Upgrading Paragon as part of a listed Reit

[SINGAPORE] As the local bourse waits for potential new real estate investment trust (Reit) listings to materialise, Paragon Reit, which went public in July 2013, might be delisted soon.

The fate of Times Properties’ proposed privatisation of Paragon Reit via a trust scheme of arrangement lies solely with minority investors who meet in an extraordinary general meeting (EGM) and scheme meeting on Apr 22. If the scheme becomes effective, subject to Singapore Exchange’s approval, Paragon Reit will be delisted.

Times Properties is a wholly-owned subsidiary of Paragon Reit’s sponsor Cuscaden Peak Investments, which is in turn owned by Cuscaden Peak – a consortium comprising Temasek’s CLA Real Estate Holdings and Mapletree Investments. Cuscaden Peak and its subsidiaries, which own 61.5 per cent of the Reit’s units, will abstain from voting at the above meetings.

The outcomes of the EGM and scheme meeting are uncertain. Still, Cuscaden Peak may be confident that Times Properties’ cash offer of S$0.98 per unit is sufficiently enticing for Paragon Reit’s minority investors. Indeed, with the volatility in the equities market, investors may be more inclined to accept the offer.  

PrimePartners Corporate Finance, the independent financial adviser to the trustee and directors of the manager of Paragon Reit who are deemed independent in respect of the scheme, said the scheme’s financial terms are fair and reasonable. 

The scheme consideration of S$0.98 per unit represents a premium over Paragon Reit’s net asset value as at end-2024 and exceeds the trust’s highest price ever traded in the two-year period prior to the announcement of the proposed privatisation.

Paragon’s upgrading conundrum

Paragon Reit’s unitholders might suffer much pain if major asset enhancement works are carried out at the trust’s key asset, Paragon. 

Located along Orchard Road, high-end mall and medical suite/office property Paragon, which is over 30 years old, accounted for about 72 per cent of the trust’s property portfolio valuation as at end-2024. 

Facing challenging conditions in the luxury retail environment, tenant sales at Paragon fell 5.5 per cent in 2024 compared to a year ago.

According to Paragon Reit’s manager, crown jewel Paragon’s status as a leading upscale mall is being challenged by upcoming new malls nearby and existing competing malls undergoing major upgrades.

Times Properties envisages that a major potential asset enhancement initiative (AEI) is needed to future-proof Paragon’s competitive positioning. 

A potential AEI could involve among others upgrades to façade and interiors, reconfiguration and optimisation of retail and circulation spaces, improved connectivity and accessibility, as well as upgrades and replacement of mechanical and electrical services and equipment.

Such an exercise may require capital expenditure of between S$300 million and S$600 million, and take three to four years to complete.

According to an illustration provided by Times Properties, assuming capital expenditure of S$300 million funded by debt at a cost of 4.4 per cent per annum and a drop in Paragon’s net property income (NPI) of between 10 to 40 per cent, Paragon Reit’s adjusted distribution per unit (DPU) for 2024 would fall by between 21 per cent and 53 per cent. For capital expenditure of S$600 million, adjusted DPU would decline by between 32 per cent and 64 per cent. 

Adjusted DPU excludes the impact of properties which Paragon Reit has since divested, namely The Rail Mall in Singapore and Figtree Grove Shopping Centre in Australia. Today, Paragon Reit’s portfolio comprises Paragon, The Clementi Mall in Singapore and the Westfield Marion Shopping Centre in Australia. 

Certainly, Reit investors value receiving stable distributions and may be unwilling to stomach a massive dip in DPU. 

Still, asset upgrading works on a property can help drive higher NPI and property valuation. And such works might be unavoidable for a property to remain attractive to users. 

Solving the upgrading conundrum

Perhaps, a solution should be found where Paragon Reit can carry out major upgrading works at Paragon while mitigating the pain to unitholders when the works are underway.

Possibly, Paragon Reit can sell a stake in Paragon to Cuscaden Peak and use sale proceeds to help fund a potential AEI on Paragon as well as provide income support to dampen the hit to Paragon’s NPI when works are ongoing, thereby boosting DPU.

After completing upgrading works, Paragon Reit can buy back Cuscaden Peak’s stake in Paragon, thus retaking full ownership of Paragon. When buying back the said stake, Paragon Reit could raise equity, which helps boost its free float.

Sure, there may be tax leakages and other regulatory concerns relating to the above arrangements. Nonetheless, authorities can work out measures including on the tax front to support the arrangements as part of efforts to boost the competitiveness of Singapore’s listed Reit sector.

Having a successful listed Reit sector matters. A vibrant Reit sector helps support Singapore’s equities market development. And Reits can be good investments for retirees in a fast-ageing Singapore.

Various stakeholders including sponsors, managers, regulators, tax authorities, bankers, accountants and lawyers should come together and work out how Reits can efficiently undertake major AEIs without hurting DPU too adversely when the upgrading works are ongoing. This issue is especially pertinent for Reits with relatively smaller property portfolios that own older buildings.

Singapore is working hard to grow its equities market. Incentives being rolled out might help draw more new listings to the local bourse.

However, success in drawing new listings risks being undone by the privatisation and delisting of existing listed entities. 

Paragon Reit is hampered by a small free float and low trading liquidity. However, Cuscaden Peak could possibly have placed out units it owns in Paragon Reit to help improve the trust’s free float. 

Also, the trust could potentially raise equity on the back of an upgraded Paragon or to help buy The Woodleigh Mall in Bidadari estate, in which Cuscaden Peak Investments has ownership interest.

Sponsors and other stakeholders need to step up to help Singapore’s listed Reit sector continue growing. More needs to be done urgently to keep Reits that own high-quality property portfolios listed on the local exchange.

(The writer is a unitholder of Paragon Reit)