SHARES of CapitaLand Investment (CLI) fell 2.9 per cent to S$3.01 as at 9.05 am on Monday (Dec 11), following Friday&rsquo s net profit guidance for FY2023.

 

With 2.6 million shares traded, it was one of the most heavily traded counters at Monday&rsquo s open. The last time when the shares closed at this level was in October.

 

The real estate investment manager said on Friday that it expects fair value losses on its portfolio of investment properties, primarily those in China, Australia, Europe, the United Kingdom and the United States. It also expects a &ldquo significant&rdquo net profit reduction on the year.

 

In its Q3 business update in November, CLI recorded a 3 per cent drop in revenue to S$2.1 billion for the nine months ended Sep 30, primarily driven by weaknesses in its real estate business, dragged by a faltering China market.

 

CLI said its operations including deal making and fundraising have been challenged by dampening investment sentiment, persistently high interest rates, as well as geopolitical tensions. Its core markets, at the same time, have been confronting significant valuation risks.

 

After being very obliging, allowing The Edge Singapore to photograph him for half an hour, Chris Chong, CEO of retail and workspaces at CapitaLand Investment (CLI), explains his role at the sprawling real estate investment manager (REIM).

 

&ldquo I&rsquo m currently taking care of all the asset management as well as the property management across Singapore and Malaysia, with Singapore being our home market and core market,&rdquo Chong says. Both asset management and property management are key components of CLI&rsquo s revenue base.

 

To take a step back, in 2021, CapitaLand Group changed its listed entity to a REIM, privatising the development part of the business, which is now CapitaLand Development (CLD). CLI has two major income sources &mdash fee-income-related businesses (FRB) and real estate investment businesses (REIB).

 

For the nine months to Sept 30, FRB contributed 36% to total revenue and reported a 9% y-o-y rise to $799 billion. REIB, which contributed 64% of total income, fell by 8% y-o-y to $1.44 billion. REIB comprises lodging income (79%), retail (11%), new economy (7%) and office (3%). FRB income comprises lodging management, listed funds management, private funds management and commercial management.

 

Lodging management is the largest part of the $799 million income in 9M2023, with $249 million, up 31% y-o-y, followed by commercial management with $246 million up 3% y-o-y. Listed funds management contributed $221 million unchanged y-o-y while private funds contributed $83 million, down 29.7%. Chong is responsible for 60% of commercial management income (previously property management).

 

&ldquo When we talk about property management, we deal with a lot of asset enhancement initiative (AEI) projects. We look at unlocking value in the assets that we manage. Our property management involves retail, commercial, business and science parks and industrial, which include logistics,&rdquo he describes.

 

All properties need a property manager

 

In its latest 3Q 2023 business updates, CLI also announced that it will prioritise its fee-based business and that commercial management will become one of the key pillars of CLI&rsquo s business verticals.

 

Geographically, the $246 million commercial management fee comprises Singapore (60%), China (29%) and India (11%). Structurally, the fee is mainly from CLI with 14% from CLD and external parties. Sectorally, commercial management is mainly from property management, leasing and development, and retail consultancy.

 

All buildings need a property manager. CLI&rsquo s listed REITs have property management agreements with various CLI and CapitaLand units. Under CapitaLand Integrated Commercial Trust C38U 0.54% &rsquo s (CICT) agreement with CapitaLand Retail Management, property management fees are charged on 2.00% per annum of the gross revenue of the properties 2.00% per annum of the net property income of the properties and 0.50% per annum of the net property income of the properties, in lieu of leasing commissions. The property management fees are payable monthly in arrears.

 

CapitaLand Ascendas REIT (CLAR) has several service agreements in relation to its property operations &mdash the New Singapore Property Management Agreement, the New Singapore Project Management Agreement, the New Singapore Lease Management Agreement, the New Australia Strategic Management Agreements, the New Australia Master Asset Management Agreements, the New US Master Asset and Lease Management Agreement and the New Europe Master Asset and Lease Management Agreement. The duration of the New Management Agreements is 10 years commencing from Oct 1, 2022.

 

CLAR has a range of property management fees, which at the basic level comprise 2% per annum of the adjusted gross revenue of each property, managed by the property manager. Leasing fees depend on the length of leases but in general work out to one month&rsquo s rent and service charge for securing a tenancy between six months and less than three years. There is a leasing fee of one month&rsquo s rent and a service charge for securing a tenancy of three years and two months and a service charge for securing a tenancy of five years.

 

As an incentive to drive shoppers to its mall, and more recently as a service to tenants, CapitaLand Group&rsquo s CapitaStar rewards programme is offered across 30 properties, with 1.5 million members in Singapore.

 

The CapitaStar rewards programme is also offered to properties that are not managed by the CapitaLand Group. Among the most recent initiatives, the CapitaStar rewards programme has been extended to the Singapore assets of Paragon REIT announced in April. These malls are The Paragon, The Clementi Mall, The Rail Mall, and The Seletar Mall, which is owned by Cuscaden Peak Properties, a joint venture between Hotel Properties H15 0.00% , CLA Real Estate Holdings and Mapletree Investments.

 

Properties owned or partially owned under CLD such as Sengkang Grand Mall, and properties that CLI and CLD do not own, such as Changi City Point and SingPost Centre mall, are also part of the CapitaStar rewards system. For the time being, Changi City Point has been onboarded on the CapitaStar programme but does not have a retail management contract with CapitaLand.

 

Although best known for its eCapitaVouchers (eCV), which CLI says is Singapore&rsquo s most widely accepted digital shopping voucher, CapitaStar has been extended to CapitaStar@Work which manages the operational and technological aspects of the workspace properties including industrial properties, and to meet the growing demand for digital integration with tenants. The CapitaStar@Work app is used to serve the needs of tenants, including office, business park and science park, and industrial tenants.

