http://www.businesstimes.com.sg/prem...tower-20130822

Published August 22, 2013

HOCK LOCK SIEW

CapitaLand could do strata sales at Westgate Tower

By Kalpana Rashiwala [email protected]


CAPITALAND announced earlier this month that it will retain its corporate headquarters at Capital Tower in the CBD. This was a reversal of its announcement a year ago that it will be moving to Westgate Tower in Jurong East.

The property giant's news release gave a fair amount of information on Capital Tower but was silent on plans for Westgate Tower.

Due for completion in late 2014, the 20-storey office block is part of a retail-office project on a 99-year leasehold site beside Jurong East MRT Station being undertaken by the property giant together with two of its listed units, CapitaMall Trust and CapitaMalls Asia.

CapitaLand was to have occupied about half of Westgate Tower. However, all 320,000 square feet net lettable area (NLA) in the tower is now available.

Most analysts expect the group to stick to its usual modus operandi and lease out the space. The fundamentals in the suburban office leasing market appear to be positive. New office supply in the suburbs available for lease is tightening, with Ho Bee's 1 million sq ft Metropolis project in Buona Vista already 82 per cent let. In addition, the clampdown on unauthorised use of Business 1 space (which costs less to rent as it is meant for light industrial use) has also boosted demand for suburban offices.

In the vicinity of Westgate, all 314,000 sq ft of office space in the Jem project next door has been leased. The 11-storey office tower will be completed later this year.

There is another source of new office supply in the area: Sim Lian's mixed development project in Venture Avenue. A minimum 90 per cent office component has been stipulated for the project, which could translate to around 500,000 sq ft NLA of offices. Going by Sim Lian's current business model, the common view is that it will strata subdivide the office space in its Venture Avenue project for sale, just as Guthrie and its partners have done at Paya Lebar Square.

BT understands, however, that Sim Lian is mulling whether to hold on to the offices as a long-term investment to build up a source of recurring rental income - mirroring Ho Bee's strategy for Metropolis. If CapitaLand proceeds to lease out Westgate Tower, it may have to contend with this potential source of competition. The Urban Redevelopment Authority (URA) has not barred strata subdivision for either project.

Westgate Tower will have column- free floor plates of about 17,000 sq ft and CapitaLand could mint just one strata title per floor - to preserve the image and quality of the office tower. Or it could carve out smaller strata units as in Paya Lebar Square to extract higher per square foot (psf) prices.

Based on the $1.5 billion total development cost of the Westgate project previously stated by CapitaLand and the project's retail-office mix, some insiders estimate a breakeven cost for the office component at around $1,600 psf and $2,400 psf for the retail portion.

CapitaLand should be able to sell strata offices in its Jurong project on a whole- floor basis for around $1,800-1,900 psf, riding on the current fervour in the Jurong Lake District, and a higher $2,000-2,200 psf on smaller units - say, of around 500-1,000 sq ft. Based on the higher price range, the pre-tax profit from selling off Westgate Tower would be around $128-192 million.

One factor that would have whetted CapitaLand's interest in the strata office sales arena is watching rival Far East Organization rake in handsome profits from the SBF Center project next to Capital Tower. The time could be ripe for CapitaLand to venture into strata office sales to shore up earnings from its Singapore property development sales business - given a scenario of slowing home sales. This will help its bottom line, release cashflow and contribute to achieving the group's return-on-equity targets.

Of course, another route for the CapitaLand consortium to divest Westgate Tower would be to sell it to CapitaCommercial Trust (CCT). This would typically be done a year after the project's completion - that is, around late 2015, by which time its rental income would have stabilised. But who knows what Singapore office capital values will be like then?

On its part, CCT would not buy the asset at a high price reflecting low yields.

Typically, selling strata units results in higher psf prices than offloading the whole asset. And if CapitaLand can lock in an attractive price for Westgate Tower by selling it on a strata basis today, it could be a better proposition for its shareholders.

With a new CEO at the group's helm who is not shy to do things differently, venturing into strata offices might just make sense for CapitaLand.