Questions for KepLand to address

MORE than a month after Keppel Land’s sale of its one-third stake in One Raffles Quay (ORQ) to its listed trust K-Reit Asia, questions are still being raised about the site’s pricing. KepLand sold its share in ORQ for $941.5 million, which works out to some $2,109 per square foot (psf).

While KepLand has described the price as fair and pointed out that the sale comes with significant long-term strategic benefits for it, some analysts and shareholders are still wondering if KepLand could have got a better deal if it had sold to a third party.

When the deal was first announced, analysts pointed out that the price appeared to be on the low-end of the range, considering ORQ’s prime Grade A status. Nearby, 1 Finlayson Green was sold to a UK property fund at a considerably higher $2,650 psf in June.

The company’s share price has slipped some 8.3 per cent to $7.70 from $8.40 when the deal was announced on July 30. While part of the fall can be attributed to a broad market pull-back, the overall property index has fallen by a smaller 3.5 per cent.

At the heart of the matter is a series of discounts offered by KepLand to K-Reit. KepLand says that the effective price for its one-third ORQ stake comes to between $2,882-$3,052 psf. But the actual price paid by K-Reit was much lower. For starters, the trust received a 10-15 per cent discount as it was only being sold a minority stake in the project.

In addition, a discount of $150 psf was given as K-Reit faces potential tax exposure from its ORQ stake. The stake sold to K-Reit was in ORQ’s North Tower, which is classified as ‘trading property’ – unlike the South Tower. Profit on the sale of trading properties is subject to tax.

Both reasons for the discounts have come under market scrutiny. For one, some shareholders and analysts have questioned the rationale for the 10-15 per cent discount. Said one analyst BT spoke to: ‘Why 10-15 per cent? Why not 5 per cent?’

KepLand, on its part, said that a 10-15 per cent discount is ‘within market range for a sizeable transaction with minority rights and limited financing options’ – but there is no full agreement in the market on that. Similarly, there are questions as to why the North Tower was classified as a trading property.

KepLand needs to explain its rationale to shareholders and analysts quickly. The developer has already met with some institutional investors to explain the pricing, BT understands.

But more of an effort has to be made, especially when it comes to retail investors, who have been left somewhat in the dark. This is especially urgent as KepLand will soon have to hold an extraordinary general meeting to obtain shareholders’ approval for the sale.

Keppel Land owns about 40 per cent of K-Reit. And most analysts BT spoke to agree on one thing – that the sale is positive for KepLand from a strategic long-term view as there is a recurrent stream of fee income which would not be the case if the stake had been sold to a third party.

An analysis by Goldman Sachs, for example, shows that the net benefit to a developer is roughly the same from selling to a sponsored Reit or from selling to a third party at a price that is nearly 20 per cent more. But more investors need to be convinced of that. And the rationale for the discounts has to be explained better.

Source : Business Times – 11 Sept 2007

MacarthurCook Reit portfolio value up $30.6m on revaluation

MACARTHURCOOK Industrial Reit (MI-Reit) said independent revaluations of six of its properties have resulted in the total value of its initial portfolio of 12 properties standing now at $346.8 million, a rise of $30.6 million or 9.7 per cent.

MacarthurCook Investment Managers (Asia), the manager of MI-Reit, has a policy of revaluing properties in the portfolio on a rolling basis throughout the financial year and in accordance with the property fund guidelines.

The initial portfolio of the real estate investment trust, which was listed on April 19 this year, comprises 12 industrial assets across Singapore with a combined value of $316.2 million at the date of listing.

The largest rise in valuation came from UE Technology Park – MI-Reit’s largest property by value – which saw a revaluation gain of $23.9 million, or 21 per cent.

The revaluations of all the six properties were conducted by CB Richard Ellis.

Just last month, Singapore’s fourth listed industrial Reit said it was extending its investments into offices and technology parks by agreeing to buy Plot 4A, International Business Park from Eurochem Corporation (a member of Tolaram Group), for $91 million.

MI-Reit invests primarily in industrial real estate assets in Singapore, Japan, Hong Kong, Malaysia and China.

Last month, the Reit reported a distributable income of $3.9 million for its first quarter ended June 30.

Distribution per unit (DPU) was 1.52 cents, which, was 3 per cent higher than the forecast DPU of 1.47 cents.

