CapitaLand Ascott Trust’s Strategic Divestments Could Mitigate Prolonged High Interest Rate Risks

CapitaLand Ascott Trust (Clas) continues its proactive approach toward portfolio rebalancing, focusing on strategic divestments that align with favorable exit yields. The trust’s recent sales underscore a thoughtful approach to capital recycling amid a challenging interest rate environment.

In October, Clas announced it would sell the Somerset Olympic Tower Tianjin in China, with the deal expected to finalize in Q2 2025. The same month, it also divested the Citadines Karasuma-Gojo Kyoto and Infini Garden in Japan for S$53.1 million and S$108 million, respectively—netting premiums of 40% and 55% over book values.

These moves are part of Clas’s broader strategy to exit mature assets while reallocating capital to higher-yielding investments. Earlier this year, Clas executed a series of profitable sales in Sydney, Osaka, and Singapore, including the high-profile divestment of Citadines Mount Sophia Singapore to BlackRock and Weave Living. Proceeds from this sale are earmarked for acquiring lyf Funan Singapore, a co-living asset with a stronger EBITDA yield of 4.7% compared to Mount Sophia’s 3.2%. This acquisition, valued at S$263 million, should drive a projected 1.5% increase in distribution per stapled security (DPS).

With over S$500 million in divestments completed this year at premiums to book value, Clas has successfully unlocked S$60 million in net gains. As of September, its portfolio comprises 101 properties valued at S$8.5 billion.

This divestment strategy reflects a well-calibrated approach to managing asset life cycles. Properties such as Citadines Karasuma-Gojo Kyoto are considered mature, and recycling capital from these assets allows Clas to invest in more profitable properties without the extensive costs of asset enhancement.

However, macroeconomic factors may impact short-term returns. Despite a revenue increase of 11% to S$386.4 million in H1 2024, Clas’s DPS dropped 8% from the prior year, partly reflecting broader headwinds in the REIT market due to rising interest rates. Comparatively, the Straits Times Index has recorded 20.3% total returns year-to-date, buoyed by strong performance from local banks, whereas Singapore REITs have generally struggled.

With the recent uptick in interest rates and concerns over potential inflationary policies following Donald Trump’s election victory in the U.S., Clas’s commitment to divestments while the hospitality market remains strong appears prudent. JLL Research projects minimal growth in hotel room supply in Singapore, and major hospitality asset sales this year have exceeded prior levels, bolstering investor interest in quality, well-located properties.

This favorable market landscape presents Clas with an opportunity to continue its portfolio reconstitution strategy, using favorable exit yields to buffer against prolonged high-interest rates. As of September, Clas maintains a debt headroom of S$1.9 billion and has S$1.4 billion in available funds, providing a solid financial base to navigate any future rate increases or economic challenges.

By carefully managing its portfolio and seizing market opportunities, Clas positions itself to weather interest rate volatility while potentially enhancing returns for its investors.

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