Mitsubishi Estate Asia, CapitaLand, CCT to redevelop Market St Car Park

There is a possibility of a glut of new office space in the near future, and this will put pressure on rental reversion. However, this has not stopped Japan’s Mitsubishi Estate Asia (MEA) from acquiring a 10 per cent stake in the redevelopment of Market Street Car Park.

Together with CapitaLand and CapitaCommercial Trust (CCT), the Japanese real estate company will transform the car park into a Grade A office building by 2014.

In April, CCT announced its intention to redevelop Market Street Car Park with CapitaLand holding a 50 per cent stake in the joint venture (JV).

On Thursday, CapitaLand said it will hive off a fifth of its share to MEA in the S$1.4 billion project.

CCT added that the project will now be funded by the three parties in proportion to their stakes in the JV.

A call option has been granted to CCT to acquire CapitaLand’s and MEA’s interest in the completed development. This call option may be exercised any time over a period of three years after the temporary occupation permit (TOP) of the new office tower is obtained.

Lynette Leong, chief executive officer of CapitaCommercial Trust Management Limited, said: “To get majority control of the asset, at the end of the day when it is completed, we should be buying the 60 per cent. However, we will still need to assess whether the returns will be yield-accretive to CCT, when the time comes to exercise the call option.”

CCT believes the property is well positioned to reap the office space demand in 2014, as that there is not going to be any new supply of office space in the Central Business District (CBD) in 2014.

But with a substantial supply of office property coming on over the next three years, analysts are warning of potential headwinds in the sector.

Nicholas Mak, executive director for Research & Consultancy at SLP International, said: “From now until the end of 2014, we are going to see about 7 million square feet of office space being completed. And a large bulk of this – about 4.7 million – is going to be completed this year and next year. This is almost more than double the annual absorption rate for the market.”

Analysts said some older office properties could start seeing a hollowing out, as tenants move to newly completed properties.

This would put downward pressure on office rents.

Ms Leong said: “The rentals are still about 45 per cent lower than the previous peak in 2008…There are some negative rent reversions in the portfolio, because most of the leases were signed during the peak, and once the market catches up, then we should be able to see more stable returns.”

Separately, CCT also announced a lower distributable income of S$54.38 million for the second quarter ended June 30.

This is a fall of 2.3 per cent from S$55.67 million a quarter ago.

In a statement, CCT said this is mainly attributed to “the reduction in rental income following the divestments of two non-Grade A properties and negative rent reversions”.

Gross revenue for the quarter dipped 9.2 per cent to S$91.01 million.

Unitholders can expect a distribution per unit (DPU) payout of 3.77 Singapore cents for the first half of this year.

However, not all is bleak in the office property sector.

Analysts said that while large office plates of 10,000 to 25,000 square feet may face competition from the completion of buildings such as Asia Square and Ocean Financial Centre, there could be good opportunities in the smaller-sized office space.

These are between 1,000 and 3,000 square feet in size.

Source : Channel NewsAsia – 14 Jul 2011

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