Source : Business Times – 05 Sep 2007

MI-Reit to buy warehouse for $18.3m

MACARTHURCOOK Industrial Reit (MI-Reit) has signed a conditional put and call option agreement to acquire a four-storey office and warehouse facility at 7 Clementi Loop for $18.3 million.

The vendor of the facility, Nova Engineering and Logistics, will lease back the property for five years, with the option to extend the lease for another five years.

The lease will start after refurbishment to the building is completed by Nov 30, which is when MI-Reit’s acquisition of the property is expected to be completed.

Based on this scheduled completion date, the pro forma financial effect on MI-Reit’s distribution per unit (DPU) for the financial year ended March 31, 2008 is an additional 0.20 cents per unit on an annualised basis.

This represents an increase of 2.7 per cent from the forecasted FY2008 DPU of 7.41 per cent per unit.

For FY2009, the pro forma effect of the acquisition is an additional 0.23 cents a unit, representing an increase of 3 per cent over the forecasted DPU of 7.59 cents a unit.

Chris Calvert, CEO of the Reit manager MacarthurCook Investment Managers (Asia), said that apart from the yield accretion derived from the deal, the property will provide greater geographic diversification to the Reit’s portfolio and provide exposure to the growing logistics and warehousing property sub-sector here.

‘MI-Reit will benefit from firm rentals and capital values in this sub-sector as a result of the strong demand for high quality and strategically located warehousing and logistics property, arising from the growing outsourcing trend in high value-added industries,’ said Mr Calvert.

The acquisition will reduce MI-Reit’s exposure to UE Tech Park, the Reit’s largest property by value, from 36.1 per cent to 34.1 per cent of total portfolio value. In terms of income source, exposure to UE Tech Park is reduced from 33.2 per cent to 31.3 per cent.

The purchase of 7 Clementi Loop is also the first of a series of acquisitions worth a total of $500 million that MI-Reit intends to complete by March 31, 2008.

Source : Business Times – 1 Sept 2007

MI-Reit to expand into offices and technology parks

THE fourth listed industrial real estate investment trust (Reit) – MacarthurCook Industrial Reit – is extending its investments into offices and technology parks.

MI-Reit yesterday announced that it has agreed to buy Plot 4A, International Business Park from Eurochem Corporation (a member of Tolaram Group), for $91 million.

This is a 13-storey office park building with a basement car park located in Jurong East’s International Business Park.

MI-Reit’s first investment in offices or technology parks brings it a 20 per cent exposure to the sector.

According to Jones Lang LaSalle Research’s Asia-Pacific Property Digest for Q2 2007, business park rents grew 30 per cent in the quarter while capital values grew 8 per cent.

‘The strongest rental growth of all industrial sub-sectors will be in this sub-category, principally as a result of the tight office supply situation causing a spillover effect as Central Business District tenants relocate to suburban office parks such as the International Business Park,’ said Chris Calvert, CEO of MacarthurCook Investment Managers (Asia), which manages the Reit.

Under this sale and leaseback arrangement, Eurochem – a Singapore- based company in the petrochemical sector – will sign a head lease over the entire facility for 10 years, with an option to extend for another five years.

This will start from the date of completion, scheduled for December 2009.

Mr Calvert added that the acquisition will increase the size of the portfolio from the initial value of $316.2 million at the time of listing in April, to $407.2 million upon completion of the acquisition.

MI-Reit said the purchase will extend its average weighted lease expiry duration from 6.3 years to seven.

To be funded wholly by debt, other alternative funding sources will also be considered, said the manager.

MI-Reit’s gearing level will increase from its current 8.6 per cent to 29.1 per cent, assuming 100 per cent debt financing and that there are no other acquisitions between now and settlement of the property.

MI-Reit’s initial portfolio comprised 12 industrial assets across Singapore, the largest of which is UE Technology Park, which was acquired for $115 million.

At the date of listing, the initial properties in MI-Reit had a combined value of $316.2 million.

The Reit invests primarily in industrial real estate assets in Singapore, Japan, Hong Kong, Malaysia and China.

Last month, the Reit reported a distributable income of $3.9 million for its first quarter ended June 30 – 2.9 per cent higher than the forecast $3.8 million.

Distribution per unit (DPU) also beat expectations, coming to 1.52 cents, which was 3 per cent higher than the forecast DPU of 1.47 cents.

