http://sgx.i3investor.com/servlets/fdblog/35936.jsp
Old Edge Article that will provide good insight not only to PCRT but the incoming assets to be injected into St James:
Perennial China Retail Trust taps tycoons for cash; gathers assets in Singapore, China
Author: StockFanatic | Publish date: Wed, 30 Nov 15:09 | >> Read article in Blog website
Pua Seck Guan might not have the huge balance sheet of the CapitaLand group behind him anymore, but he is deftly assembling a formidable band of financial backers that could be just as effective as he builds up his own property empire. A former senior executive at property behemoth CapitaLand, Pua decided to strike out on his own some three years ago. And after a brief stint at Indian developer DLF, he set up Perennial Real Estate, a property management firm. Over the last two years, he snapped up a string of landmark properties in Singapore, including the Capitol Building and most recently Chijmes, through privately held funds backed by the likes of restaurant tycoon George Quek, a company linked to asset trader Oei Hong Leong's sister Sukmawati Widjaja and the Kwee family of Pontiac Land. He has also been financed by heavyweight corporates such as Keppel Land, Singapore Press Holdings and even NTUC Fairprice Co-operative.
Now, billionaire Kuok Khoon Hong is amassing a stake in Perennial's sole public listed investment vehicle, the Perennial China Retail Trust (PCRT). The trust came to market only in June at an IPO price of 70 cents, promising a forward yield of 5.3% for this year and 5.5% for next year based on the IPO price and DPU of 2.37 cents in 2011 and 3.86 cents in 2012. Since then, its unit price has slumped 39% in the wake of the broad market sell-off to a historical low of 0.385 (See chart, left) before rebounding above 0.45 now. The operating assets owned by PCRT are in Shenyang, China. They include 50% of Shenyang Red Star Macalline Furniture Mall, 50% of Shenyang Longemont Shopping Mall and 50% of Shenyang Longemont Offices. When stabilised, PCRT is looking at yields of 7% on the Shenyang properties. On Nov 4, PCRT said it would acquire 50% of Chengdu Longemont Shopping Mall Development for RMB2.28 billion ($464 million), which would boost its property portfolio by some 59%. PCRT was listed with assets of $764 million.
'We told the market [the Chengdu property] will be yield accretive, and therefore you can expect it to be higher than our current portfolio yield of 7%,' Pua says. Chengdu Longemont is connected directly to Chengdu High Speed Railway Station and sits atop two metro lines. The price PCRT is paying works out to approximately RMB10,000 per sq m. 'Chengdu is going to be one of the mega cities with a population of more than 20 million. Therefore, in my opnion, I would expect this place to be like Tokyo Station,' Pua says, referring to the Japanese rail hub that serves 3,000 trains a day. Pua is at pains to explain that the acquisition will be fully debt funded, and will quickly boost the net asset value of PCRT as it appreciates in value. 'The debt is arranged in such a way that we come out with very little money upfront,' he says. Furthermore, PCRT has negotiated with Shanghai Summit (one of the cornerstone investors) for shareholders to have an additional earnout or income support.
Chengdu Longemont is one of two 'pipeline' properties detailed in PCRT's listing prospectus. It is due to be completed in 2014. The other pipeline asset that PCRT will eventually acquire is a 100% stake in Foshan Yicui Shijia Shopping Mall. Yet, with a portfolio of properties that is still largely in the process of being stabilised as income generating assets, investors evidently haven't been as confident about its prospects as established REITs such as CapitaMall Trust or CapitaRetail China Trust, which have held up well amid the recent market slide. Couldn't PCRT have waited until its initial portfolio was fully stabilised before listing? And, wouldn't it have been better off if it bought the Chengdu property after it has been completed?
'When it's ready, I cannot buy it at this price,' Pua counters. Moreover, foreign companies have a hard time getting approval to acquire completed buildings in China. 'When you go through a development stage, you are seen to have a certain value add. When you buy a completed building, the government sees you as speculating on the renminbi, unless you are WOFE [wholly-owned foreign enterprise] structured,' Pua explains. While the market doesn't appear confident about PCRT's prospects, billionaire Kuok apparently sees value in the trust. Kuok is a nephew of Malaysian 'Sugar King' Robert Kuok (Picture left), and the major shareholder, chairman and CEO of palm oil juggernaut Wilmar International, one of the top 10 largest companies by market value listed in Singapore. According to filings with the Singapore Exchange, he has already accumulated a 4.6% stake in PCRT.
