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[SINGAPORE] CapitaLand Integrated Commercial Trust (CICT) – the Republic’s oldest and largest real estate investment trust (Reit) – offers investors exposure to properties that are used for retail and/or office purposes, with a large Singapore focus.

In 2024, the trust raised its retail exposure. It bought 50 per cent of trophy mall Ion Orchard and the connecting underpass from its sponsor CapitaLand Investment, and sold office asset 21 Collyer Quay.

However, after Tan Choon Siang became chief executive officer of CICT’s manager in May, the trust’s first acquisition has helped to increase its office property exposure.

CICT recently upped its interest in CapitaSpring’s commercial component from 45 per cent to 100 per cent. This comprises office and retail net lettable area of about 661,400 square feet (sq ft) and 11,900 sq ft, respectively.

With this acquisition, the trust’s exposure to office assets increases from 38 per cent to 40 per cent of its portfolio, while portfolio weightage of retail assets and integrated developments reduces from 36 per cent to 35 per cent, and 26 per cent to 25 per cent, respectively.

Retail exposure

Strategically, perhaps CICT should reduce its office assets’ exposure and be more retail-centric.

One, the trust’s malls have higher productivity than its office buildings. While the value of CICT’s office assets exceeded its retail assets, retail properties contributed substantially higher net property income (NPI) than office assets in H2 2024.

Two, buying a high quality mall instead of a premier office building in Singapore is likely to add more to CICT’s distribution per unit (DPU). A premier mall here can possibly be bought at an NPI yield that is over 100 basis points higher than that of a Grade A office building with a broadly similar remaining land lease.

The capitalisation rates used to value top grade malls here may be close to 5 per cent, versus around 3.5 per cent for city-centre Grade A office buildings. In the income capitalisation method, a property’s value is derived by dividing the assumed NPI by its cap rate. The property’s value is inversely related to the cap rate used.

Three, there could be greater scope to generate additional returns from retail, versus office spaces, through active asset management and asset enhancement initiatives.

A landlord can refresh tenant mix, reconfigure spaces or improve pedestrian flow to drive a mall’s shopper traffic and tenants’ sales. Also, a mall can host events to draw visitors seeking experiences.

Four, CICT could possibly reap richer rewards by leveraging its market leading position here with malls versus office buildings.

The trust can partner retailers seeking to expand islandwide including in downtown and suburban locations. A major mall owner is also well-placed to run effective rewards programmes and marketing campaigns for its properties. Moreover, with access to more data points of various retailers and trade categories, CICT can react quickly to changing trends.

Ion and Jewel

Looking ahead, CICT could consider selling its 999-year leasehold office asset Six Battery Road in Raffles Place, which was valued at about S$1.6 billion as at end-2024. As yield-focused Reit investors may not appropriately reward ownership of long leasehold assets, selling Six Battery Road might make sense.

21 Collyer Quay – another 999-year leasehold Raffles Place office property – transacted at a premium to its end-2023 book value. Might Six Battery Road fetch above its end-2024 book value?

While malls here are generally tightly held, CICT likely has an inside track in buying stakes in two top malls. It could potentially buy the rest of Ion Orchard, which is held by Hong Kong’s Sun Hung Kai Properties (SHKP) and 49 per cent of Jewel Changi Airport from CapitaLand Development (CLD).

CICT trades at a much superior book value multiple versus SHKP. If SHKP sells its Ion Orchard stake to CICT in exchange for units in the trust, SHKP creates value for its shareholders and gets exposure to top Singapore assets via a capital efficient and liquid vehicle.

In addition, SHKP could leverage its exposure to the Singapore Reit space to potentially unlock the value of its huge investment properties portfolio by using Reits and private funds.

Privately held CLD, whose development capabilities span multiple asset classes, may wish to free up funds by selling its Jewel stake to recycle into property development opportunities.

Opened for operations in 2019, Jewel, which is jointly owned by Changi Airport Group and CLD, has a distinctive design and nearly 1.5 million sq ft of gross floor area. Its shops and eateries include various new-to-market brands and new-concept stores.

As a mall generally takes several years to stabilise operations post-opening, now could be a good time for CLD to sell Jewel. In 2024, Jewel achieved a record full-year footfall and sales, up 10 per cent and 5 per cent year on year, respectively.

Last year, Jewel welcomed over 30 new brands, including nine new-to-Singapore international brands that chose it as their launchpad.

With Changi Airport expanding to meet growing travel demand within Asia and beyond, Jewel’s long term prospects look bright.

Online shopping is convenient and the online experience will improve as technology advances. Also, many Singaporeans shop overseas.

Still, locals and visitors will continue patronising premier malls here as they seek experiences and interesting spaces to interact in. Indeed, a mall owner who stays abreast of consumer trends and offers visitors a great experience might reap rich rewards.

Lower interest rates have helped to revive investor interest in Reits including CICT. Perhaps this blue-chip trust can give investors even more reasons to look at it by juicing up DPU through raising portfolio weightage of premier retail spaces while possibly reducing exposure to office assets.

The writer is an investor in CICT and SHKP