City&Country: Axis REIT begins asset upgrades

Long past their prime is one way of describing some of the buildings belonging to Axis Real Estate Investment Trust (Axis REIT) but their inherent potential is something that the REIT’s manager is beginning to unlock. Axis REIT Managers Bhd CEO and executive director Stewart LaBrooy has plans for a series of refurbishments, which he describes as low in cost but high in impact.

He argues that some of these office buildings, especially those in Petaling Jaya, which offer low densities and large floor plates upwards of 10,000 sq ft, are becoming rare and more sought-after by businesses such as service and call centres, and the business process outsourcing (BPO) sector, which Axis REIT is eyeing as tenants.

“You can’t have people running up and down to different floors. Here, the boss can stand from one end and yell from across the floor to everybody. It’s efficient. You have one receptionist, one point of contact, one point of security — it makes a lot more sense.

“No one’s building these types of buildings anymore because a lot of developers build to sell and nobody can afford to buy 45,000 sq ft. It’s really expensive. So these kinds of buildings are getting quite rare but the demand for them, if anything, is increasing.

“We’re trying to see where the inflection point is so we can capitalise on it and upgrade these big floor-plate buildings for what we see as quite a strong future demand. And [the refurbishments are] all timed very nicely with our income stream, development ... and basically it will provide exciting returns to our shareholders.”

Axis REIT’s latest and arguably most ambitious rejuvenation exercise to date is the transformation of the five-acre Wisma Bintang estate in Jalan 225 in Section 51a in Petaling Jaya, Selangor, into Axis Business Campus.

Its other property due for refurbishment 2013 is Axis Eureka (formerly FBSM Plaza) in Cyberjaya.
The REIT manager’s modus operandi for these properties and, likely, other office-building refurbishments, is to inject elements of lifestyle into them and apply for Cybercentre status, which will boost yields by raising rents to the next band of prices — by as much as an extra RM1 psf, according to examples shown by LaBrooy.

Axis Business Campus
In less than three months, Wisma Bintang will begin its transformation into a modern, more space-efficient property with a higher net lettable area (NLA), upgraded M&E (mechanical and electrical) and new lifestyle facilities.

“We liked the ‘ABC’ song by Michael Jackson so we called it Axis Business Campus because it’s easy to remember. It’s as easy as ABC,” quips LaBrooy.

To recap, the fund acquired the 27-year-old property — comprising a 4-storey office block occupied by Tenaga Nasional Bhd and another office/showroom building called the south block tenanted by Cycle & Carriage and Cherry Auto — in June 2006 for RM32.5 million, with an appraisal value of RM47.1 million. As part of the deal, Mercedes-Benz distributor Cycle & Carriage will occupy the building for six years until the end of June this year.

“We couldn’t do anything [as] it was a sale and leaseback. Cycle & Carriage was managing the whole property. Now we have an opportunity to take it back and do what we want with it,” LaBrooy explains.

“There are nearly no more five-acre tracts in Petaling Jaya with these facilities. This is the last bit that’s this large and has such a low density. Everything else is going to be crammed in with God-knows-what-else and cause a traffic jam,” he says.

Regarded as Axis REIT’s most expensive refurbishment project to date, Axis Business Campus will cost an estimated RM20.9 million. It will entail a new, modern facade in an attention-grabbing palette, upgraded internal toilets and lift lobbies, new passenger and cargo lifts for the office/showroom building and a complete overhaul of the two buildings’ M&E systems, says head of development and global real estate David Aboud.

The most significant addition to the project, however, is a new 6-storey office that will come up on its one-acre car park. The floor plates will average 10,000 to 11,000 sq ft and the building will feature a canopied drop-off zone, two passenger lifts and a basement car park, which will connect to the existing basement car park at the south block.

This will boost the NLA to 223,000 sq ft from the current 173,000 sq ft, bring the number of parking bays to 537 and prepare Axis Business Campus for Cybercentre-status application.

“The other key wins we are looking at are utilising empty land, higher returns on the asset, a repositioning opportunity — preferably for IT, BPO and call centres — the opportunity to leverage extra frontage and acquiring much-higher car park provisions than normal buildings provide,” LaBrooy adds.

