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SINGAPORE: The corridors of Palais Renaissance are perhaps the quietest of any Orchard Road mall. But that does not bother Eddie Lee, owner of upscale jewellery boutique De Stijl. Lee has been a tenant at Palais Renaissance since 2002, occupying a unit in the basement.
"In 2004, when Marmalade Pantry came here, traffic improved," he says, referring to the restaurant that proved to be hugely popular. The number of visitors to the malls tailed off again, however, after Marmalade Pantry moved to the much busier ION Orchard when it opened in 2009, he adds. "If I were to rely on shopper traffic, I'd be dead."
In fact, Lee and many of his fellow tenants at Palais Renaissance have never relied on casual, walk-in customers.
Most of them already have an extensive rolodex of established clients who regularly come to the mall specifically to visit them.
Among Lee's fellow tenants is hairdresser extraordinaire David Gan, whose salon Passion has doubled its space at Palais Renaissance, says Corrine Yap, deputy general manager, marketing and leasing at City Developments (CDL), which owns Palais Renaissance. "He's expanded to be the biggest hair salon in Singapore. He's taken 7,500 sq ft."
Yap says other tenants that have recently taken up space at the property include piano maker Steinway and Hermes' home products. Such tenants do not attract large crowds of shoppers, but generate big-ticket sales from the few visitors who walk through their doors. "Steinway is doing very well.
"In their first week here, they sold two concert grands at S$150,000 (RM367,000) each. In fact, they were running short of pianos to sell. They underprojected the demand. The showroom is very prominent on Orchard Road, and Steinway is a very well-known brand," she adds.
Few analysts and investors appreciate the niche positioning of CDL's key Orchard Road property, though. Apart from the lack of crowds at Palais Renaissance, they are unimpressed with the way the property is managed.
Unlike other owners of major Orchard Road malls such as CapitaMalls Asia, Singapore Press Holdings and Starhill Global REIT, the company does not monitor shopper traffic and tenant sales at its most visible Orchard Road property.
And, it has not been as aggressive as its peers with asset-enhancement initiatives to expand its net lettable space and rental income.
However, CDL's portfolio of investment properties extends well beyond Palais Renaissance. Farther up the street, it owns several strata-titled units at Delfi Orchard.
At the junction of Serangoon and Kitchener Roads, the company also owns City Square, which has some 440,000 sq ft of net lettable area, larger than Palais Renaissance and Delfi.
"This mall is in a brand-new location," Yap says, adding that shopper traffic and tenant sales are closely monitored at this property. "Within a year, we've built up one million visitors and our target is two million a year."
The company also owns Republic Plaza at Raffles Place, as well as several mostly Grade B office buildings, including Fuji Xerox Towers, City House and some strata-titled offices.
The company is one of Singapore's largest landlords in the retail and office property sectors, with more than six million sq ft of rentable space.
According to a recent Morgan Stanley report, its retail property accounts for 10% of gross asset value, while office property accounts for a further 30%. Property held for residential development accounts for another 36%, while most of the balance relate to hotel properties held under its 54%-owned subsidiary Millennium & Copthorne Hotels plc.
Yet, with the low-key nature of many of its commercial properties, CDL is thought to be primarily a property developer rather than a property owner with a substantial portfolio of real estate assets.
In recent months, that perception has not served the company well at all, thanks to market anxiety over tougher measures to curb speculation in the mid-tier segment of the residential market, to which its development projects are exposed. Shares in CDL are down 11.8% this year, versus a 4.9% decline in the FTSE Real Estate Index and a 2% decline in the Straits Times Index.
Vikrant Pandey, an analyst at UOB Kay Hian, figures that CDL has a revised net asset value (RNAV) of S$12.10 a share. Yet, with its shares trading 7% below that level, he is maintaining a "neutral" rating. "In the near term, there has been a change at the [Ministry of National Development].
Once the review is complete, we expect some measures," he says. "We are cautious. There is value and stocks are trading at a discount to RNAV, so they are a cheaper entry to physical property. But, the catalyst is lacking."
Morgan Stanley estimates City Development's RNAV to be an even higher S$12.44 a share. It has an "underweight" recommendation, however, and a price target of S$9.85. According to Bloomberg, CDL has six "buy", 11 "hold" and five "sell" calls. CDL is not the only counter suffering because of its perceived exposure to the risky residential property sector. According to a Morgan Stanley report, residential property stocks are trading at an average discount of 28% to their respective RNAVs.
Recycling of investment assets
Now, CDL might be about to change the perception that it is little more than a residential property developer. And, it could draw attention to the underlying value of its investment properties. That is the result of it divesting some of its investment properties and ploughing the proceeds into new projects and investments.
"We believe that the strongest driver for CDL's share price in 2011 will be its asset-recycling potential," says Pang Chin Hong, an analyst at CLSA, in a report last month. "The group has actively engaged in divesting older properties since 2009."
