One of the most recognisable buildings in Beijing — and there are many — is CapitaMall Xizhimen, located near the western part of Beijing’s 2nd Ring Road and in a university area. The mall is the largest asset in CapitaLand China Trust AU8U ’s (CLCT) portfolio by value. As at 1HFY2024, its occupancy stood at 99.1%.
During the Covid-19 pandemic, CapitaMall Xizhimen’s occupancy fell to 92.6% in 1HFY2020 but rebounded to more than 96% by the end of FY2020, a testament to its resilience. At that time, CLCT’s manager decided to diversify from retail. In November 2020, CLCT proposed the acquisition of five business parks from its sponsor CapitaLand in a RMB4,945.0 million or $1 billion deal, and the transaction was completed in 2021.
“The Covid-19 years were difficult. There were days when malls couldn’t open. As a landlord, we have to support our tenants. When they can’t operate, they cannot generate sales, it is difficult for them to pay rent,” says Tan Tze Wooi, CEO of CLCT’s manager.
Today, CLCT is the largest China-focused REIT in Singapore. It has three pillars for delivering sustainable returns: create, unlock and extract value. “We actively drive organic growth through asset enhancement initiatives (AEI), optimise our portfolio and use the proceeds to enhance our balance sheet as we look for new opportunities to strengthen the portfolio.” There are a lot of efforts on the ground to sieve out deals with good entry value that enable us to reap the benefits of a resilient, diversified and quality portfolio,” says Tan.
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Diversifying portfolio to generate new revenue streams
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CapitaLand had completed a merger with Ascendas-Singbridge (ASB) in 2019. CapitaLand and ASB have been in China since 1994, developing different asset classes. ASB was an early mover in business and tech parks in China while CapitaLand was an early mover in residential, serviced residences, integrated developments, office and retail malls in China. The merger enabled CLCT to acquire business parks, diversifying and de-risking its portfolio from pure retail.
“When the two teams in China merged, that gave us access to different real estate classes,” Tan notes.
Following the completion of the transformational acquisition in 2021, CLCT acquired four logistics parks in October 2021, in Kunshan, Shanghai, Chengdu and Wuhan, for RMB1,683.4 million or $350.7 million. With this acquisition, CLCT currently owns nine retail malls in six cities, five business parks in three cities, and four logistics parks in four cities.
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In 1HFY2024, the retail portfolio remained resilient, recording better occupancies and improved tenant sales. The retail malls contributed 70.3% to gross rental income (GRI), followed by the business parks with 26.8% of GRI and logistics parks contributed 2.9% to GRI. Business park occupancies stabilised, experiencing a mild recovery q-o-q in 2Q2024 on a portfolio basis. The logistics park portfolio also staged a modest recovery q-o-q, excluding Shanghai Fengxian Logistics Park, which is undergoing a repositioning evaluation.
Proactive initiatives to build a quality portfolio
Tan has been focusing on organic growth following a slowdown in China’s GDP growth prospects. “In the last 18 months, we have been focusing on optimising our portfolio and driving asset performance through AEI,” Tan says.
In FY2023 and 1HFY2024, CLCT’s manager ceased operations at CapitaMall Qibao and returned the property to its owner in April 2023, ahead of its master lease expiry. In January, CapitaMall Shuangjing was divested for RMB842 million ($157.8 million) at an exit yield of 2.8%. “We sold CapitaMall Shuangjing well above our carrying value, and the proceeds were used to improve our balance sheet strength,” Tan says.
Despite the exit of CapitaMall Shuangjing, overall retail net property income (NPI) increased 0.3% y-o-y, driven by improvements in the “AEI malls”, which saw an 18.7% y-o-y increase. On a comparable nine-mall portfolio basis, NPI improved 6.1% y-o-y in 1H2024, underpinned by CLCT’s AEI malls.
The malls that completed AEI are CapitaMall Yuhuating in Changsha, Rock Square in Guangzhou and CapitaMall Grand Canyon in Beijing. In 1H2024, footfall across the retail portfolio grew 14.1% y-o-y while tenant sales rose by 6.6% y-o-y. This increase was driven by the strong performance of CLCT’s dominant malls, of which AEI malls contributed to about 70% of the increase in tenant sales. Occupancy rose to 97.8% as at end-June. Rental reversion for 1HFY2024 was positive at 1.2%.
“Occupancy has moved to where it used to be before Covid,” Tan observes. CLCT has a mixture of malls, with the top five “dominant” malls contributing more than 80% of the retail portfolio’s NPI performance. Out of the nine malls, CapitaMall Xinnan in Chengdu and CapitaMall Aidemengdun in Harbin are the smallest properties.
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Small malls need more thought in their positioning
“The team on the ground went through many rounds of discussion on how to reposition CapitaMall Xinnan. The smaller malls need a longer time to reposition,” Tan says. Repositioning requires studying the neighbourhood and requirements of the population in the “catchment”. Tan shares that there are times when the neighbourhood may not need another supermarket or enrichment school, and such factors must be considered.
“As a result, we are moving more towards leisure and sports, focusing on hiking and adventures. These tenants are taking spaces that used to be occupied by fast fashion such as Zara, H&M, Muji and Uniqlo,” Tan says. Chengdu and Sichuan are neighbours of Qinghai to the northwest and Tibet to the west. The Kunlun Mountain Range, popular with trekkers, runs through Qinghai and Tibet.
