Sabana Reit to buy 21 Joo Koon Crescent for about $20.3m

Sabana Shari'ah Compliant Industrial Real Estate Investment Trust is proposing to buy 21 Joo Koon Crescent, a three-storey factory building with ancillary office, for $20.274 million from AVA Global.

Under the sale and leaseback deal, the seller will upon completion of the sale, take a master lease of the entire premises for a four-year term on a triple net basis. Sabana Reit's manager intends to fund the acquisition by debt.

This acquisition, along with the proposed acquisitions of 39 Ubi Road 1, 3A Joo Koon Circle and 2 Toh Tuck Link, announced earlier will see the Reit's aggregate leverage (gross borrowings divided by total deposited property value) rise to 35 per cent from 25.1 per cent at June 30, 2011.

21 Joo Koon Crescent is a JTC leasehold estate of 30+30 years tenure starting from Feb 16, 1994, with a remaining tenure of about 43 years. The proposed transaction is subject to approval from JTC, among other conditions.

On course to cross $1 billion portfolio

•Acquisition of 3A Joo Koon Circle and 2 Toh Tuck Link at a total price of $80m

•DPU accretive resulted from debt financing

•Maintain Buy recommendation with unchanged target price of $1.120

Bagged two industrial properties through third-party acquisition

Sabana REIT purchased two industrial properties, comprising a factory and a warehouse in the western part of Singapore. The property at 3A Joo Koon Circle, is a 2-storey building with mezzanine floor and a 3-storey factory building, well served by two major expressways – Pan-Island Expressway (PIE) and Ayer Rajah Expressway (AYE) – and close proximity to Joo Koon MRT station. While the property at 2 Toh Tuck Link, is a 6-storey warehouse, well connected by both PIE and AYE and approximately 2 km away from Jurong East and Clementi MRT stations.

Both properties have a total GFA of 398,315 sq ft. This raised the portfolio GFA from 3.4 million sq ft to 3.8 million sq ft. Since the two properties are segmented under the general industrial and warehouse property type, the lion share of high-tech industrial is reduced to 38% in term of percentage to the entire portfolio GFA. The inclusion of new property assets will diversify the source of income stream and result in less reliance on Master lessees such as Branbury Investments Ltd and its sponsor which have substantial revenue contributions. These two properties were sold to Sabana REIT at a total price of $80m through a sale and leaseback arrangement. Upon completion, a triple net master lease for a term of three years will be entered and the lease will be expired in 2014. Both transactions will further lengthen the weighted master lease tenure and spread out the renewal risk in the event that the master lessees choose not to renew the lease.

The purchases were wholly financed by debt and would enhance DPU growth. The gearing ratio is expected to increase to c.33.7% upon completion. Based on comfortable leverage target of 40%, Sabana REIT has a debt headroom of c.$80m to drive acquisition growth.

Valuation

With the surge of 31% in semi-annual review of average development charge rates for industrial and warehousing use on 1 September 2011, we opined that the revaluation of properties will boost the asset value to exceed its target of $1 billion portfolio even without any further acquisition towards the end of 2011. Similar to the acquisition made last month, both the new acquisitions are not factored into our model as details of the lease agreement are not available. The rental contributions from the three acquisitions will take place in the fourth quarter when the transactions are understood to be completed. Anticipated DPU growth and revaluation gains will support the price from the external headwinds. Based on previous closing price, our target price represents a 26% potential upside. Thus, we maintain our BUY recommendation with an unchanged target price of $1.120.

Sabana Real Estate Investment Management Pte Ltd announced on Monday that Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) has entered into two sale and purchase agreements to acquire two properties to diversify its income stream.

In the first acquisition, Sabana Reit will purchase a 217,580 sqft property along Joo Koon Circle from Ringford Pte Ltd for S$40.2 million. Comprising of a two-storey building with mezzanine floor and a three-storey factory building, the property is a JTC leasehold estate with a remaining tenure of 36.3 years.

The second property, also a JTC leasehold estate with 45.3 years remaining on the lease, carries a purchase consideration of S$39.8 million from Winfred Pte Ltd, and is a six-storey warehouse along Toh Tuck Link occupying 180,735 sqft.

Both properties are being sold on a sale and lease basis wherein Sabana Reit will upon completion of the acquisition, take master lease of the entire premises for a term of three years on a triple net basis.