Why is Kuok buying shares in PCRT? What role will he play in the property group Pua is building? Pua says he first met Kuok sometime ago but the subject of business never came up. 'It was casual,' he says of the meeting. But a more serious meeting took place as Pua was preparing to list PCRT. 'Just before the IPO, a private banker brought me to see Mr Kuok. I met with him for 35 minutes. He seemed to know what we are trying to do,' Pua tells The Edge Singapore. Pua adds that he came away with the impression that Kuok 'liked' the Perennial story. 'He knows China, and the retail scene. He knows what it takes to do a project and the opportunity in the market place. He looked at our pricing of the project and he knew it's very attractive,' Pua says.
In September, Kuok (left) was appointed a director at PCRT's manager. Soon after, as global markets swooned in the face of weakening growth prospects in the US and growing concerns over sovereign debt crisis in Europe, Kuok started buying shares in PCRT. PCRT's key cornerstone investors are Shanghai Summit, which is owned by Tong Jinquan, who controls the Longemont group; the Nanhai Nenking Group, which developed Nanhai Square in Guangzhou; and Hong Kong based Nan Fung. Shanghai Summit and Nanhai Nenking are providing pipeline properties to be acquired by PCRT in different phases. The other cornerstone investors of PCRT include Alan Wang, a former director of Kim Eng Securities, institutional funds AEW, Asdew and Prudential Asset Management. Kuok has made a number of other high profile real estate investments recently. Together with his partner in Wilmar, Martua Sitorus, Kuok reportedly paid some US$470 million for London's Aviva Tower earlier this year. And in December last year, Wilmar got into a joint venture with Kerry Properties and Shangri-La Asia to acquire a 200,000 sq m site in Yingkou City, Liaoning Province.
The site in China is designated for residential, commercial and hotel uses, with a 70 year lease for residential and 40 year lease for commercial use. The whole project is expected to cost RMB 2.6 billion, with Wilmar's stake at 35%. 'The demand for quality residential, commercial and hotel property in the second and third tier cities in China is expected to experience strong growth in the future,' Wilmar said when announcing the deal. Pua figures that PCRT could now give Kuok exposure to the retail property sector in China. 'In the market place, there are not so many good retail managers around. The China market sees rising consumption. This middle class kind of positioning will have a lot of scope to grow,' Pua says. 'We have similar thinking and we both see things in the same light.'
Delivering returns in Singapore
Pua expects to begin delivering returns to his financial backers shortly. In Singapore, he is preparing to open 112 Katong (pictured left) later this month. The property is the redeveloped Katong Mall, which Perennial acquired in 2009 for $248 million. To fund the deal, Pua stitched together a consortium comprising Alpha Investment Partners, a unit of Keppel Land, which owns 77% of the project; and BreadTalk, which is controlled by George Quek. In addition to the acquisition cost, the consortium spent a further $60 million on asset enhancement initiatives. The property has been turned into a Peranakan themed destination,with half of the space devoted to food and beverage outlets. 'We will deliver our financial results to our investors as promised,' Pua says, when asked about the return he expects.
Perennial followed up its acquisition of Katong Mall with a deal to buy the 20 year old Chinatown Point last year. Pua swooped down on it swiftly with a group of investors that included German fund manager SEB, NTUC FairPrice Co-operative and Singapore Press Holdings. The consortium paid $250 million for City Developments' 65% stake in 283 strata titled retail units and four office units in the property. It will be spending a further $75 million to refurbish the mall. Then, in December last year, Perennial clinched what could be the most exciting project in Singapore, the redevelopment of Capitol Theatre, Capitol Building and Stamford House. The project's cost, including the acquisition of the properties, is $750 million. Perennial's partners in the deal include Pontiac Land and Top Global, a locally listed company controlled by Widjaja.
