Category: KepREIT
REITs – UOBKH
Mixed Performances In Turbulent Times
Growth was 1H07 theme. For the most part of this year, growth has been the main theme of the real estate investment trust (REIT) sector. The best-performing REITs for 1H07 were high-growth REITs such as CapitaRetail China Trust (CRCT), Capital Mall Trust (CMT) and CDL Hospitality Trust which saw returns in excess of 40%. As the market has turned cautious with the bottoming out of interest rates in April and May, most REITs have fallen from their highs in May and June. The recent correction has resulted in the decline of most REITs.
Boring REITs offer capital protection. In turbulent times, the market’s appetite for risk falls sharply and risk premiums shoot up. The focus then shifts from growth to capital protection and income preservation. Investors should consider boring REITs. Though less exciting, they have the lowest growth premiums built into their stock prices. We look for REITs with low price-to-book values for capital protection and high-yield REITs for income preservation. In addition, we prefer REITs with a greater focus on the Singapore economy given the latter’s safe haven status. ParkwayLife REIT (Parkway) and Macquarie MEAG Prime REIT (MMP) stand out in terms of yields and price-to-book ratios.
Avoiding logistic REITs for the time being. With slower asset appreciation and rental reversion, REITs focusing on the logistics segment rely on acquisitions to drive growth. As risk premiums go up, the increase in cost of capital makes it more expensive to fund new acquisitions on yield-enhancing terms.
Buying opportunities for the brave. The current market turbulence may represent an opportunity to pick up some high-quality REITs at depressed prices. For the bottom-fishing investor, we recommend CapitaCommercial Trust (CCT), K-REIT Asia (K-REIT), CRCT and CMT for their ability to grow organically and via acquisitions. As the market recovers, these higher-quality REITs are likely to be the first to stage a rebound. As seen in the market rebound this week, these REITs had the bigger price appreciation.
KREIT, SUntec – BT
One Raffles Quay: A good deal for buyers
KEPPEL Land and Cheung Kong (Holdings)’ sales of their respective one-third stake in One Raffles Quay (ORQ) to K-Reit Asia and Suntec Reit have generated much interest in the property market, with many seasoned observers saying the deals are underpriced.
KepLand and Cheung Kong are each selling their one-third stake for a headline figure of $941.5 million. In addition, the vendors are providing ‘income support’ to the respective buyers of up to $103.4 million through 2011 in the case of K-Reit Asia’s purchase, and $103.48 million spread over 54 months for Suntec Reit’s acquisition.
The acquisition price works out to $2,109 per square foot of net lettable area based on the headline price of $941.5 million. Stripping out the $103.4 million income support provided by the vendors reflects a lower net purchase price of $1,877 psf.
Office industry players generally regard this price as low. 1 Finlayson Green was transacted recently at over $2,600 psf. No doubt it is freehold but the 99-year leasehold ORQ, completed last year, is considered a superior property, with bigger floor plates and a top-grade tenant list including UBS, Credit Suisse, ABN Amro and Deutsche Bank.
Talk is rife that a deal is close to being struck for Chevron House (formerly Caltex House), a much older 99-year leasehold property, for $2,700 psf. The buyer is not expected to be a Reit.
Based on this, market watchers say such a non-Reit buyer would have offered at least the same price as Chevron House, if not around 10 per cent higher, or nearly $3,000 psf, for a new Grade A office property like ORQ.
By selling their stakes in ORQ to Singapore Reits (S-Reits), KepLand and Cheung Kong are getting a much lower price.
Reits (real estate investment trusts) need any acquisition to be immediately yield-accretive. Otherwise, there is a risk of the unit price on the stock market falling. This limits the price that a Reit can pay for a property – all other factors being equal.
However, non-Reit buyers, including foreign private equity and unlisted funds, can bid more aggressively. They are prepared to look beyond poor initial yields, on expectation that Singapore office rentals and capital values will continue to increass leases are renewed at higher market rents, and there is also a possibility of selling the asset a few years down the road, to crystallise capital appreciation.
Based on a $2,700 psf price, Keppel Land could have sold its one-third stake in ORQ for $1.2 billion. Assuming a higher $3,000 psf, its divestment could have been for $1.34 billion.