Sabana Reit has paid a 1 per cent deposit for each property and the acquisitions, completely funded by debt, are expected to be completed by the fourth quarter of 2011

Global largest listed Shari’ah compliant REIT

Trust profile

Sabana Shari’ah Compliant Industrial Real Estate Investment Trust (Sabana REIT) is a Singapore-based REIT with a mandate to invest in income-producing industrial real estate and real estate-related assets in Singapore and Asia with compliance to Shari’ah investment principles. Sabana REIT is the first fully certified shari’ah-compliant REIT to adopt Gulf Cooperation Council (GCC) Shari’ah Compliant standards, and provide access to Islamic equity markets and diverse investor base.

Investment merits

• Revaluation surplus offers potential upside to net asset value per share (NAVPS) and may act as a re-rating catalyst to share price.

• Freight Link’s expertise in chemical warehouse & logistics give them an edge over its peers.

• Triple net master lease structures provide some form of security as the rental income is locked-in and likely to be stable and visible for the next three years.

• The adoption of GCC standards Shari’ah compliance provides additional access to Islamic equity market that is untapped by Shari’ah compliant REITs listed in Malaysia.

• Ample debt headroom leaves Sabana REIT in good position to take advantage of acquisition growth.

Potential risks

• Renewal of master leases in 2013 may pose a challenge to the management as 60% of the master leases based on the gross revenue will be expired in 2013.

• Listing of more Islamic REITs may compete with Sabana REIT. This may turn on the battle for the flow of funds from the Islamic equity market.

• Uncertainties in global economies could moderate Singapore economic growth. Manufacturing sector may experience a tepid expansion compared to last year.

Valuation

In view of the short land tenure for industrial properties, we ascribe a 9.5% discount rate to Sabana REIT. We initiate coverage on Sabana REIT with a fair value of $1.11, representing a potential upside of ~29% with the inclusion of FY11 dividend yield of 10%. The revaluation of properties this year is expected to increase owing to the buoyant industrial property market. We therefore opine that an increase in book value may act as a re-rating catalyst to the share price. With Sabana REIT set forth to cross $1 billion portfolio by the year end, further upsides are expected in the 2H 2011 to drive up the share price. Future acquisition is not priced into the model.

Sabana kindles Gulf interest in Islamic Reits

Dubai aims for first Reit listing within a year, two UAE firms plan offers in M’sia

Persian Gulf companies are planning their first syariah-compliant real-estate investment trusts, after shares in Singapore’s debut offering recovered from the lowest level since it was started in November.

The city-state’s Sabana Shari’ah Compliant Industrial Reit has advanced 2.2 per cent to 94 Singapore cents since the shares reached a low of 92 cents on March 31. The initial offering price was S$1.05. The company said on April 27 it would distribute more income to shareholders than originally planned.

Dubai is aiming to list its Reit on the local exchange within a year, while two United Arab Emirates companies plan offerings in Malaysia, which pioneered the industry in 2006.

Asia may see at least one new Islamic property trust listing this year as funds seek assets that comply with Islam’s ban on receiving interest or investing in casinos and bars, said HSBC Amanah, the syariah-compliant unit of Europe’s largest bank.

‘We can expect investments in trusts generally to see more activity over the coming months,’ Kuala Lumpur-based Oz Ahmed, associate director of wholesale banking at HSBC Amanah, said in an interview on Tuesday. ‘The market should expect another syariah-compliant trust in real estate, and quite a lot of pipeline, discussions and increased interest across this industry.’

Singapore’s Sabana, the world’s biggest publicly traded Islamic Reit, is the republic’s sole trust complying with religious principles. Malaysia has three listed syariah-compliant vehicles. Malaysia’s 14 Reits, which include Islamic and non-Islamic, have a combined market worth of US$3.4 billion, or 12 per cent of Singapore’s US$29.3 billion, according to a March 17 report by property consultant CB Richard Ellis.

The city-state’s ‘developed’ Reit market may encourage more Islamic issuance, Pratik Burman Ray, a senior property analyst at HSBC Securities Singapore Pte, said on April 15. Industrial property prices in Singapore will probably increase 5 per cent to 8 per cent this year, he said.

‘Singapore has a far more sophisticated regulatory framework for Reits and that naturally puts the market ahead of the rest,’ said Mr Ray. ‘If you want to attract Middle East investors, you have to offer size and Singapore has that.’

Sabana, which invests in properties such as warehouses and high-technology office space, raised S$664.4 million from the November initial offering. It had S$19.3 million in income that can be distributed to shareholders in the period Nov 26 to March 31, 2 per cent more than planned, the company said on April 27.