The project will include turning the Capitol Theatre (pictured left) into one of the largest single screen cinemas in Singapore, with approximately 800 seats. A luxurious 200 room boutique hotel will sit atop the ground level shop fronts of Stamford House and Capitol Building. Facilities will include private lounges, a bar and dining restaurant as well as a ballroom. The redeveloped property will also have a four storey retail podium and a 15 storey residential podium. The residential units are expected to range from 1,200 to more than 2,000 sq ft, with designer fittings. Now Pua is preparing to take on possibly his most challenging project in Singapore. Last month, Perennial agreed to pay Suntec REIT $177 million for Chijmes, the former convent that houses a collection of bars and restaurants. As a heritage site, many people reckon that not much can be done to improve the earnings potential of Chijmes, but Pua says he can make it work.
'It's very simple. The current yield is 3.8%. Yield is a function of the cost, the rental rate and NLA [netlettable area] efficiency you can get.' NLA efficiency is the ratio of NLA to gross floor area (GFA). The GFA of Chijmes (pictured left) is 154,000 sq ft, compared with its NLA of 80,000 sq ft. 'I bought Katong Mall at a yield of 2%. Now, I'm getting above 7% yield on cost. That's how you can create value,' Pua explains. Similarly, the Perennial consortium acquired Chinatown Point at an efficiency of less than 55%. Now Pua estimates it is in the high 60% range. 'We are able to put in the prime space that can generate higher rental. Similarly, that's what we did for Katong Mall." Besides boosting the NLA efficiency of Chijmes, Pua also figures he can improve foot traffic to the property by connecting it to Perennial's Capitol project via an underpass. The latter is scheduled for completion in 2014. Perennial's backers for the Chijmes project include Ron Sim, the founder of massage chair maker Osim International; and BreadTalk. Pua says there are other investors in the project, who cannot yet be named.
Higher returns in China
Pua says the returns Perennial is likely to deliver on its Singapore projects could pale in comparison to what it generates in China through PCRT. 'China is a lot more exciting than Singapore in terms of growth potential,' he says, adding that returns on Singapore for investors are often little more than 10% to 15%. 'In China, you can actually make 100% if you do it correctly.' Indeed, he notes that while PCRT is effectively paying RMB10,000 per sq m for its recent acquisition in Chengdu, a mid-tier mall in the same city called Galleria recently changed hands for close to RMB20,000 per sq m. As he sees it, cities such as Chengdu are still taking shape and there is a huge supply of new properties that are being developed. 'The market is big, the pie is big. The market can afford to accommodate a few players,'Pua says. Still, having a plan and clear sense of how to execute it is essential, he adds. 'You must know your business well to control your costs very well. And, you must have a team to deliver what you envisage to do." And you must have the execution team to do the asset plan and leasing.'
Pua figures PCRT won't go too far wrong if it focuses on properties that serve the needs of China's growing middle class. And that means it must not pay too much for the properties, he adds. 'A lot of developers are targeting the higher end of the spectrum. To target the middle class, you must be able to control your cost very well.' By his calculations, a cost of RMB10,000 per sq m would be about right for a middle-tier shopping mall. 'To do RMB10,000 per sq m, we need a rent of RMB3 per sq m per day, andwe will get a 7% yield,' he says. 'We just need to optimise our mix along the way to improve our yield.' So, should investors follow the example of Pua's latest backer Kuok and buy into PCRT? Analysts at Citigroup say they have turned more positive on the trust after its steep slide. Citi has a price target of 70 cents for PCRT, based on a 30% discount to its 2012 net asset value estimate of 99 cents. The sharp discount reflects heightened policy risks in the China property market, Citi says. On its forecasts, PCRT offers a forward yield of 5.7% for this year and 7.8% for next year, before dropping sharply to just 3.3% for 2013. PCRT's 3Q results were released on 11 Nov.
For his part, Pua says investors shouldn't look to PCRT just for its yield. 'If PCRT is just pure yield, it's not exciting. I'm trying to combine yield plus NAV growth structured such that it is transparent so that people know the value of these malls,' he adds.'Nobody who looks at the portfolio can say we are expensive."
Source : The Edge Singapore