Why did Keppel Land feel compelled to sell its stake for a much lower price to its 40.7 per cent- owned associate K-Reit Asia, which is also listed on the Singapore Exchange?
Of course, there are some merits to the deal from KepLand’s perspective. As UBS Investment Research notes: ‘Selling the asset to K-Reit allows Keppel Land to control the asset in a more tax-efficient structure.’ Reits do not pay corporate tax at the vehicle level if they distribute all their income to unit holders.
But even after factoring the tax saving, KepLand will book a smaller contribution from ORQ following the divestment of its stake to K-Reit.
Of course, many KepLand shareholders may still hold units in K-Reit. The trust was not listed through an initial public offering; instead, KepLand shareholders were given 200 K-Reit units for every 1,000 KepLand shares they held, as at April 18 last year.
At the time that K-Reit was introduced to the Singapore Exchange last year, around 60 per cent of the total number of units went to KepLand shareholders, with KepLand itself holding the remaining 40 per cent stake.
Of course, there may be some KepLand shareholders who do not own any K-Reit units, because they sold them or they bought their KepLand shares after last year’s distribution-in-specie of the K-Reit units.
From their perspective, the argument that KepLand could have fetched a much higher price for its ORQ stake had it sold it to a non-Reit buyer, is even stronger.
The situation is even more complex for Cheung Kong’s sale of its ORQ stake to Suntec Reit. Cheung Kong itself does not hold a stake in Suntec Reit but its ultimate controlling shareholder Li Ka-shing owns some units in Suntec Reit. However, Cheung Kong has a 30 per cent interest in the entity that manages Suntec Reit and, through this, would get a share of the acquisition fee for the deal, usually 1 per cent.
But on a more positive note the deals are attractive to K-Reit and Suntec. They may not have found such attractive acquisitions elsewhere in Singapore.
KREIT, Suntec – BT
K-Reit, Suntec Reit buy stake in ORQ
Both trusts will pay $941.5m for one-third share each
K-Reit Asia and Suntec Reit have each agreed to buy a one-third stake in downtown office complex One Raffles Quay (ORQ). Both the real estate investment trusts (Reits) will pay $941.5 million each.
K-Reit will acquire its stake from its parent company Keppel Land. In a separate statement, KepLand said it will see a net gain of $221.6 million from the sale. Suntec Reit’s one-third stake will come from Hong Kong billionaire Li Ka-shing’s Cheung Kong Holdings. The remaining one-third stake in ORQ will continue to be owned by Hongkong Land, BT understands.
The three partners – KepLand, Cheung Kong and Hongkong Land – paid $462 million in total, or $290 per square foot (psf) of gross floor area, in 2001 to take equal stakes in the 99-year leasehold project. With the sales of their respective stakes, both KepLand and Cheung Kong will be exiting the ORQ investment.
On the other hand, the acquisition is expected to boost the portfolio sizes of both K-Reit and Suntec Reit substantially. For K-Reit, the purchase will more than double its portfolio size to $1.62 billion, from $677 million at end-2006, the trust said. Suntec Reit’s total assets under management would also increase to $4.8 billion, from $3.9 billion at present.
K-Reit said that its purchase will come with an income support of up to $103.4 million till 2011. Suntec will also receive rental top-up payments of $103.5 million (inclusive of GST) over 54 months, it said.
The two Reits also said they are looking at ways to finance their acquisitions. K-Reit plans to issue new units as well as look into debt financing, it said.
In line with this, KepLand, which held 40.7 per cent of K-Reit as at July 27, said that it will subscribe for new units in the Reit to maintain its proportionate stake.
Suntec Reit is also now reviewing financing options for its ORQ stake, including issuing new units, loans, convertible bonds and/or other debt securities.
On its part, KepLand managing director Kevin Wong said that the developer will continue to ‘unlock value in our investment buildings to re-deploy resources to grow our property development business and fund management activities in Singapore and the region’.
Located in the Marina Bay area, ORQ comprises two office towers with a net lettable area of about 1.3million square feet. The complex is fully let, and major tenants include ABN Amro, Barclays, Credit Suisse, Deutsche Bank, Ernst & Young and UBS.
Suntec Reit’s shares closed one cent up at $1.86, while K-Reit’s stock climbed four cents to close at $2.84. KepLand’s shares rose 10 cents to end the day at $8.40.