Emirates Reit, Dubai’s first Islamic real-estate investment trust, was established in November and may be publicly traded on Nasdaq Dubai, Marwan Ahmad Lutfi, deputy chief executive officer at the Dubai International Financial Centre Authority, said on April 10.

Two developers from the UAE are planning to list Islamic Reits worth RM2 billion (S$826 million) in Malaysia this year, Raja Teh Maimunah, global head of Islamic markets at Bursa Malaysia Bhd, said on Feb 23.

In an Islamic Reit, payments to investors are based on rental income or dividends. Syariah-compliant trusts prohibit income from properties involved in gambling, financial services based on interest payments, hotels and bars.

‘Reits resonate well with Islamic finance because they’re backed by underlying assets,’ said HSBC Amanah’s Oz. ‘There’s an element of risk sharing because investors are taking a risk on the portfolio of assets.’

Malaysia’s Islamic Reits had a market value of RM2.3 billion at the end of 2010, according to an e-mailed reply to questions from Bursa Malaysia, the stock exchange regulator.

‘Bursa Malaysia has received interest from foreign issuers to list their Reits, including Islamic Reits here,’ the regulator said. ‘Any foreign assets seeking listing on Bursa Malaysia will have to go through a due diligence process and assessment by the regulators prior to approval.’

Malaysia is the world’s biggest market for Islamic bonds, which pay returns on assets to comply with the religion’s ban on interest. Sales of Malaysian-currency sukuk rose to RM11.4 billion this year, compared with RM6.7 billion in the same period last year, according to data compiled by Bloomberg.

Global issuance increased to US$5.2 billion, from US$4.4 billion in the same period last year.

‘Malaysia is a more regulated and mature market, and from an investor perspective, it’s one of the fully Islamic integrated markets in the world,’ Riad Saad, Islamic product manager at the Treasury and Investment Department of Abu Dhabi Commercial Bank PJSC, said in an interview on April 19. ‘There is government support and liquidity, and it has all the capabilities of making Reit launches successful.’

Syariah-compliant bonds returned 4.4 per cent this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. Debt in developing markets gained 2.5 per cent, JPMorgan Chase & Co’s EMBI Global Diversified Index shows.

The difference between the average yield for sukuk and the London interbank offered was little changed at 242 basis points on Tuesday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.

Average yields fell to 4.14 per cent, the lowest since June 2005. The spread between Malaysia’s dollar sukuk and the Dubai Department of Finance’s 6.396 per cent note due November 2014 narrowed three basis points to 235, Bloomberg data show.

Malaysia can play catch up with Singapore by ‘playing its syariah card,’ said Kuala Lumpur-based Stewart Labrooy, chief executive officer at Axis Real Estate Investment Trust. Axis-Reit, which sold 98.4 million shares at RM1.25 when it listed on the Malaysian stock exchange in August 2005, converted to an Islamic property trust in 2008.

The price of Axis-Reit rose 0.4 per cent to RM2.38 this year as of 4:17 pm in Singapore, according to Bloomberg data. The company will list a syariah-compliant property trust valued at more than RM3 billion, Reuters reported on its website on March 11, citing three unidentified people familiar with the matter. Mr Labrooy declined to comment on the report when contacted by Bloomberg.

‘People wanting to invest in syariah products in Malaysia will have a very high degree of comfort in investing in Islamic Reits here as there is a high degree of transparency, syariah governance and compliance,’ Mr Labrooy said. He forecasts growth in industrial property prices in Malaysia of 5 per cent to 10 per cent this year.

The Al-’Aqar KPJ Reit, listed on Malaysia’s bourse since August 2006, was the first publicly traded Islamic property trust in Asia. Al-’Aqar, managed by hospital operator KPJ Healthcare Bhd, raised RM179.3 million from the share sale. The price climbed 2.7 per cent to RM1.15 this year, according to data compiled by Bloomberg.

Al-Hadharah Boustead Reit, listed on the local stock exchange on Feb 8, 2007, raised RM229.7 million through an initial offering. The shares dropped 1.4 per cent in 2011 to RM1.42. The trust owns and invests mainly in plantation assets in Malaysia including palm oil.

Malaysia’s ‘focused’ approach to its Islamic finance industry will offer the nation an advantage in luring more listings from foreign companies, including those from the Persian Gulf, Bernard Ching, the head of research at Kuala Lumpur-based brokerage services company ECM Libra Capital Sdn Bhd, said in an interview on April 19.

‘Malaysia has the infrastructure in place, whether it is financing, the investor base or expertise, including syariah advisory,’ he said. — Bloomberg