Commentary

Why merger of CapitaLand's mall and office Reits makes sense

$8.3b deal creates entity with heft amid retail challenges, fatigue in office market

Being a shopping mall landlord is risky business in the age of e-commerce, even in retail-crazy Singapore. So it is only sensible that CapitaLand Mall Trust is merging with CapitaLand Commercial Trust, which owns offices.

The $8.3 billion deal between the two sister real estate investment trusts, or Reits, will create a property owner of some heft.

The combined entity will have the firepower to undertake up to $4.6 billion in overseas acquisitions. At home, the revenue stream from shops - under pressure from online sales - will get commingled with more stable office rents.

That will be a relief. CapitaLand Mall Trust's income available for distribution grew a healthy 7.5 per cent last year, but the Reit's tenants saw sales decline 1.4 per cent on a per sq ft basis, with electrical and electronics, home furnishings and information technology and telecommunications recording falls of over 10 per cent, according to figures released on Wednesday.

This is part of a global trend. As I wrote previously, Singapore's Generation Z - those born after 2000 - will not be mall rats. It will be a challenge for landlords to eke out positive rental "reversions" when tenancies come up for renewal.

More than half of Raffles City Singapore, a marquee property in the trust's portfolio, was leased out again last year, and the owner saw no increase in rates.

At The Atrium@Orchard - another prestigious downtown location - rentals dropped 6.5 per cent from when CapitaLand Mall signed them three years earlier.

Mind you, Singapore's office market is also showing signs of fatigue. Rents for Grade A offices stopped rising in the December quarter as the city's small, open economy slowed amid US-China trade tensions.

Colliers International forecasts they will climb just 1 per cent this year, before sliding 4 per cent next year. Things could get uglier still if the co-working trend comes under strain following last year's WeWork debacle.

But even those worried about the shared-space segment should be encouraged by the technology industry - especially fintech.

With 21 bids for up to five new digital bank licences, the outlook for the city's office market is more optimistic than it is for retail. CapitaLand Commercial Trust generally experienced positive rental reversions during the December quarter.

Properties such as Six Battery Road, formerly Standard Chartered Bank's Singapore headquarters, and 21 Collyer Quay, where WeWork will move in after HSBC Holdings moves out, could do even better after the landlord spruces them up this year.

Singapore's office market will also undergo transformation as city planners make a deliberate attempt to have more people living in and around the Central Business District.

The idea is to increase the utility of the island's priciest real estate so that it is not a ghost town after working hours. As part of the plan, old office towers near the central bank and the stock exchange will be redeveloped as mixed-use properties that have more space to sell or rent out.

Neither these structural changes nor the cyclical ebb and flow of office demand and supply is a surprise to property builders and owners. Assessing the retail industry is trickier.

Not only could it be facing terminal decline because of surging digital consumption, but it is also driven by tourism. Interest in the city peaked after the 2018 release of the movie Crazy Rich Asians, and continued to rise - to about five million visitors in the third quarter of last year - after Hong Kong's anti-government protests. The recent outbreak of a new respiratory virus, however, is a reminder of how ephemeral such gains could be.

The virus, which originated in the central Chinese city of Wuhan, may or may not be a repeat of the deadly 2003 Sars epidemic, which hit Singapore hard. Yet it gives real estate investors another reason to want their rents coming from a combined pool of retail and offices. That way, the profit available for distribution will become more future-proof - at least until artificial intelligence makes it unnecessary for humans to show up for work at all.

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A version of this article appeared in the print edition of The Straits Times on January 25, 2020, with the headline 'Why merger of CapitaLand's mall and office Reits makes sense'. Subscribe