On Jan 14, CapitaLand announced that it is acquiring all the shares in two wholly-owned intermediate subsidiaries of Ascendas-Singbridge (ASB), which is in turn a subsidiary of Temasek. The acquisition, valued at $11 billion, will make CapitaLand the largest diversified real estate group in Asia.
The question is why. Scale is one of the main reasons. “It has become apparent over the last few years that scale has become increasingly important, as it provides a competitive advantage,” says Regina Lim, JLL head of capital markets research for Southeast Asia. “Moving forward, there could be more such M&As (mergers and acquisitions).”
Post-transaction, CapitaLand will be a behemoth with combined total assets under management (AUM) of more than $116 billion. The expanded portfolio will cover a wide spectrum of the real estate industry — from logistics/ business parks, industrial, lodging, commercial, retail to residential. Its geographical presence will span 180 cities across 32 countries.
“The acquisition will provide almost immediate scale in the key industrial and business park sectors, and access to new growth markets such as India and Korea, while CapitaLand rapidly expands its presence in the mature European and US real estate markets,” says Moray Armstrong, CBRE managing director of advisory & transaction services, Singapore.
CapitaLand’s M&A will give it access to Ascendas-Singbridge’s Changi Business Park (Credit: Samuel Isaac Chua/The Edge Singapore)
The acquisition gives CapitaLand a strong foothold in the Singapore industrial and business park sector where ASB was traditionally one of the largest and most experienced developers and landlords, adds Armstrong.
While CapitaLand is a key player in the CBD commercial office space, Ascendas dominates the business park and suburban office space. “CapitaLand bought ASB so it can control the downstream penetration of this market,” says Mark Lampard, director and head of regional tenant representation, Cushman & Wakefield (C&W). Lampard was speaking at the BCA-Real Estate Developers’ Association of Singapore (REDAS) Built Environment and Property Prospects seminar on Jan 14, the same day that the M&A deal was announced.
Grade-A office rental rates in the CBD are over $10 psf per month today, while rental rates in suburban office and business park space are in the range of $4 to $6 psf per month, notes Lampard. “This arbitrage is what organisations are looking for, and that’s the biggest reason why CapitaLand bought ASB.”
Aside from business parks, ASB Tower along Robinson Road will also be added to CapitaLand’s portfolio. A redevelopment of the CPF Building, ASB Tower has a total lettable area of 514,000 sq ft and is expected to be completed in 2020.
In addition to ASB Tower, the only other Grade-A office space that will be completed in the next two years is CapitaLand’s CapitaSpring (redevelopment of the former Golden Shoe Carpark). Located on Market Street, the project has a total lettable area of 635,000 sq ft.
While CapitaLand will be in control of upcoming new supply of Grade-A office space, industry observers say it is unlikely that this would impact rent in the prime office segment.
A redevelopment of the former CPF building, the ASB Tower at 79 Robinson Road will feature over 500,000 sq ft of prime Grade A office space (Credit: Samuel Isaac Chua/ The Edge Singapore)
Armstrong doesn’t expect the expanded footprint of the combined group to affect the competitive environment in the office market. “The office sector in Singapore is already pretty competitive with a multitude of private owners and investors alongside established government-linked providers of commercial space,” he says.
What this acquisition will bring is an expanded pipeline of potential assets which can be injected into Ascendas Reit (A-REIT), CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) — which are now the three largest Reits in the [Singapore] market. The acquisition is unlikely to change the landscape to a large degree. “The larger aggregated portfolio may, however, open up more opportunities for the group to reposition its assets,” says Armstrong.
With this acquisition, CapitaLand is now in a position to offer “a broader suite of premises solutions to corporate occupiers — covering front office and corporate HQ as well as locations suitable for support functions and backend infrastructure”, observes CBRE’s Armstrong. “The ability to deliver end-to-end solutions addressing customers’ space requirements will provide opportunities for the group to deepen relationships with customers.”
Chris Archibold, JLL’s head of leasing, agrees. He reckons that the merger “will allow CapitaLand to execute a more holistic strategy across its occupier offering as it can now offer clients Grade-A office space to business park space”.
On the new economy front, CapitaLand will now have “an even broader portfolio base to testbed and roll out its best-in-class digital offerings to enhance customer experience and connectivity”, he adds.
