Units in CapitaLand China Trust closed at 73 cents on July 10, representing a price to NAV (P/NAV) of 0.67x. In FY2024, CLCT distribution per unit (DPU) translates into a yield of 7.7% based on its July 10 price.
Its P/NAV compares with a P/NAV of 1.5x for consumption-related C-REITs, and it is trading at a relatively higher yield versus the consumption C-REITs’ sub-4% DPU yields as at end-June.
Interestingly, the consumption C-REITs’ DPU yields averaged 5.5% during their respective IPOs based on data compiled from their financial statements and presentations, and have compressed post-IPO.
On April 17, CLCT announced it planned to divest CapitaMall Yuhuating into a C-REIT, CapitaLand Commercial C-REIT or CLCR. CapitaLand Investment (CLI) and CapitaLand Development (CLD) will be divesting CapitaMall Sky+ into CLCR. CLI, CLD and CLCT will have a 20% stake in CLCR. On June 12, CLCT announced that the floor price of CapitaMall Yuhuating will be RMB748 million, and it would take a 5% stake in CLCR.
“We have asked for our unitholders’ approval to approve a floor price of RMB748 million, which is the lower of two independent valuations. The regulations required in an interested party transaction (IPO) are such that we should not sell below the lower of the two valuations,” says Gerry Chan, CEO of CLCT’s manager. The second valuation was at RMB780 million.
The floor valuation for Yuhuating was 4.7% below the mall's valuation as at Dec 31, 2024 compared to the large discount that CLCT units are trading at versus their book value.
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“We are trading at a discount. Hopefully, after we demonstrate our value arbitrage, the discount will be smaller,” Chan says. If CLCT can crystallise the value of Yuhuating, CLCT’s unit price could recover.
Additionally, if CLCT manages to receive a larger premium for Yuhuating, at a price higher than RMB748 million, CLCT would have additional financial flexibility.
“It could be a combination of uses. We will try to lower our debt. As a guide, we want to get it closer to 40%,” Chan says.
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Meanwhile, analysts are continuously suggesting that S-REITs and banks should undertake share buybacks. Chan thinks they are not wrong. “Our units are trading at 7% to 8% and at a discount to NAV. If we reinvest at 8% it would improve ROE and be accretive to NAV."
The recent C-REIT listings have garnered significant institutional and retail interest. Suzhou Hangtai Rental Housing REIT, Etown Industrial REIT and CGDG Mall REIT (consumption) had institutional subscription rates of more than 200x and retail subscription rates of more than 600x. CGDG Mall REIT’s IPO yield was 4.8% and it has compressed to 3.5% as of July 4.
The main difference between CLCT and CLCR is that CLCT targets global investors, and CLCR targets domestic investors. CLCR can only own income-producing retail malls. CLCT has diversified — rightly or wrongly — into business parks and warehouses. CLCR must own 100% of the asset. S-REITs can own less than 100% of an asset. For instance, CapitaLand Integrated Commercial Trust owns 70% of CapitaSky and 50% of ION Orchard.
As an S-REIT, CLCT can undertake development projects of up to 10% of its deposited property. CLCR can only own income-producing assets. The aggregate leverage limit for C-REITs such as CLCR is 28.6% whereas S-REITs’ aggregate leverage can rise to 50% subject to certain conditions, although no S-REIT would consciously go towards 50%.
“Our CapitaLand name is well known in China. People recognise it as a trusted brand and CapitaLand is known to have deep expertise in retail for many years,” Chan says.
CapitaLand pioneered REITs in Singapore. Regulators from other jurisdictions have come to Singapore to understand the S-REIT model.
“Once we’ve listed the C-REIT we will be able to demonstrate to valuers that our retail assets do have some value support. We should be able to protect that part of our valuation,” Chan says.
