Portfolio Reconstitution Strategy
As a proactive REIT manager, one of our approaches to generate value for the Trust is through our portfolio reconstitution strategy. We grow the portfolio through acquisition or continually extract value from our properties through market cycle. However, each property will have its own life cycle and there could be times when it is better for us to divest the building and recycle the proceeds into other growth opportunities.
Acquiring a property with growth potential
We grow our portfolio by sourcing for well-located buildings which are able to strategically fit into our portfolio. Accessibility to transportation and amenities, a floor plate allowing for efficient and flexible layout and quality specifications; existing lease expiry profile and average passing rent are just some of the features we look out for in an acquisition.
Enhancing the property
We constantly look for ways to upgrade and improve our assets. This is done through asset enhancement, refurbishment or a change of use. In this way, we explore the highest and best use for the property during its life cycle and the market cycle.
Some of the assets we have successfully enhanced include Raffles City Tower, which now features an upgraded concierge area and main lobby as well as enhanced security with the introduction of new security turnstiles. Additionally, the office tower has refurbished lift interiors, and restrooms with energy-saving lighting and water-efficient fittings. Externally, the entrance of the building features a distinctive canopy and the sculpture, "L' Envol", created by renowned French sculptor, Etienne. The S$32.3-million enhancement delivered a return on investment of 9.3%, which is higher than the targeted 8.6%.
We also completed an improvement programme at Twenty Anson in January 2015 including the installation of turnstiles at the main lobby, implementation of Destination Control System for the lift system, upgrades of lift motors of the low-rise passenger lifts, a new concierge counter and a visitor self-registration kiosk.
Capital Tower underwent a S$35.0 million asset enhancement initiative to reinforce its position as a Grade A office tower. Completed in 4Q 2015, we achieved a higher return on investment of 8.2% compared to the initial target of 7.8%. The works included installation of new security turnstiles, self-registration kiosks, enhanced lift lobbies and a refurbished main lobby. Green features such as more efficient lighting and the recycling of condensate water from the air-handling units for the cooling towers of the new chiller plant were also incorporated.
Unlocking the property's value
Other than the market cycle, each property will have its own life cycle. We seek to realise the maximum value of our assets by divesting them at an optimal stage of their life cycle, leveraging on the improvements we have made over time. Our past divestments include Robinson Point and StarHub Centre. We were able to sell them at premiums which were over the value at which they were acquired. In the first quarter of 2010, Robinson Point was sold for S$203.3 million, which was 69.7% above its appraised value of S$119.8 million when it was acquired in 2004.
StarHub Centre, which we creatively repositioned as a potential residential-commercial site in the heart of Orchard Road was sold for S$380.0 million - 42.8% above its appraised value of S$266.1 million when we acquired it in 2004.
In 2017, we divested One George Street to One George Street LLP (OGS LLP), in which CCT owns 50.0% interest, at an agreed property value of S$1,183.2 million or S$2,650 psf. We also divested Wilkie Edge at S$280.0 million or S$1,812 psf. Both One George Street and Wilkie Edge were divested at prices which were 16.7% and 39.3% above their respective 31 December 2016 valuation.
Re-investing the value
The proceeds gained from divesting our non-Grade A buildings are recycled to generate growth in other areas - development, asset enhancements and acquisitions. For example, our acquisition of Twenty Anson was funded by re-investing part of the proceeds from the sale of Robinson Point and StarHub Centre, freeing us from the need to raise equity.
Similarly, we have been able to use the cash proceeds from our divestments to participate in the redevelopment of Market Street Car Park into a new Grade A office tower, CapitaGreen. This project is a joint venture with CapitaLand and Mitsubishi Estate Asia with 40.0% interest, 50.0% interest and 10.0% interest respectively. CapitaGreen obtained its temporary occupation permit (TOP) in 2014. In 2016, CCT exercised its call option to acquire the remaining 60.0% interest we did not own.
With the aim of replicating the success of CapitaGreen, CCT embarked on the redevelopment of Golden Shoe Car Park through a joint venture between CCT (45.0% interest), CapitaLand (45.0% interest) and Mitsubishi Estate Co., Ltd. (10.0% interest). The target completion is in 1H 2021. The project development estimate is S$1.8 billion with a target yield on cost of about 5%. CCT has a call option to acquire the balance 55.0% of the commercial component (comprising office, retail and car park spaces) of the new integrated development at Market Street, that it does not currently own, within five years upon the receipt of TOP at market valuation. This will provide CCT with another growth pipeline after 2021.
The acquisition of Asia Square Tower 2, a premium Grade A office tower in Marina Bay is another example of successful capital recycling. Part of the proceeds from the divestments of One George Street and Wilkie Edge were recycled into acquiring Asia Square Tower 2 at an agreed property value of S$2,094.0 million and an entry yield of 3.6% p.a..