Investor interest suggests a strong demand for a stake in Ion Orchard. A private placement of 171.737 million new units in CapitaLand Integrated Commercial Trust C38U (CICT), aimed at raising $350.3 million, received significant attention from new and existing institutional, accredited and other investors. The offering was approximately 3.7 times covered.
The private placement was part of a capital raising exercise to partly fund CICT’s acquisition of Ion Orchard. CICT is looking to raise $1.1 billion, with the remaining $757.2 million to be raised from a pro-rata and non-renounceable preferential offering of 377.3 million new units at $2.007 per unit, or 56 new units for every 1,000 units.
The private placement units will be issued on Sept 12 and will not be entitled to the advanced distributions. On Sept 4, CICT’s manager announced that unitholders will be entitled to an advanced distribution of 2.11 cents to 2.21 cents, with a book closure date of Sept 10.
On Sept 3, CICT’s manager announced the proposed acquisition of 50% of Ion Orchard from CapitaLand Investment for $1.85 billion, subject to an EGM sometime towards the end of October or early November. The resolution is an ordinary resolution requiring 50% of shareholders present and voting to approve the transaction.
CapitaLand Investment (CLI) will divest its 50% interest in Ion Orchard to CICT. Ion Orchard is a joint venture (JV) with Sun Hung Kai Properties, which holds the remaining 50%.
The agreed property value is within the range of two independent valuations of Ion Orchard, separately commissioned by the trustee and the manager of CICT. DBS Group Research indicates that the valuation will make Ion the most expensive property on Orchard Road.
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“The agreed property price of $1.85 billion implies $5,928 psf on a net lettable area basis. Considered as one of the best and most visible malls along the street, the agreed price will make it one of the “priciest” retail malls on an SGD psf basis to be transacted, justified by its trophy status,” DBS says.
Accretion, NPI yield, taxes
The Singapore Exchange S68 announcement by CICT’s manager says on a pro forma basis, assuming CICT had held and operated Ion Orchard from Jan 1 to June 30, the distribution per unit (DPU) accretion is expected to be 0.9%.
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Based on FY2023 data, the gross yield and the agreed transaction price of $3,697 million is 7.1%. Assuming a net property income (NPI) margin of 70%, the pre-tax NPI yield is 4.97% and the post-tax NPI yield is 4.1%. JP Morgan points out that “1H2024/FY2023 NPI margin for CICT’s retail properties were 72.2%/69.5% respectively.”
“We project a 1% accretion in DPUs for 2025-26. The trust is working to achieve tax transparency for Ion Orchard and it expects a further 0.9% accretion to DPU when approved by the relevant authorities (and subject to the agreement of Sun Hung Kai Properties),” says Xavier Lee, equity analyst at Morningstar.
DBS Group Research concurs. “We estimate that the proposed price implies c.4% to 4.1% yield on a post-tax basis (with the opportunity to drive it towards 4.8% to 4.9% if a more tax-efficient structure is sought in the medium term).”
According to a statement on SGXnet by CICT’s manager, the DPU for FY2023 and the six months ended June 30 show an accretion of 1.2% and 0.9%, respectively. “The pro forma DPU accretion may be higher due to the possibility of tax savings should there be a conversion of the property holding entities to allow for tax transparency, along with the possibility of a total payout from the property. The potential conversion of the Property holding entities for tax transparency purposes is subject to the JV partner’s agreement and the approval of the relevant authorities,” the CICT announcement says.
“We may need to restructure the holding company. There is no certainty we can get tax transparency; it is only given to REITs. It’s still worth exploring, and the indication is that the joint venture partners are not against it,” says Tony Tan, CEO of CICT’s manager.
CICT’s 1HFY2024 DPU was 5.43 cents, giving an annualised DPU yield of 5.1%. Following the acquisition, the pro forma aggregate leverage will be at 39.9%.
Compared with other transactions
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Ion’s NPI yield compares with a yield of 4.8% for Nex shopping mall when acquired by Frasers Centrepoint Trust J69U , 4.8% for Jurong Point when acquired by Link REIT and the divestment of Changi City Point at 4.6%.