Axis REIT also plans to combine the outdoor spaces of Axis Business Campus and Axis Vista and Axis Technology Park — both located behind the campus — to create a 12.5-acre common compound.

“We will be controlling at least, 500,000 to 600,000 sq ft in this area, which is fairly substantial but spread out. It’s not so high-density, it’s a pleasant working environment and it does lend itself to a new way of looking at development,” says LaBrooy.

F&B outlets, which will come up in the shared compound of these three buildings, can tap into a catchment of around 3,000 people, he says.

“[Axis Business Campus] will have a nice look and feel to it and has what I consider to be elements of a lifestyle centre for people who actually want to move in. There are very big floor plates in the back portion there. We’re targeting the data centres, call centres and shared-service providers. We’d also like to say that there are good opportunities for companies with auto interests as well because this is very much an auto area. So we have an array of potential tenants to look at.”

The refurbishment is expected to boost the valuation of the property to around RM90 million while the building’s monthly income will almost triple to RM640,000 from the current RM238,000, boosting yields to around 14%, says LaBrooy.

Axis REIT Managers is holding preliminary discussions with potential tenants and no leases have been firmed up yet, he says.

In the pipeline
Next up for refurbishment is Axis Eureka in Cyberjaya, a nine-year-old office building that is currently home to 13 tenants, including Scicom (MSC) Bhd, Multimedia Development Corp Sdn Bhd and Wolters Kluwer Enterprise Services Partners Sdn Bhd.

The building, formerly named FBSM Plaza, was acquired in April 2011 at RM52.25 million, slightly lower than its appraisal value of RM53.2 million.

Work on the building is expected to cost RM4 million and will entail the refurbishment of its main lobbies, an additional 10,000 sq ft of floor space, more lifts and an F&B lifestyle area.

“In the main lobby, we’re bringing in some F&B elements to make it more of a destination, then we can move on to the rental side.”

LaBrooy notes that with the refurbishments, the building will be better-positioned to command higher rents when tenants renew their leases. He estimates that the rents in Cyberjaya are around RM4 to RM4.50 and hopes to bring the rents of Axis Eureka closer to this band.

On future acquisitions, LaBrooy says the group has assets worth RM437.3 million under negotiation. They include an industrial facility in Nilai valued at RM26.5 million; retail hypermarkets in the Klang Valley (RM57.8 million); an office/industrial facility in Petaling Jaya (RM85 million); a technology centre in Petaling Jaya (RM30 million); an industrial facility in Bangi (RM27 million); two industrial facilities in Pelabuhan Tanjung Pelepas, Johor (RM46 million); and two warehouses in Shah Alam (RM165 million).

However, Axis REIT will need to raise more equity before the acquisitions can go through, he says. LaBrooy believes the fund will be able to raise a further RM110 million in equity before the group goes to the market for another placement. To perform another placement, targeted for 4Q, the trust will have to achieve a gearing level of 35% to 39%.

“This means that [our asset portfolio value] should exceed RM1.5 billion in 2012 and [we can] target the RM2 billion mark in 2013,” says LaBrooy.

Currently, the trust owns 29 assets, including two new additions, namely a logistics distribution centre (DC) in Bayan Lepas valued at RM48.5 million and another logistics DC in Prai valued at RM59 million, bringing the total asset value of its portfolio to RM1.4 billion.

In 1Q2012, Axis REIT reported a 27.18% growth in net trust income to RM20.96 million from RM16.48 million, underpinned by a 21.42% increase in total trust revenue to RM33.08 million from RM27.25 million.

The trust declared a distribution per unit (DPU) of 4.3 sen for its first interim income distribution, which is payable on May 31.

Returning to its refurbishment activities, LaBrooy says the fund manager will continue to rejuvenate its older properties to keep up with what it observes as modern office trends.

“I think working environments are changing very dramatically. We have to provide assets and products that suit the market to a larger extent. The old office is gone. People don’t put up partitions anymore. People want an open office [and] to plug in and play. A lot of companies are going into cloud computing, which means you can work from anywhere, so that means flexible office hours are in. We are going to see huge transformations in how people view offices in the next 10 years.”

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 907, April 23-29, 2012

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