The Business Times reported today that Oxley is close to acquiring Chevron House in Raffles Place for S$660 mil, or S$2,526 psf on its net lettable area of 261,280 sq ft. Is this another shrewd move by Oxley? Or is Oxley overpaying for an old asset?
Chevron House is a 32-storey building with 215,667 sq ft of offices (from level 6 to 32) and 45,613 sq ft of retail space (from basement 1 to level 4). The building has a remaining leasehold of 71 years. Chevron is the anchor tenant of the building, occupying 83,000 sq ft of office space over 10 floors and it will be moving to Duo Tower by 2020. The building is currently 98% occupied. There is an asset enhancement potential of 14,950 sq ft of unused GFA that the Oxley could tap on.
Buy in Year 2017, Pay Year 2011 Price
Chevron House was put for sale in the market in Year 2011 at a price tag of S$656.6 mil or S$2,500 psf. There were no takers for the property back then. Looks like Oxley is now paying the asking price in Year 2011 (though it is a property that is 6 years older now) without any price inflation!
Is the seller leaving money on the table for the new buyer?
For readers who work in CBD and familiar with Chevron House, you might be wondering if there is any space on the retail podium that can be used to create new GFA. The area looks built-up and any usable open spaces are already utilised for kiosks and promotion space. Whilst these spaces can be utilised to create new GFA for shops, it is uncertain whether the incremental return on existing revenue can justify the AEI costs for the creating of such shops. Slabbing over existing voids to create new spaces? It will probably be an expensive effort and once again the question is whether the returns can justify the costs. Probably, we would need some expert advice here who can suggest how to tap on this unutilised GFA.
The seller – Deka Immobilien had brought up this unutilised GFA when it was marketing the property in Year 2011. After a long period of 6 years, it has not done anything to tap on this unutilised GFA. Is the seller kind enough to leave money on the table for the new buyer? Or is it that this hanging fruit is too high up on the tree for anyone to pick?
Multiple strategic options for Oxley
In SPK’s view, Chevron House offers a lot of strategic options for Oxley. There is no immediate pressure to do anything to the property as the anchor tenant lease expires only in 2020. Oxley can enjoy net property income of around S$25 mil per year, which translate to a yield of 3.8% on its reported purchase price. Not a bad yield, considering residential are trading at around 3% yield today?
Oxley can also concurrently plan its asset enhancement initiatives for Chevron House over the next 2 to 3 years to revamp the common areas of the office and try to tap on the unutilised GFA.
The big payday will probably come at a time that is closer to the lease expiry of Chevron. Subject to the market conditions in 2019/2020, Oxley can opt to keep Chevron House as an investment property, subdivide and lease out the Chevron floors and higher rental rates. Alternatively, Oxley can strata-divide the building and sell the individual strata units. Or if Oxley has built up a substantial portfolio of income-producing assets, it can try to spin off all these properties into a REIT.
Does strata-selling the office units make sense? SPK does agree that based on Oxley’s acquisition price, the returns might not be fantastic. Oxley is unlikely to make the kind of 30% to 40% returns that Perennial made from selling AXA Tower and TripleOne Somerset. But nonetheless, considering the 3.8% yield that Oxley will be getting every year, this would have made the overall returns more palatable. And time is on Oxley’s side. Over the next 3 years, it can continue to enjoy the rental income while waiting for an upswing in office property prices.
Looks like time is on Oxley’s side for this acquisition.
Oxley has been a shrewd player in the Singapore property market. May its legacy continues with the acquisition of Chevron House!