Mapletree North Asia Commercial Trust (RW0U.SGX) announced the acquisition of a new property, The Gangnam Seoul, at SGD528.4mil. It must be noted that MNACT only acquires 50% of the property rights. The property details are as follows:
- 20 storey Grade A office
- completed in 2011
- linked to underground MRT
- Gross Floor Area 44,444Sq meter
- WALE 2.8year
- occupancy rate 89.6%
This is the first time MNACT has set foot in South Korea, and the purchase price is 1.5% lower than the valuation. However, this is a controversial acquisition because The Gangnam’s NPI (net property income) yield is only 3.2%. According to the 19/20 annual report, MNACT NPI yield was 3.3%.
Please don’t forget that MNACT Hong Kong property income fell sharply in fiscal year 19/20. In fiscal year 18/19, MNACT’s NPI yield was 4.3%. The Gangnam’s NPI yield is indeed low, even if a 100% occupancy rate is recorded in the future, it will be difficult to exceed 4%.
Although 97% of leases include Rental escalation, and it is expected that the rent can be increased by 2-3% each year.
In the 20/21 fiscal year, only 8.8% of the leases will be expired (based on gross rental), but 51.3% of the leases will be expired in 21/22. If the tenants, unfortunately, stop renting, I am afraid they will record negative income, especially MNACT The all-in borrowing cost around 2.48%.
MNACT intends to complete the acquisition with a loan, and the gearing ratio is expected to increase to 41.4%, which is currently 39.6%.
It is also weird that MNACT’s sponsor has no other investment property in Korea.
Together with the acquisition, MNACT also brings another good news. Before the annual DPU (distribution per unit) breaks through 7.124cent, the performance fee is exempted.
In fact, in fiscal year 19/20, MNACT has not charged a performance fee. The reason is that MNACT’s performance fee calculation formula is:
“Performance fee is calculated based on 25.0% of the growth on DPU in a financial year over DPU in the preceding year multiplied by the weighted average number of units in issue for such financial year.”
In other words, as long as the DPU does not grow, there is no need to pay the performance fee. The 19/20 DPU is 7.124cent and the 18/19 is 7.69cent, so there is no need to pay the performance fee in 19/20.
In general, I don’t think this is a wise acquisition. Compared with Keppel REIT’s acquisition of T tower in South Korea in 2019, the NPI yield was as high as 4.7%. The purchase price was only a mere SGD301mil, and it located in the CBD (The Gangnam Seoul is located in GBD), I really don’t understand why MNACT acquired The Gangnam Seoul.
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