Lendlease Reit could divest Jem office tower but still ride Jurong growth story with mall

Citi Commercial Pte Ltd

LIKE some of its real estate investment trust (Reit) peers listed in Singapore, the manager of Lendlease Global Commercial Reit : JYEU 0% (LReit) could be looking to pare down some debt amid the higher-for-longer interest rate environment.

But with its portfolio mainly comprising just three properties, the Reit manager would have to carefully consider the merits of a divestment to raise cash against the pressure of losing one of its prized assets.

As at end-June 2023, LReit’s property portfolio was valued at S$3.65 billion, with 88 per cent of it in Singapore.

Its major assets in Singapore are Jem, an office-and-retail property next to the Jurong East MRT station and bus interchange, and 313@somerset, a prime retail mall in Orchard Road. Overseas, the Reit owns Sky Complex, comprising three office buildings, in Milan.

"Another plus point is that given current high construction costs, the price for the Jem office tower is likely to be below replacement cost."

Citi Research analyst Brandon Lee noted in a May 6 report that LReit’s unit price has fallen 15 per cent in the year to date – underperforming the 12 per cent decline of its Singapore Reits (S-Reits) peers.

He attributes this to LReit’s “relatively high gearing of 41 per cent”, which is the second-highest among S-Reits under Citi’s coverage.

Lee is of the view that the high aggregate leverage, which could be mitigated via asset sales, needs to be addressed before LReit’s existing valuations can move closer to the mean for S-Reits.

According to Lee, LReit is trading at a price-to-book (PB) ratio of 0.7 times and an FY2024 estimated yield of 7.8 per cent, compared with an average PB of 0.9 times and an estimated FY2024 yield of 6.5 per cent for its S-Reit peers.

L-Reit’s gearing ratio of 41 per cent as at Mar 31, 2024, is up from 40.5 per cent as at Dec 31, 2023, and 39.3 per cent per cent as at Mar 31, 2023.

Excluding amortisation of debt-related transaction costs, LReit’s weighted average cost of debt has also gone up to 3.5 per cent per annum as at Mar 31, 2024, from 3.37 per cent at the end of the previous quarter and 2.51 per cent a year earlier.

LReit’s manager, it appears, is cognisant of the cost pressures.

Word on the grapevine is that LReit is open to selling the office space in Jem.

The Jem office and retail complex is on a site with a 99-year leasehold tenure from September 2010, leaving a balance term of about 85 years. The 12-storey office tower accounts for 311,217 sq ft net lettable area (NLA), out of the total NLA of 893,044 sq ft for the complex. Assuming the indicative price is around S$1,600-1,700 psf, the deal size works out to roughly S$500 million to S$530 million.

The offices are fully leased to Singapore’s Ministry of National Development under a 30-year lease that runs till 2044, with rent reviews every five years, subject to caps on any increases or decreases.

Market observers estimate that, based on the indicative price of S$1,600-1,700 psf for the office tower, the net property yield would be close to 4 per cent.

Chances of success

What are the chances that LReit will succeed in finding a buyer for the Jem office space?

Institutional investors’ interest in big-ticket Singapore office assets has thinned on the back of high borrowing costs and muted office leasing demand, with large occupiers such as tech companies and banks generally cautious about expanding.

It is also difficult for property funds and other institutional investors to clinch approval for office acquisitions, if their investment committee members are based in places such as the US and parts of Europe where the office market is under duress due to low office utilisation.

That said, the office tower in Jem is a good-quality asset that will continue to be fully leased for the next 20 years to a strong tenant, providing stable cash flow.

The deal size may be palatable to a potential investor with a core real estate investment strategy – that is, stable income generation, with low risk and requiring minimal asset management – and that does not need to borrow much to fund the purchase in the current high-interest environment.

Another plus point is that given current high construction costs, the price for the Jem office tower is likely to be below replacement cost.

While the balance lease on the site will decline, capital values of the offices at Jem may be supported by the Jurong Lake District (JLD) growth story.

Boost from mega project

Singapore’s Urban Redevelopment Authority (URA) has envisioned JLD as the “largest mixed-use business district outside the city centre, a model for urban sustainability and innovation, and a place to grow businesses, homes and communities by Jurong Lake and Jurong Lake Gardens”.

To kick-start the next phase of development in JLD, the URA last year launched a nearly 700,000 sq ft master-developer site spanning three plots of land between Jurong East MRT interchange station and the future Jurong Lake District station on the Cross Island Line. The site can be developed to a maximum gross floor area of close to 4 million sq ft.

Of this, at least 1.57 million sq ft has to be for offices. Up to 1.79 million sq ft is to be for residential use. There will also be about 786,000 sq ft for complementary uses such as shops, restaurants, entertainment, hotels and community.

At the tender close on Mar 26 this year, a five-party consortium of Singapore and Japanese property heavyweights submitted two bids, with different concept proposals, for the master-developer site.

As the proposed integrated development is progressively completed over the next 10 to 15 years, observers expect surrounding property values to also benefit from an uplift.

This may entice a long-term property investor to acquire the Jem office space.

On the retail front, LReit reported healthy operational performance in its latest third-quarter FY2024 business update.

As at Mar 31, 2024, LReit’s retail portfolio maintained a high committed occupancy rate of 99.4 per cent. Tenant sales and visitation in Q3 FY2024 rose 2.6 per cent and 6.1 per cent year on year, respectively.

For LReit, divesting Jem’s office tower will create more breathing room from a capital management angle while still retaining some exposure to the JLD growth story via the retail component of the complex.

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