“The whole approach is to stage the AEI and to plan ahead of time, knowing when anchor spaces are up for renewal,” Tan says.
Mall managers also need to be cognisant of consumption trends. Carrefour used to be one of CLCT’s top tenants, anchoring CapitaMall Grand Canyon, CapitaMall Qibao and CapitaMall Shuangjing. Now, tech-enabled supermarkets like Freshippo by Alibaba and 7Fresh by JD.com are setting new trends where shoppers walk around accompanied by digitally enabled shopping carts and checkout without going through traditional scanners.
“We have brought in 7Fresh. The supermarket chain has a better understanding of the evolving demographics and has oversight on supply chain inventories. The format has changed. The new supermarkets can use a smaller frontage area to do the same business because of faster stocking, better inventory management, better supply chain,” Tan says.
In his view, CLCT has to continue making better use of its net lettable area (NLA). The NLA mix of its malls has evolved over time. The biggest shift is in F&B, now the biggest contributor by NLA to CLCT’s retail portfolio.
“The whole concept of F&B has shifted over time from corporate dining and dining in private rooms. Consumers want some casual dining and to socialise as well. We all have to remodel the space to suit the needs of today and tomorrow,” Tan says.
Despite AEI, there will be natural constraints to upgrading a mall. In cases where upgrading the specifications of properties may not be feasible, they could be divested. “Most of the assets we monetised are through our connections on the ground who understand the motivations of the buyers. We also work closely with the local authorities to strike a deal. This was what happened with CapitaMall Shuangjing,” Tan reveals.
CLCT is one of the most diversified REITs in terms of leases. Its top 10 tenants are retail, business park, and logistics park tenants, with reduced concentration risk.
“Our single largest tenant today contributes 1.6% to GRI. If the business model of a tenant is no longer viable, we can use our platform strength to find replacements as soon as possible,” Tan says.
Positioning CLCT to capture growth opportunities in line with China’s economic policies
CLCT also aligns its portfolio with China’s economic policies. The Third Plenum, which took place from July 15–18, focused on promoting high-quality development, deepening reform, advancing the rule of law, ensuring the nation’s well-being, protecting the environment, and social stability.
China is also promoting local champions and supporting R&D and technology. At the same time, the Chinese government is attempting to lessen the economy’s reliance on investment-led growth as it pivots to services and consumption.
“If you look at recent years, I would say the big themes or pillars of growth going forward will be consumption, innovation, and technology,” Tan says.
CLCT’s business parks are poised to benefit from the emerging trends centred on innovation and technology. They are located in Hangzhou, Suzhou and Xi’an. The Ascendas Xinsu Portfolio has the strongest occupancy. It is situated in Suzhou Industrial Park, within a strong catchment area that continues to see high leasing demand. CLCT announced renewed leases of around 33,000 sq m and new leases of 17,000 sq m, both at single-digit positive reversions.
Ascendas Innovation Towers and Ascendas Innovation Hub in Xi’an maintained above-market occupancy rates amid corporate consolidation in the submarket. However, the Singapore-Hangzhou Science Technology Park Phase I and the Singapore-Hangzhou Science Technology Park Phase II experienced lower occupancy in the three months ended June 30. CLCT is leveraging internal and external resources to attract potential tenants and improve occupancy. As a result, the manager has signed about 20,000 sq m of new and expansion leases in 1HFY2024, including a new e-commerce tenant with positive reversion.
“We are working closely with the local government to see what kind of tenants they would like to attract into the parks. By doing so, the landlord benefits from tax incentives and higher value-add. We are continuously aligning CLCT with China’s domestic market and economic priorities,” Tan says.
In line with China’s push for technological advancements, the contribution from the electronics and engineering sectors to CLCT’s portfolio GRI increased from 5.9% to 6.1% y-o-y and 3.6% to 3.7% y-o-y respectively in 1HFY2024.
On the capital management front, CLCT will likely continue shifting from offshore Singapore debt to onshore and RMB-denominated debt at a lower cost as the People’s Bank of China lowers policy rates to kickstart growth. CLCT has also diversified its sources of capital and increased its RMB-denominated facilities to 27% as at June 30. It is on track to increase its RMB-denominated loan facilities to 30% of its total debt by end 2024.
CLCT also became the first Singapore-based issuer to launch the free trade zone offshore RMB600 million bonds in October last year with an annual coupon rate of 3.8%. This enabled CLCT to save interest by the early refinancing of a Singdollar-denominated offshore debt. Looking ahead, it plans to explore further opportunities to raise more domestic capital and reduce the overall cost of debt.
CapitaLand Investment (CLI) arranges its REITs and business trusts around sectors and geography. CapitaLand Integrated Commercial Trust C38U and CapitaLand Ascendas REIT A17U focus on developed markets, with most of their assets in Singapore. CapitaLand China Trust is China-centric, CapitaLand India Trust CY6U is India-centric and CapitaLand Malaysia Trust is Malaysia-centric. CapitaLand Ascott Trust HMN is a global lodging trust that straddles both developed and emerging markets.
“How CLI manages its six REITs and business trusts are around very clear investment mandates, geographies and asset classes,” Tan says.
As a long-term player in China and leveraging the strong on-the-ground capabilities and tenant network of its sponsor CLI, CLCT is ready to pick up steam as China’s growth rebounds.
