After a few months since rumour began circulating, Lendlease Global Commercial REIT ("LREIT") finally revealed on August 4, 2025, that it will indeed be divesting Jurong East Mall ("JEM") office for S$462 Mil. The buyer of the office tower is Keppel Ltd.
1. Big Strategic Mistake To Sell off JEM Office.
LREIT should have sold off the underperforming Sky Complex buidling in Milan. Instead it sold off a high yielding office building at JEM with stable government agency tenant. I recalled that they just got a 13% rental reversion after the recent 5 years review in 2024. JEM's area is currently still undergoing transformation and development and LREIT will be missing out on potential future capital appreciation. This is actually the worst time to be selling off the JEM office.
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| Screen Extract of Rationale of Sales |
2. Market Reaction
Strangely, the market reacted positively (August 5, 2025) to the upcoming disposal as there is a +S$8.9Mil gain over book value that LREIT may use to distribute back to unit-holders. Short term view of "get rich quick" distribution among investors seems to be driving the rally in unit price of LREIT to S$0.575 per unit (+1.77%) since the release of the divestment announcement.
Personal Thoughts and Views
As an existing unit-holder of LREIT, I am extremely disappointed with LREIT management team's decision to sacrifice a good asset with 100% occupancy just for short term gains instead of cutting losses with Milan Sky Complex. In addition, we have not seen any concrete executionary results with regard to Sky Complex where occupancy remains in the doldrum at 81.6%.
Hi Blade knight, JEM office earns 12.3mil. If escalation of 13% flows down, It will make 14 mil. its valuation sold is at 462 mil. This means a 3.3% earning yield. Lendlease has a weak debt profile with about 42% debt (cost of debt is 3.45%), another 120 mil of 4.75% perpetual. If JEM office is sold off at 460 mil cash nett off fees and Lreit does not use the cash to buy new properties but instead redeem perpetuals and pare down its 3.45% debt, it is DPU accretive; increasing DPU by 4%. Even if you assume MND has another rental reversion in 2030 at 13%, the new earnings yield in 2030 is 3.42%, its still lower than Lreit's cost of debt.
ReplyDeleteHi Choon Yuan,
DeleteGood day to you.
1. Market expects the cost of debt to keep going down…..hence REITs as a whole now rallying. Also, Jurong East area more development coming which will improve drastically the future cashflow. Combination of these 2 future factors makes JEM office a superior asset relative to Sky Complex.
2. How did you derive $12.3Mil? It is on the low side. MND makes up around 12% of Gross Revenue Income of LREIT. 2025 revenue is $206.5 Mil. Hence $24mil. Let’s also do a sanity check using commercial guru Westgate and other nearby offices of $5 per sqft to $8 per sqft. This means around $1.5Mil per annum using lower boundary and means $18Mil on 311k sqft.
its in the announcement, page 6
Deletehttps://links.sgx.com/FileOpen/Jem%20Office%20Divestment%20Announcement.ashx?App=Announcement&FileID=854260
Hi Bro, thanks for sharing this. I will refer you back to my earlier pt 1 on the variables in favour of long term cashflow increases from enhancement of amenities in Jurong East as well as the declining interest rate environment.
DeleteAlso, some costs such as the CEO and backend costs allocated to JEM office to derive the net property income after expenses will not be reduced as these are fixed cost to the REIT. JEM remains a relatively better property than Milan Sky Complex.
my feel is they just divest this asset to make way for parkway parade since this is a much larger asset and they need headroom for this.
ReplyDeleteif not they will go with EFR which is much more dilutive.
Hi Han, thanks for dropping by and sharing your thoughts on LREIT. If they mop up remaining Parkway Parade, then it will be great to have such defensive asset in residential area.
DeleteEFR can be good if they extend to all existing unit-holders. Problem is many REITs management these days only interested to do short cut private placement at the expense of all loyal existing unit-holders….haiz.
it will be dilutive at current price no matter what.
Deletethey won't go with just preferential offering cause the uncertainty is there unlike private placement which is just overnight placement., so will be dilutive in term of NAV, but DPU wise again is lots of assumption which they failed to deliver back during their acquisition.
I just feel the whole REIT industry is really which sponsor is more greedy which i think lendlease is one of them.
Yup....I get what you mean man. If the sponsor prioritises their own interest over unitholder returns, you end up in this “greed vs. governance” perception. Unfortunately (from my personal view), Lendlease hasn’t exactly built the best track record to counter that view.
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