 

&ldquo Today, we&rsquo ve onboarded around 87 buildings and we are able to harness an increased user base. At its very basic level, the app serves a very utilitarian purpose for fire drills being communicated, and other value-added services which depend on tenant interest. For instance, tenants can use this app to access the building and their offices,&rdquo Chong elaborates.

 

CapitaStar for Business addresses the needs of retailers looking for holistic digital solutions to reach out to an established database of members, reward their stakeholders and cultivate consumer loyalty. It also enables small businesses to tap into the 1.5 million CapitaStar members for advertising outreach via the CapitaStar app, and allows these SMEs access data insights garnered through member interactions on the app.

 

&ldquo Tenants who want to advertise their promotions can do so on the app itself to reach out to our members via pop up banners, mastheads, and in-app notifications,&rdquo says a CLI spokesperson.

 

Extending retail consultancy

 

On Nov 10, Kallang Alive Sport Management (KASM) announced the appointment of CapitaLand as its new retail operator for a term of six years, from April 1, 2024 to March 31, 2030. CapitaLand will manage the Kallang Wave Mall as well as other retail spaces located at the Singapore Sports Hub. The current operator is Stellar Alpha, which has managed the spaces since the Singapore Sports Hub opened in 2014.

 

&ldquo What&rsquo s important is also the building of a diverse and healthy portfolio, with different synergies. For example, the Sports Hub is very welcomed, because when we see the product that we&rsquo ll be helping them to create, it will add diversity and synergy to the existing portfolio of not just the downtown malls, but also the suburban malls. The focus for Sports Hub will be certainly in the areas of entertainment, fitness, and sports. When we have such a commercial management contract, we will add that skill set and diversity to the rest of the portfolio,&rdquo Chong explains.

 

Additionally, he says that there is no cannibalisation because the location is a standalone location served by Stadium MRT station.

 

Chong is looking to pick up more retail management contracts but is somewhat tight-lipped when asked if Changi City Point &mdash which was divested by Frasers Centrepoint Trust J69U 0.46% on Oct 31 &mdash is next on the list for a retail management contract. Neither will he comment on retail consultancy for Paragon REIT which is listed and has its own property manager.

 

Property management as a service

 

&ldquo We are the de facto asset management and property management arm of the CapitaLand Group. We serve different capital sources when we run property management and asset management. These are the listed REITs, balance sheet assets, joint ventures or CLD,&rdquo Chong says.

 

As he sees it, the synergy &mdash when it comes to signing of the leases &mdash benefits from scale. &ldquo As an organisation, we could be talking to the same tenant for different purposes,&rdquo Chong says.

 

For example, Don Don Donki, the popular Japanese grocery and supermarket, has a central kitchen in a CLAR property and is also a tenant in CapitaLand&rsquo s malls. Elsewhere, Putien is a tenant across the retail and workspace sectors. Putien&rsquo s restaurants operate at five CapitaLand malls &mdash Raffles City Singapore, Tampines Mall, Westgate, ION Orchard and Jewel. The restaurant&rsquo s central kitchen is located at 2 Senoko South Road, an industrial facility owned and managed by CLAR.

 

French 3PL company Bolloré Logistics is a tenant in a CLAR property. Its customers, such as businesses dealing with fast-moving consumer goods or FMCGs and perfumes, are tenants of CapitaLand&rsquo s retail ecosystem.

 

&ldquo When we talk to the management for a retail or logistics discussion, our partners appreciate that we are the only ones to offer an all-in solution for retail, commercial, logistics and industrial. That is a key advantage for property management, and it transforms it into a platform play,&rdquo Chong says.

 

As he describes the CapitaLand property management platform, it is no longer the signing of a property management contract on a one-off basis. CapitaLand is able to offer property management as a service to a tenant&rsquo s entire value chain.

 

&ldquo A shift has occurred post-Covid, against the backdrop of rising interest rates and oil prices. All of these mean that the cost of operations is definitely on the rise,&rdquo Chong points out. In addition, it is much easier to calculate the customer acquisition cost under CapitaLand&rsquo s platform than for many e-commerce players.

 

According to Chong, the cost of customer acquisition for a physical shopping mall is relatively more affordable. &ldquo When you open a store, there will be the natural catchment, the human traffic, whether due to the transportation nodes or a work-and-play lifestyle. To our advantage, under the CapitaLand property management platform, when we manage all these different types of assets, retail, commercial, and industrial, we are able to stitch together a very powerful platform whereby for example, in announcing new store openings, new concepts, new product launches, we have access from a B2B standpoint as well. We will be able to tap our IoT platform in retail and a workspace platform that harnesses the different communities in the workspace area,&rdquo adds Chong.

 

Proxy to end of rate hike cycle

 

DBS Group Research held investor meetings with key management of CLI in November. DBS says in a recent report that both CLI and its listed REITs were well received. &ldquo We find reassurance that the group remains on the hunt to deploy capital. CLI also has an additional $10 billion of embedded funds under management as dry powder to use on the back of an expanded product suite in the private funds&rsquo space. We are on the lookout for its first credit-focused private fund that is expected to be launched during 1H2024,&rdquo the DBS report says.

 

Demand-supply dynamics for the CLAR and CICT remain robust. The US Federal Reserve appears to be done with the interest rate hike cycle, while a mortgage war is brewing in Singapore. DBS points out that Sora has dropped by around 10 basis points m-o-m in November. &ldquo If rates continue to trend lower on expectations of a more dovish Fed, this implies lower erosion risk for DPUs in 2024 than in 2023,&rdquo DBS says.