Source : Business Times – 28 Aug 2007

Reits a safe choice in roily market: Goldman

SINGAPORE’S real estate investment trust (S-Reit) market could be just the place to park your funds while weathering the storm in the equity markets, says Goldman Sachs executive director (Asia-Pacific Investment Research) Leslie Yee.

In a report on S-Reits, Mr Yee said: ‘We reiterate our positive view on S-Reits and recommend investors to buy in the prevailing choppy equity markets.’

S-Reits were sold down recently but Mr Yee believes the market is ‘under-appreciating the defensive qualities and overstating risks’.

Goldman Sachs highlighted four attributes that make Reits ‘defensive’. These are: low gearing, typically about 40 per cent; income payout which is often 100 per cent; secured leases, usually for three years; and limited development risk.

The report said that the current market volatility will affect the near-term ability of Reits to access capital market funding, but Goldman Sachs believes Reits have the necessary debt capacity and expect that equity markets will be willing to fund good acquisitions.

Goldman Sachs S-Reit Index has fallen by 11.8 per cent since July, which is slightly less than the decline in the Singapore property stock index of 15.3 per cent.

It has also lowered its target price for the nine S-Reits it covers by 0.5-10 per cent. Based on revised target prices, these S-Reits offer an upside of 7-37 per cent.

In particular, Goldman Sachs has added CapitaMall Trust to its ‘Conviction Buy’ list. It has upgraded Suntec Reit to ‘Buy’ from ‘Neutral’, and reiterates ‘Buy’ on K-Reit.

Goldman Sachs also likes sponsored Reits. And it does not matter if a Reit does not pay top dollar for a sponsor’s asset. ‘Our analysis on the sale of a completed asset shows the net benefit to a developer is roughly the same from selling to a Reit or from selling to a third party at a price that is nearly 20 per cent more,’ explained Mr Yee.

He said: ‘We see the current market providing a good entry point into Reits’, noting the sector leader’s – CapitaMall Trust – pull-back of 20 per cent from its share price two months ago.

In the near term, it does see cost of funding for acquisitions like the one-third stakes in One Raffles Quay by K-Reit and Suntec-Reit as a major risk.

But in the long term, it sees potential for growth through acquisition and argues that ‘win-wins’ can be created when a developer sponsor sells assets to Reits.

Goldman Sachs launched its Reit coverage in January when it also forecast the nine S-Reits would make $15 billion in acquisitions within a three-year period, boosting portfolio sizes by 75 per cent.

Based on announced acquisitions to date, the nine Reits have made $3.9 billion worth of acquisitions, which is 27 per cent of the target.

Source : Business Times – 25 Aug 2007

Market overstating risks for Singapore REITs: analysts

Like most other property-related counters, Singapore-listed real estate investment trusts or REITs have been sold down in recent weeks amid the market volatility.

As one analyst puts it, the last time he looked, the buildings were still standing, the offices still occupied and owners still collecting rents in a robust economic environment.

But it appears that investors are not seeing REITS in the same positive light.

According to a Goldman Sachs index, Singapore REITs have fallen by 11.8 percent over the past two months.

That is a better showing than the 15.3 percent drop in its property stock index.

Analysts said a fearful climate has caused the market to under-appreciate the defensive qualities of REITs and overstate their risks.

Tony Darwell, Head of Asian Equity Research at Nomura Singapore, said: “When you look at say the Singapore office market, what we’ve seen is very, very strong growth in terms of capital value, but that strong growth in capital value has been driven by rents. We’ve not actually seen yields in the office market compressed.”

A case in point is K-REIT.

Its unit price fell by 20 percent over the last one month, while Keppel Land’s share price dropped by just 6 percent.

Analysts said they remain positive about Singapore REITs.

“There’s definitely risk in terms of outlook in the US, but given the supply demand dynamic over the next 12 to 18 months, given an expectation that rental and rental growth is likely to be relatively robust, some of the REITs in the offering – Guoco Commercial REIT, Macquarie Prime REIT, Capital Commercial Trust – look quite interesting at current valuation,” said Mr Darwell.

Analysts said REITs offer a much higher income payout than property stocks – often 100 percent, compared to 20 to 40 percent.

They also believe that Singapore-listed REITs are trading significantly below their current asset valuation.  – CNA/so

Source : Channel NewsAsia – 24 Aug 2007

Parkway Reit debuts below offer price

One of the biggest initial public offerings (IPO) this year made a disappointing debut yesterday – a casualty of the uncertainties afflicting financial markets.

