Property giant City Developments (CDL) has structured another investment deal to unlock about $1.1 billion from its real-estate assets here.
CDL will partner Alpha Investment Partners to set up a joint office investment platform, which will acquire three of its office buildings - one in the Central Business District, another near the CBD and the third, in Tampines.
Private equity firm Alpha will invest $200.2 million, while CDL will inject $133.3 million through its subsidiary, Bestro Holdings.
The remaining $750.1 million will come from borrowings from OCBC and DBS Bank.
This "profit partnering security" investment, as it is called, is CDL's second such deal in 12 months. This is similar to a deal involving its Sentosa Cove properties about a year ago that helped it raise $1.5 billion.
Under the new deal, Alpha, a wholly-owned subsidiary of Keppel Land, will be guaranteed an annual fixed payout of 5 per cent for five years.
CDL chief executive Grant Kelley described the set-up as similar to a private equity investment.
"The objective is to recapitalise the assets with a high-quality partner," said Mr Kelley, who described Alpha as the best real-estate private equity firm here for the past 10 years.
Towards the end of the five-year period, both investors will look to "exit" the investment by selling the buildings. Mr Kelley said: "Just like a private equity deal, the returns to the investors are predominantly on the exit."
This new deal is part of CDL's two-prong approach to diversify into different geographical regions outside Singapore as well as to venture into fund management.
"When the market looks at fund management, especially for public companies like CDL, it traditionally looks at Reits," said Mr Kelley.
But there are other ways to structure fund management. And such private-equity style structures offer more flexibility and a promise for an exit within a fixed period.
Mr Kelley believes the partnership with Alpha will result in a "win-win" outcome, with the payout occurring in three tranches.
When Alpha exits the investment after the buildings are sold, it will get back its entire investment of about $200 million and additional cash that will represent a return of 12.6 per cent on an equivalent annualised basis.
After Alpha is paid, then CDL will get back its initial capital injection of about $133 million.
Finally, Alpha and CDL will then share the rest of the proceeds of the sale in a 40:60 ratio.
"Like any private equity structure, this incentivises the sponsor (CDL), to 'sweat' the asset, which is to maximise the yield and the value of the asset, for the best exit," said Mr Kelley.
The suite of three office buildings - Central Mall, which is by the Singapore River; Manulife Centre beside Bras Basah MRT station; and 7 and 9 Tampines Grande in Tampines Regional Centre - were picked to provide Alpha with "a package of properties that it will find appealing".
The buildings enjoy 98 per cent occupancy rates, have a good profile of tenants and have proved to be resilient over several business cycles, said Mr Kelley.
While he admits that the outlook for offices in Singapore will be bad in the next two years, he is confident that things will pick up by 2018 and 2019. "This will represent good value for the investors," he said.