“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 (IPT) are such that we should not sell below the lower of the two valuations,” says Gerry Chan, CEO of CLCT’s manager, in a recent interview.
CLCT needs the approval of independent unitholders in an EGM to divest Yuhuating. Sponsor CapitaLand Investment (CLI) and the CapitaLand Group cannot vote because Yuhuating is an interested party transaction where the value of the transaction is equal to or exceeds 5% of CLCT’s latest audited net tangible assets (NTA). In addition, CLI and CapitaLand Development (CLD) will also be divesting CapitaMall SKY+ into CLCR.
Based on CLCT FY2024’s audited financial statements, the NTA (less debt and goodwill) of CLCT was $1,926.6 million as of Dec 31, 2024. The NTA of the transaction is $153.9 million or 8% of the NTA and the NAV of CLCT, the circular issued on July 11 says.
A long journey
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“The journey started two years ago when the regulator allowed consumption assets into C-REITs. We chose Yuhuating because it was an asset that we felt was already mature,” Chan says. Yuhuating underwent an AEI, which was completed in March 2023. The AEI was for 8,900 sq m of space, and resulted in a positive 112% rental reversion for the space in FY2023. In FY2024, Yuhuating reported a 7.5% y-o-y rise in shopper traffic and a 13% increase in tenant sales. Yuhuating’s gross floor area (GFA) is around 75,431 sq m.
SKY+ has a GFA of around 92,974 sq m. It is located about 8 km from Guangzhou’s CBD at Pearl River New Town and about 23 km from Baiyun International Airport. Sky+ is directly connected to Baiyun Park subway station on Line 2, and it is the retail component of an integrated development that comprises a 200m high office tower. It serves a population catchment of about 5.7 million people within a 5 km radius.
“SKY+ is definitely a bigger mall, and it is in a tier one city,” Chan says. “Ours is in a tier two city, and that obviously impacted valuations.”
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CLI, CLD and CLCT will have a 20% stake in CLCR. SAC Capital, an independent financial adviser to CLCT’s unitholders, has said that the transaction, which comprises divesting Yuhuating and SKY+ into CLCR, and for CLCT to subscribe to 5% of CLCR’s new units, “is on normal commercial terms and would not be prejudicial to the interests of CLCT and its minority unitholders.” The 5% is subject to a lock-up period of five years.
SAC Capital has also said the independent directors and the audit and risk committee should recommend that unitholders vote for the proposed transaction.
The divestment price will only be finalised after the IPO units are priced, and Yuhuating could be sold to CLCR at a price that is higher than the floor price.
“The transaction is strategically important for CLCT,” Chan says. Units in CLCT traded at 75 cents on July 14, representing a price to NAV (P/NAV) of 0.69 times. In FY2024, CLCT distribution per unit (DPU) translates into a yield of 7.5% based on its July 11 price.
Its P/NAV compares with a P/NAV of 1.5 times 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.
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.
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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SAC Capital says no two C-REITs are alike because of geography, land lease and so on. Yuhuating’s exit yield (based on net property income) ranges from 6.4% based on the higher price and 6.8% based on the floor price. This is within the C-REITs’ average exit yields, ranging from 5.4% to 7%.
Following the divestment, retail as a portion of total assets will drop to 75.1% from 76.4%. Although CLCT’s retail portfolio has been stable, its business parks and logistics parks have underperformed retail. CLCT’s decline in portfolio value in FY2024 and the widening discount between unit price and NAV were caused by disappointment over the performance of its new economy assets. The occupancy of CLCT’s business parks is at 83.7% as of 1Q2025 versus 97.7% for the retail malls in 1Q2025. “We’ve got to stabilise the occupancy of the business parks,” Chan says.
“Hangzhou is more e-commerce. The general health of the e-commerce economy, especially the Alibaba ecosystem, affects Hangzhou,” says Chan. Xian’s business parks are geared towards back-end services, software services and call centres, and this has impacted occupancy in the Xian business parks, he adds.
“Our immediate focus is to bring up the occupancy before we think of portfolio reconstitution. Obviously, anyone who wants to buy an asset would want to buy an asset that is well occupied,” adds Chan.
On the logistics front, occupancy has improved because a single tenant fully occupies Shanghai Fengxian Logistics Park, and Kunshan Bacheng Logistics Park is also 100% occupied. However, rental reversions in 4Q2024 were negative.
“We have worked hard to increase the occupancy by quite a lot,” says Chan, referring to the occupancy of the logistics parks. “We signed an eight-year lease for the Shanghai asset.”
DPU-accretive, valuation uplift
What will CLCT do with the divestment proceeds? “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%,” says Chan. 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.”
An estimate is provided in the circular of accretion to CLCT should Yuhuating be divested at the floor price of RMB748 million. The proceeds would be around $133 million, of which $20.7 million is used to subscribe for 5% of the IPO units, $50 million is used for a unit buyback programme the remaining amount is used to pare debt. With this use of proceeds, the accretion to distribution per unit would be 0.4%.
CLCT will be able to gain C-REIT exposure through its strategic stake in CLCR, allowing CLCT to provide unitholders with upside potential. Since the launch of the first batch of infrastructure C-REITs in 2021, the C-REIT market has demonstrated steady growth momentum.
In March 2023, the Chinese government expanded the scope of C-REITs to include consumption infrastructure projects, allowing retail malls to be part of the eligible asset class for C-REITs. As of July, nine consumption-related C-REITs have successfully listed. The Chinese government has been ramping up efforts to boost consumer spending and consumption.
The recent C-REIT listings have garnered significant institutional and retail interest. Suzhou Hengtai Rental Housing REIT, Etown Industrial REIT and CGDG Mall REIT (consumption) had institutional subscription rates of more than 200 times and retail subscription rates of more than 600 times. 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%.
“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.
“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,” adds Chan.