Despite a generally upbeat stock market, Parkway Life Real Estate Investment Trust (Reit) opened trading in the afternoon session at $1.27, a cent below the offer price of $1.28, and steadily fell before ending at $1.19 a unit.

Ms Daphne Roth, vice-president of equity research at ABN Amro Private Banking, said: “This is really wrong timing. The full risk appetite has not come back.”

The Reit was established by Parkway Holdings to invest mainly in income producing Asia-Pacific real estate especially for healthcare and healthcare-related purposes.

Parkway Holdings sold 288.9 million shares at $1.28 apiece and investors applied for about 12 times the available stock.

The strong demand had some market participants speculating that the Reit could open as high as $1.48, with generally buoyant market sentiment pushing the units as high as $1.50 apiece.

Still, UOB KayHian said that the Reit’s yield is comparable to hospitality Reits such as CDL Hospitality Trust and Ascott Reit.

“Its yield is much more attractive when compared to Reits investing in commercial, retail or industrial properties,” it said. — AGENCIEs with additional reporting by Cheow Xin Yi

Source : Today – 24 Aug 2007

MMP Reit takes full control of mall in Chengdu

INSTEAD of acquiring a 50 per cent stake, Macquarie MEAG Prime Real Estate Investment Trust (MMP Reit) is now taking full control of Renhe Spring Department Store in Chengdu, China, for 350 million yuan (S$70.3 million).

MMP Reit had in April this year announced that it would acquire a half stake in the 101,000 sq ft department store owned by Renhe Spring Group for 150 million yuan. The property, valued at 340 million yuan as at Dec 31, 2006, was re-valued at 350 million yuan as at July 31 this year.

On the increased stake, Franklin Heng, chief executive officer of the Reit’s manager, Macquarie Pacific Star, said: ‘This is a win-win arrangement…Not only will the yield accretion of this transaction for MMP Reit now be higher, Renhe Spring Group will also have more financial resources for its expansion and development projects in China, over which MMP Reit will continue to enjoy a first right of refusal.’

Renhe Spring Group’s pipeline of opportunities in China includes two other prime retail properties in Chengdu with combined gross floor area of more than one million sq ft.

The 100 per cent stake in the department store represents a yield accretion of 3.4 per cent on an annualised basis to MMP Reit’s distribution per unit, assuming full debt financing.

Between 2005 and 2006, Renhe Spring Department Store registered about 23 per cent of year-on-year retail sales growth and, for 2006, its sales were 263 million yuan.

The 350 million yuan price tag comprises 310 million yuan in cash and the assumption of an interest-free debt of 40 million yuan owed to Renhe Spring Group and repayable over seven years. Renhe Spring Group will also continue to operate the department store for a fee of 0.8 per cent of the gross turnover.

Renhe Spring Group guarantees annual net distributable profits of 26.4 million yuan, which is secured for two years by the sum of 20 million yuan to be deducted from the consideration and held in escrow.

With the completion of MMP Reit’s acquisitions in Japan in May and assuming the acquisition in China is fully funded by debt, MMP Reit’s gearing will be 31.8 per cent.

MMP Reit comprises eight properties including a 74.23 per cent stake in Wisma Atria, a 27.23 per cent stake in Ngee Ann City, and six properties in Tokyo.

Source : Business Times – 23 Aug 2007

Is CityDev mulling residential Reit?

CITY Developments executive chairman Kwek Leng Beng showed at his property company’s latest results briefing why he sees himself as a trend-setter.

Mr Kwek revealed at the group’s second-quarter results briefing last week that the group was considering retaining two blocks of apartments of its Cliveden development at Grange Road for rental purposes and long-term investment instead of selling them off in a rush.

The 66-year-old tycoon – who is known to pride himself on not aping the competition’s business model – indicated that this could be the start of a new business model for the group’s residential business. The idea would be for the group to retain some units in selected high-end residential projects for lease to ride on strong rental demand.

It can then sell these units later at much higher prices – if current trends continue – and who knows, in the longer term, if a collective sale were to materialise, CityDev could then buy out its fellow owners in such condo developments and redevelop these sites into new projects instead of having to go to the market and look for land all the time, as most developers have to.

