In December last year, City Developments (CDL) and CapitaLand Investment (CLI) warned that their overseas portfolios would cause their total patmi (profit after minority interest) to fall significantly.
Before their announcements, Frasers Property TQ5 (FPL) warned investors that its net patmi would be negatively impacted by revaluation losses in the UK, Europe and Australia. As it turned out, that set the tone for the January-February 2024 results season.
Given that FPL’s patmi fell by 81% y-o-y in FY2023 ended September 30, 2023, it was no surprise that CLI’s total patmi fell by 79% y-o-y. CDL’s patmi fell by 75% y-o-y. Ho Bee Land H13 suffered the largest impact, swinging into a loss in FY2023. However, CLI’s UK exposure is through CapitaLand Ascott Trust HMN and CapitaLand Ascendas Trust. Its impairment losses were mainly from China ($511 million) and the US ($213 million).
In terms of absolute numbers, CDL’s 75.3% y-o-y in patmi decline translates into $317.3 million. It reported an impairment loss on investment property of just $43.7 million. While this looks modest, CDL adopts a historical less depreciation cost accounting approach rather than fair value.
On Feb 28, CDL also announced it had divested a site in Shirokane, Tokyo, for JPY50 billion ($450 million) in 3Q2023. The Shirokane site was acquired in September 2014 for JPY30.5 billion or the equivalent of $355.5 million.
According to its presentation, CDL’s total UK assets are carried at about $4.9 billion, using historical cost. In 2018, CDL acquired 125 Broad Street for the equivalent of $494 million and Aldgate House for $328 million. In December 2022, CDL bought a purpose-built student accommodation portfolio for $357 million. Last year, CDL bought St Katharine Docks for $636 million, 1NQ for the equivalent of $125.7 million and Morden Wharf for $129.6 million.
It appears that CDL does not hedge its income but adopts a natural hedge policy for the investment. Hence, it is taking onshore sterling pound debt for the properties. Out of the $4.9 billion, 96% or $4.487 billion is hedged.
More drastically, Ho Bee Land recorded higher revenue in FY2023 and ended December 2023 but due to unrealised fair value losses, it reported a net loss of $259.8 million versus earnings of $165.9 million in FY2022.
Specifically, Ho Bee booked a revaluation loss of $472.2 million on its investment properties in London due to a sharp expansion in capitalisation rates. The local developer has eight investment properties in London, including The Scalpel, Ropemaker Place and 1 St Martin’s Le Grand.
See also: Frasers Property: Narrowing the discount
According to valuations done by Savills, The Scalpel, valued at GBP680 million as at Dec 31, 2022, is now valued at GBP554 million. Ropemaker Place’s valuation in the same period was lowered to GBP635 million from GBP703 million, while 1 St Martin’s Le Grand is now valued at GBP170 million, down from GBP198 million a year ago.
UK’s GDP growth is expected to be at a glacial 0.4% in 2023 and 0.9% in 2024. Inflation is expected to fall faster than previously expected, reaching the Bank of England’s 2% target by May and averaging 2.4% in 2024. As a result, the bank rate is also expected to fall in 2024, with 100–125 basis points (bps) of rate cuts predicted this year, according to EY.
CBRE says interest rate cuts in 2H2024 will bode well for property yields. “After peaking in 2024, these yields are expected to stabilise and compress over the following years, signalling a turning point for values across all sectors,” it says. Prime offices will benefit from a relatively shallow peak in unemployment as job growth continues to surprise on the upside, particularly in London, adds CBRE.
According to the consultant, high interest rates and falling values have created a lack of viability for debt buyers and contributed to a thin market. But as debt costs fall, this should improve. Fewer transactions have made it more difficult to track market pricing, CBRE says. However, as yields decompress further, the mismatch between buyers and sellers will close, with transaction activity increasing throughout 2024.
Matt Oakley, director of commercial research at Savills, says: “As is often the case, the first signs of recovery in capital values will come in the markets where income-focused equity investors tend to play, and we expect to see prime yields hardening in both London City and West End offices by the end of 2024.”
The UK market is much broader than a single city but London has the deepest and most liquid market. Therefore, while most of the bad news may be behind the local developers, they are unlikely to be able to write back all their losses this year.
Kwek Leng Beng, executive chairman of CDL, is unfazed by the negativity around the property sector. “My task here is to find opportunities. I have known the owner of Tanglin Shopping Centre for a long time. We have a good relationship and we do things together. He is in the paper business but doesn’t know much about the UK. I’m going to bring him to the UK. He’ll love the UK.”
