a 17.5% expansion of its total floor space. But if you think that has made the owner, F&N, more willing to sell The Centrepoint Shopping Centre and F&N's REIT more eager to buy, think again.

According to Tang, FCT is uncertain about the impact that new retail properties on Orchard Road will have on rentals in the area.

"We're still monitoring developments in the Somerset micro-market," he says, referring to the neighbouring shopping centres across from The Centrepoint Shopping Centre.

Among the major developments coming up in the area are ION Orchard by CapitaLand and Sun Hung Kai Properties; and Far East Organization's Orchard Central development, both of which are scheduled for completion by the end of next year.

"[FCT] has adopted a wait-and-see approach for The Centrepoint Shopping Centre," says David Lum, analyst at Daiwa Institute. "But they might not have the luxury of waiting."

According to F&N's 2006 annual report, the Orchard Road site is worth some S$423.1 million, while the building is valued at S$86.9 million. Since then, the market valuation of the property has probably ri­sen sharply, Lum says, raising doubts about whether buying it would be immediately accretive to FCT's distribution per unit (DPU).

From the perspective of F&N, on the other hand, getting the best possible price in a sale is the main prio­rity. And, with many property market pundits calling for continued growth in the value of prime retail properties, holding back on selling The Centrepoint Shopping Centre makes sense.

"Capital values on Orchard [Road] will be re-rated," says Lui Seng Fatt, head of investments at Jones Lang LaSalle. "The wait will avoid the accusation of divesting it at a sub-optimised value."

Against that backdrop, some market watchers say it might be better for investors in FCT if the REIT simply stumped up for The Centrepoint Shopping Centre now, and then worked to improve its rental income over time.

FCT's current portfolio comprises the same three properties it owned when it listed in July last year: Causeway Point, Northpoint and Anchorpoint, with a total net lettable area (NLA) of 638,786 sq ft. The only acquisition it has made is a 27% stake in Malaysia's Hektar Real Estate Investment Trust (H-REIT) for RM104.5 million (S$45.4 million) in May this year. H-REIT owns two suburban retail malls, in Selangor and Melaka, with a total NLA of 944,501 sq ft.

The addition of The Centrepoint Shopping Centre would dramatically expand the value of FCT's portfolio, which currently stands at S$915 million.

Officials at FCT declined to say what the rental yields at The Centrepoint Shopping Centre are at the moment. However, given its prime Orchard Road location, there seems to be little reason FCT wouldn't be able to raise its rental yields over time, lifting the capital value of the property's 577,000 sq ft of gross floor area (GFA). Singapore Press Holdings' Paragon, located further down Orchard Road, has a GFA of 950,438 sq ft and was valued at S$1.82 billion in June, or over S$1,900 psf.
With a stagnant property portfolio since listing, distributable income growth at FCT has been slower than market leaders like CapitaMall Trust (CMT). For the quarter to September, distributable income at CMT was up 29% to S$53.2 million, almost twice the growth at FCT of 15.7% to S$10.3 million.

CMT owns 10 shopping malls, including Parco Bugis Junction and Plaza Singapura. It also holds a 40% stake in Raffles City and a 20% stake in CapitaRetail China Trust. About 150,000 to 200,000 sq ft of retail space will be added at Raffles City with the completion of an asset enhancement programme now underway. CMT aims to increase its asset size to S$8 billion by 2010 from S$4.8 billion as at March 31, 2007.

Even without acquiring The Centrepoint Shopping Centre, FCT plans to keep pace with the growth of the likes of CMT, targeting a doubling of its portfolio size within three years.
To do this, FCT plans to acquire three malls currently owned by its parent over the next 36 months. They are Northpoint 2 (83,000 sq ft), Yew Tee Point (80,000 sq ft) and Bedok Mall (80,000 sq ft). These will bring FCT's local portfolio to 881,786 sq ft of NLA.

FCT has signed a put and call option agreement with a price range of S$139.5 million to S$170.5 million for Northpoint 2, which is expec­ted to be injected into the trust by 4Q2008. That is expected to provide FCT with a DPU uplift of 4% in FY2009, according to a Citigroup report last week.
Some analysts also point out that too much emphasis is often placed on a REIT's acquisitions. "It is not the main avenue of growth," says JPMorgan analyst Christopher Gee. "The investment universe is tight. There are not that many properties available for sale."

REITs can lift their DPUs through a variety of other ways too. For instance, FCT stands to benefit from rising rentals with up to 60% of the leases in its portfolio coming up for renewal over the next two years. The lease expiry profile bodes well for FCT as most of its properties are below market rentals, notes OCBC analyst Winston Liew.

Meanwhile, FCT's S$12 million refurbishment of Anchorpoint Shopping Centre is on track for completion by December.

According to Tang, the previous positioning of the mall was "wrong", with too many furniture outlets. The mall will now have more F&B outlets and a broader range of retail concepts. The new makeover is expected to yield a 36% increase in average rental to S$7.20 psf, says Tang. As at September, over 90% of Anchorpoint's NLA has been committed or is in advanced stages of discussion.

Anchorpoint's asset enhancement is the first in a series of three such initiatives. FCT will start on its second mall asset enhancement initiative at Northpoint in 1Q2008, which will cost about S$30 million. It will be integrated with Northpoint 2, creating a single shopping mall with a total NLA of about 232,000 sq ft. Similar enhancement plans are in the pipeline for Causeway Point.

Still, acquiring The Centrepoint Shopping Centre would go a long way in changing the market's view of FCT. And, many investors will be watching to see whether the REIT delivers on its plans to acquire the three malls it has earmarked, and expand its portfolio. Failing to do so could colour the market's view of other REITs that F&N plans to launch. According to F&N spokesman Hui Choon Kit, it plans to launch an office REIT and industrial property REIT within the next six months.

Since the beginning of the year, units in FCT have declined 2.61% to S$1.49 last week.

At current le­vels, they offer a forecast yield of 4.5%. That's higher than the forecast yield of 3.6% offered by CMT. But to analysts and investors who have tracked the REIT over the past year, the higher yield reflects its less aggressive growth. By comparison, units in CMT are up 29.2% since the beginning of the year.

By The EDGE MALAYSIA (By Audrina Gan is a staff writer with The Edge Singapore)

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