While not the largest acquisition by a REIT, Ion Orchard is arguably the most recognisable, featuring prominently on Singapore’s tourist map. Larger transactions include Frasers Centrepoint Trust’s purchase of five malls and office property in AsiaRetail Fund for over $3 billion and Link REIT’s acquisition of Jurong Point and Swing by @ Thomson Plaza for $2.16 billion. Additionally, the merger between Mapletree Commercial Trust and Mapletree North Asia Commercial Trust, carried out via a scheme of arrangement, was valued at $4.215 billion.
What is notable about the Ion Orchard transaction is that CICT will acquire a 50% stake in Orchard Turn Developments, the property manager, as well as 50% ownership of both Ion Orchard and Ion Orchard Link (the connector between Orchard MRT Station, Tang Plaza and Scotts Road). The property management agreements dated 2 September 2021 between Orchard Turn Developments and the owners of Ion Orchard and Ion Orchard Link will remain in effect after the acquisition.
Investors will likely be attracted to CICT’s increased Singapore focus following the acquisition (see pie chart), with Singapore accounting for 94.2% of CICT’s enlarged AUM of $26.4 billion. CICT’s different segments are likely to be more balanced, with the office being reduced to 37% from 39% and retail rising to 35% from 30%. Assuming unit holders give their go-ahead, the proposed acquisition will likely be completed in 4Q2024.
Can Ion grow organically?
Ion Orchard, linked to an MRT interchange, is well-known and needs no introduction. If any mall could cater to everyone’s needs, it would be Ion Orchard. Basements one to four serve commuters, visitors and shoppers using the trains, with basement two directly connected to Orchard MRT, an interchange station.
Levels one to four may cater to all commuters, but serious shoppers on the upper levels are more likely to arrive by private transport. High-net-worth individuals (HNWIs) often use the main entrance on level two, where they can discreetly visit boutiques like Patek Philippe, Van Cleef & Arpels and other luxury jewellery and watch brands. According to Bloomberg reports, spending on luxury in Hong Kong has fallen. Hong Kong is more dependent on Chinese tourists than Singapore.
Tan believes the Hong Kong market heavily depended on Chinese consumption, while Singapore was less. “Singapore is a lot more diversified. We have wealthy PRC shoppers who come here to do their shopping. The rising trend over the past decades has been new residents. Professionals, the wealthy and HNWI are increasingly residing in Singapore,” Tan adds.
The Monetary Authority of Singapore’s Asset Management Survey 2023 said Singapore’s AUM grew by 10% to $5.4 trillion (or US$4.1 trillion) in 2023, faster than the AUM growth in Asia. Singapore is also a private banking and wealth management hub. The city-state has also become a regional hub for foreign direct investments into Asean.
“Southeast Asia is growing faster given heightened geopolitical issues. I think Southeast Asia is well underpinned to benefit,” says Tan. He also notes that during events like the Taylor Swift concert or Singapore’s Formula One race, there is a significant increase in visitor arrivals.
“Investors have asked whether we are concerned about luxury spending; people are cautious and we are not sure how the US will pan out right now, although consumption is holding up. But Ion isn’t just about luxury,” Tan adds. Most of Ion’s footfall is in its basements.
When asked where tenant sales are higher, Tan says: “Volume is always going to be from the basement where the two subway lines are located. The basements are always busy. The levels above ground could be more cyclical. You have the very wealthy, who spend a couple of million dollars in a single day when you see a bump in sales. But that doesn’t happen every day.” He adds that some brands are in Ion for projecting their branding, not just for sales.
“We will partly own the property management company and it’s very well established. So that would help us gain a better understanding of brands such as LVMH and the Kering group,” Tan says.
Orchard Turn was acquired by CapitaLand and Sun Hung Kai Properties back in 2005 for $1.38 billion. In 2006, Penta-Ocean was contracted to develop the site into a 50-floor residential tower and Ion for $478 million. Ion was last valued at $3.39 billion as of Dec 31, 2023.
In a CBRE report accompanying CICT’s presentation on Sept 3, market rents on Orchard Road are not back to 2019 levels. But they’re getting close, Tan says. What about the catchment population? “We have a catchment,” Tan says emphatically.
In addition to the new government land sale sites within walking distance of Ion Orchard, the area sees 160,000 MRT passengers daily. In 2023, Orchard Road welcomed 4.3 million tourists, with 10,600 hotel rooms nearby. The residential population in the catchment area is approximately 20,000. The appeal of Ion Orchard is now also drawing interest from CICT’s investors.
