Monday, July 19, 2010

Point of divesting Chinatown Point

CITY Developments Ltd (CDL) recently sold its stake in Chinatown Point, comprising the entire retail component (283 strata shop units) and four strata office units, for $250 million. The buyer is a consortium put together by Perennial Real Estate group - set up by Pua Seck Guan, the former CEO of CapitaMall Trust Management Ltd.

What made CDL, a seasoned developer, divest the asset it has held for two decades?

Located strategically at the intersection of New Bridge Road and Upper Cross Street, Chinatown Point is a mixed development comprising a mall (with six levels of retail space including part of Basement 1) and a 25-storey office tower. It stands on a 99-year leasehold site, which was sold by the Urban Redevelopment Authority in 1980 for $61 million to Ho Kok Cheong's People's Park Chinatown Development. Mr Ho had planned a hotel and mall development to be named Chinatown Centrepoint.

However, the project's developer ran into financial difficulty and was ordered to be wound up in August 1986. The stalled project was then put up for tender the following year and that was when CDL entered the picture. It won the tender in September 1987 and later took a couple of partners. The project's scheme was changed from retail-and-hotel to retail-and-office, along with a name change. Chinatown Point finally opened in 1990.

The location received a major boost when Chinatown MRT Station opened nearby, as part of the North East Line, in 2003. And shopper traffic in the area is set to grow further when the Chinatown Station becomes an interchange as part of the new Downtown Line.

Evolved market

But location alone is not enough in today's retail market. The mall management business in Singapore has evolved to a new level in the past 10 years or so, especially since the listing of Singapore's first real estate investment trust, CapitaMall Trust (CMT), in 2002.

It marked the dawn of a new breed of 'professional mall managers', with the mandate to extract as high a net property income as possible from the assets under their management.

One of their trademarks is the undertaking of creative asset enhancement works, such as the decanting of space from upper floors (where retail rents are lower) and the building of replacement shop space on lower levels, where rents are higher.

Mechanical and engineering equipment and sometimes even carpark space in basements are moved elsewhere to create new retail space.

Large-space tenants like department stores occupying prime spots are eschewed as these mall managers prefer to carve the area into smaller units which can generate higher per square foot rentals.

Tenants' turnovers are tracked closely as they have to pay gross turnover rents, in addition to a fixed base monthly rent. Underperforming tenants are shown the door and higher-performing replacements are found in the merciless pursuit to generate maximum returns for the Reit's unitholders, who include many mom-and-pop investors and retirees in additional to institutional investors.

This breed of aggressive professional mall managers has grown, as CMT's listing has spawned other trusts holding shopping centres - such as Suntec Reit, Frasers Centrepoint Trust and the Asia Retail Mall funds.

In such a marketplace, CDL may have found it tougher to make Chinatown Point mall shine against the competition - unless it's prepared to set up its own shopping centre Reit/trust and allied professional mall management business.

Sensible move

It makes good business sense for CDL to have sold Chinatown Point mall and redeploy sales proceeds to other aspects of the real estate business where it has a comparative advantage - such as, its ability to buy residential sites here and launch them within a short time, achieving relatively quick turnaround on its investment.

Chinatown Point isn't the first mall that CDL has disposed of; back in 2003, it sold its stake in Lot One in Choa Chu Kang.

The group has a few other shopping centres in Singapore in its portfolio - including Central Mall at Havelock/Magazine roads; Palais Renaissance, next to the red-light haunt of Orchard Towers; and City Square Mall along Kitchener Road.

It should not be too surprising if some of these are divested in future.

Source: Business Times, 19 Jul 2010

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