Or if CityDev doesn’t like some of these sites by then, it could also consider selling the apartments it has retained in such condos through a collective sale to other parties.

That seems like a good model. But it does tie up a lot of money. This could put the property giant at a disadvantage relative to its peers, for instance, when making acquisitions.

But Mr Kwek could get around the problem by spinning off these apartments held for investment into a separate vehicle and perhaps listing it, with CityDev still possibly retaining a stake, some market watchers suggest.

Such an entity – holding units in selected residential projects developed by CityDev – could be structured as a real estate investment trust (Reit), business trust or some hybrid security, depending on tax and other considerations.

Retail investors would be keen on investing in such a vehicle. To the average mom-and-pop investor, the prospect of buying an investment home for rental income may seem daunting. It involves a huge outlay, the hassle of finding a tenant, negotiating rentals and lease terms, agreeing and signing a lease, and other potential problems.

The risk would be so much more manageable for such investors if they could have exposure to income from a whole pool of such rental properties by buying any amount of shares/units they are comfortable with in a listed vehicle that owns these apartments, manages them, rents them out and, at the right time, sells them to crystallise capital appreciation.

And CityDev, if it continues to hold a stake in such a listed vehicle, could still eventually get its hands on the land on which these condos stand, possibly by securing at the outset a right-of-first-refusal to buy back the apartments it had earlier sold to the vehicle.

This would facilitate CityDev gaining full control of sites when en bloc sales come up – of course after satisfying Strata Title Board requirements that the transaction is priced on arm’s-length basis and done in good faith.

Mr Kwek has been a relative latecomer to the Singapore Reit market but when his CDL Hospitality Trusts was floated on the Singapore Exchange last year, it was a novel instrument in the local market, involving units in Singapore’s first hotel Reit stapled to units in a business trust.

Mr Kwek also said in last week’s Q2 results briefing that he was not in any hurry to set up a Reit holding some of the group’s office blocks, something that has been on the table for quite a while now.

Who knows if, instead of following in the footsteps of others who have floated office Reits here, Mr Kwek might pleasantly surprise investors by offering them an opportunity to invest in Singapore’s first residential Reit or some such hybrid vehicle?

Source : Business Times – 21 Aug 2007

CapitaLand plans launch of new Malaysian Reit

CAPITALAND is aiming to launch a new Malaysian retail real estate investment trust (Reit) within a year and has just spent $527.1 million on the plan.

Yesterday, it announced that it had entered into sale and purchase agreements to acquire two shopping malls in Malaysia. The larger of the two is Gurney Plaza in Penang, which will be acquired for $336.8 million. Mines Shopping Fair in Selangor will cost $190.3 million.

In a statement, CapitaLand said the two assets would ‘form seed assets for CapitaLand’s proposed Malaysian retail Reit’. CapitaLand CEO and president Liew Mun Leong added that the company was ‘on track’ to build up its assets under management through increasing the Reit’s portfolio in Singapore and abroad.

Mr Liew said: ‘In line with our current Reits strategy, we have identified other quality Malaysian retail assets that will augment Gurney Plaza and Mines Shopping Fair and form the pipeline of assets for our pure-play Malaysian retail Reit, which could possibly be listed within a year.’

CapitaLand did not say what the target size of the Reit would be. Its other retail Reit, CapitaMall Trust, which was listed in 2002, now has a portfolio worth almost $6 billion.

CapitaLand said it has not yet decided to list the new trust. CapitaLand has sponsored five Reits, all but one of which are listed on the Singapore Exchange. Quill Capita Trust, which was launched in January, is listed on Bursa Malaysia.

Of the latest properties, CapitaLand Retail CEO Pua Seck Guan said: ‘The acquisitions provide CapitaLand with an unique opportunity to extend our retail real estate platform to Malaysia, which in addition to Singapore, China, India and Japan, will further strengthen our position as the leading retail property company in Asia.’

He said the 700,000 sq ft Gurney Plaza is close to 100 per cent occupied. CapitaLand also signed a put and call option to acquire Gurney Plaza’s four storey extension which is under construction. It will provide an additional 130,000 sq ft of net lettable area when completed around the end of next year.

Mr Pua said that there were ’substantial asset enhancement and tenancy remixing opportunities’ at the 650,000 sq ft Mines Shopping Fair.

Source : Business Times – 17 Aug 2007