Among the properties it sold last year were The Corporate Building, Chinatown Point, Pantech 21 and New Tech Park. That boosted pre-tax profit contributions from its rental properties segment to S$422 million, or 40% of its total profit before tax of S$1.03 billion for the year.
The recognition of gains from divestments continued this year. In 1Q11, the company reported a 62.9% jump in profit before tax to S$336.9 million.
The largest contributor, accounting for S$178.1 million, or 52.8%, was the rental properties segment, which received a boost from divestment gains of S$148 million. The gains came from the sale of The Corporate Office and a strata unit at GB Building. Property development accounted for 37.7% of its profit before tax in 1Q11, and hotel operations accounted for 9.2%.
"We believe that CDL will continue recycling this year and we have identified 12 potentials," notes Pang of CLSA in his report. He does not specify which properties could be put on the block, though.
Pandey of UOB Kay Hian says CDL has been carefully assessing the potential of its ageing investment properties. "Management highlighted they had evaluated the cost-benefit of redeveloping on their own or selling. They feel the more mature ones can be sold and are holding back some for its landbank," he says.
One way to recycle its old office properties is to redevelop them into residential properties and then sell them. In fact, the company has almost sold all the units at One Shenton, a condominium development that was once an ageing office block called Robina House.
One Shenton received its TOP (temporary occupation permit) last year. Interestingly Keppel Land is also preparing to redevelop its Keppel Tower and GE Tower, which are adjacent to each other, into a condo. Keppel Land obtained the properties in a recent asset swap with K-REIT Asia. As it happens, CDL owns a property called Fuji Xerox Towers near Keppel Tower and GE Tower.
Meanwhile, CDL is raising its stake in the South Beach project, perhaps its most ambitious development. Located on Beach Road, the development will have 171 apartments, 560 hotel rooms, and 632,164 sq ft and 158,014 sq ft of gross floor area in office and retail space respectively, and is slated to be completed by 2015.
CDL will now take a 50.1% stake in the project, up from 33.33% originally. Malaysia's IOI Corp will take up the remaining 49.9%.
The new structure follows the completion of CDL's acquisition of investment company Istithmar World's stake in South Beach for S$155 million, and IOI's purchase of US-based Israeli company Elad's stake for S$173.9 million.
As at Dec 31, 2010, the South Beach consortium had total assets of S$2.02 billion and net assets of S$688 million. The company is also in the process of securing a new financing facility for S$1.6 billion.
Orchard Road properties updated
Efforts by CDL to offload or redevelop its ageing investment properties have not always gone smoothly, though. Last June, it tried to divest its strata-titled units at Tanglin Shopping Centre through a collective sale, but the deal has yet to be completed.
In June 2005, the company tried to sell 11 properties for S$788 million to Suntec REIT. They included strata-titled units in Golden Mile Complex, Fortune Centre, Katong Shopping Centre, The Arcade and 470 North Bridge Road.
City House, Plaza by the Park, Fuji Xerox Tower and Central Mall Office Tower as well as a couple of car parks were also to have been part of the sale portfolio. As it turned out, Suntec REIT did not get the necessary approvals to go through with the purchase.
On a positive note, however, demand for commercial property is about as positive as it has ever been. Yap says office rents have been rising "because of the limited supply". And, City Square, which has become a prominent contributor to CDL's rental income, is commanding good rates. "My ground-floor rents can be very high, as high as the other suburban malls," she says.
The one exception, of course, is its Orchard Road malls. While the low traffic at Palais Renaissance and Delfi might suit the type of tenants that have gravitated there, their rents are said to be lower than those of other properties in the area.
"Delfi rental rates are a fraction of Orchard Road, in single digits [in terms of Singapore dollar psf per month]," concedes Yap. "The small units of 200 to 400 sq ft are very affordable, compared with S$10,000 to S$20,000 a month farther along Orchard Road."
So, will Palais Renaissance and Delfi eventually be redeveloped to maximise the potential of the land they occupy? Will CDL one day abandon its positioning and try to build something as exciting as the South Beach project on its sites?
Sources in the property industry say CDL has considered offers for Palais Renaissance in the past, but the prices it was offered did not meet its expectations.
"The problem with Palais Renaissance is that whoever buys it will need to redevelop it because the floor plates are too small," says a senior executive at a property company. "And, with Orchard Towers next to it, no developer would want to redevelop."
For now, the company appears content to allow Delfi and Palais Renaissance to maintain their niche positioning. In fact, Palais Renaissance has gone through a subtle rejuvenation programme. "The mall is 15 years old and we knew that we had to renovate it again, particularly with the avalanche of new malls along Orchard Road," Yap says, adding that work started three years ago and was done in phases.
The lighting, flooring, ceiling, lifts, car parks and drop-off points have already been freshened up. "When you come into the mall, you will feel the environment has changed. If you see the before and after pictures, there is a difference."
The only thing left to renovate at the property is the staircase leading from Orchard Road into the basement. That probably will not be noticed much by investors tracking shares in CDL, but it might make things a little more pleasant for regular clients of Lee the jeweller when they come to visit his shop. — The Edge Singapore
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