By Romesh Navaratnarajah: The recent deal between CapitaLand and Ascott Residence Trust (Ascott Reit) gained a lukewarm reaction from the market, with both counters recording only a mild boost in prices.
Although CapitaLand is considered the "greater beneficiary" of the deal, shares increased a mere 1.4 percent since Monday while Ascott Reit's share price increased only half a cent, according to media reports.
The S$642 million deal between the two companies involved three properties, namely Somerset Grand Cairnhill Singapore, Ascott Guangzhou and Ascott Raffles Place.
CapitaLand is set to acquire and redevelop Ascott's Somerset Grand Cairnhill Singapore into a mixed residential and hospitality development and then sell it back for S$405 million by 2017.
"Whilst the asset swap will be a 'win-win' deal for both CapitaLand and Ascott Residence Trust according to management, we see the deal as being a better transaction for CapitaLand, with return on 53 percent of the total estimated development cost locked in on Day 1 and improvement in asset turns through the asset swap," said Joy Wang, analyst at JP Morgan.
"This also serves as an alternative way of obtaining landbank for the group in our view."
But the deal is also beneficial for Ascott Reit as it will unlock value in its portfolio. Upon completion of the transactions, the deal is also expected to reduce its gearing level to 39 percent from 41 percent. Related stories:ABSD to have ripple effect on housing prices: experts Asia Gardens put up for sale8000 new private homes planned for H2