Last October, CapitaLand paid $27 million for a 50% stake in co-working operator The Work Project, as part of its “office of the future” strategy. In September 2017, CapitaLand’s corporate venture fund, C31 Ventures, participated in The Great Room’s Series-A funding.
Developers and landlords have to focus on flexible space as this is what tenants want, says JLL’s Lim. “Tenants increasingly want flexibility as there is a war for talent at the moment,” she adds. “They want a built environment with a human experience in order to retain their employees and foster innovation.”
C&W’s Lampard agrees. “Two to three years ago, in talking to MNCs, they wouldn’t consider putting their staff in co-working spaces due to fear of intellectual property or security concerns,” he observes. “Now, I would challenge you to find an organisation that’s not thinking of some degree of co-working in their organisation. It could be because of the capital requirements of fitting out a new office space, or to have an environment that caters to their millennial staff.”
Increasingly, office tenants are also looking at “decoupling”, says Ong Choon Fah, CEO of Edmund Tie & Co (ET&Co). They may maintain a CBD or premium office address for their client-facing business and relocate the others to a suburban office. The enlarged portfolio of CapitaLand and ASB will mean that the group will be able to provide their clients with “more space options”, she adds. “That means tenants will be dealing with the same landlord, whether in Singapore or elsewhere, and whether they are looking for office, retail or business park space.”
A-REIT’s Aperia will be added to CapitaLand’s portfolio. Aperia is a three-storey retail and F&B podium integrated with two Business-1 towers, located at the CBD fringe (Credit: Samuel Isaac Chua/ The Edge Singapore)
The move could also be defensive, especially in the retail sector, which is undergoing a difficult time with disruption and changes in consumers’ shopping behaviour. CMT is the biggest retail mall REIT listed on the Singapore Exchange, with a market capitalisation of $8.59 billion and total AUM.
“What this means for CapitaLand is that it will now be able to handle disruption better,” says Dennis Yeo, C&W chief executive for Singapore and Southeast Asia. Retailers, for example, are increasingly looking at both offline and online retail, which means they have to take up a storefront and also take up space in warehouses or logistics space for their inventory, he adds.
With the merger, CapitaLand will be able to tap ASB’s expertise in providing such logistics or warehouse space as well as supporting infrastructure to meet the needs of their tenants, adds Yeo.
According to Tan Tiong Cheng, president of Knight Frank Asia Pacific, the retail sector is not just affected by e-commerce. “Consumer spending is down, and traditional retail malls are suffering — not just in Singapore but around the world,” he adds. “Even F&B operators are not expanding as quickly, not just because of rents but difficulty in labour. Malls are seeing more leisure and entertainment tenants.”
Co-working operators are also entering malls, further blurring the lines between retail and office space.
“The whole business model around space is changing,” says ET&Co’s Ong. “Landlords will no longer be providers of space but will increasingly become service providers.”
Lines between the different real estate sectors are blurring, and more buildings are becoming mixed-use complexes. An example is Funan, which is owned by CMT and managed by CapitaLand, and slated to open in 3Q2019. It’s an integrated development with a mall, two Grade-A office blocks as well as The Ascott’s lyf, its brand of co-living serviced residence designed for millennials.
CMT’s Funan comprises a mall, two Grade-A office blocks as well as The Ascott’s lyf brand of co-living serviced residences (Credit: Samuel Isaac Chua/The Edge Singapore)
The mall at Funan will feature Singapore’s first deployment of automated guided vehicles and robotic arm in a retail setting as well as a 24-hour click-and-collect drive-through supplemented by warehousing facilities within the property. Co-working operator WeWork became the first office tenant when it committed to taking up 40,000 sq ft in the office block of Funan in December 2017.
In Singapore, the combined entity’s AUM will grow by 40%, while in China, it will increase by 9%. The value of the group’s properties in Singapore will be worth $38.6 billion or 33% of the total AUM.
According to CapitaLand, the merger will see its number of CBD and suburban offices grow from 39 to 83 properties across 10 countries, with a total gross floor area of about 27 million sq ft.
Over 100 properties in logistics/business parks and data centres will be added to the portfolio and these are expected to drive the group’s growth in the future. “[The deal] would add on to the portfolio of asset classes that CapitaLand is traditionally strong in — residential, shopping malls, offices. The whole range of asset classes will give us more choice to deploy capital,” says Lee Chee Koon, CapitaLand’s president and group CEO.