Category: REIT
REIT – BT
Syariah compliant Reit on its way here
Reit is targeted for listing around the second half of next year
ARA Asset Management has partnered a Qatar- based property group to list a Syariah compliant real estate investment trust (Reit) in Singapore – possibly the first for the country.
The Reit – targeted for listing around the second half of next year – could hold some $1 billion worth of properties largely from the hospitality sector in Qatar.
ARA, an affiliate of Li Ka-shing’s Cheung Kong group, said yesterday that it inked a memorandum of understanding with Regency Group chairman and founder Ibrahim H Al-Asmakh to jointly manage the Reit.
Regency is a real estate developer and investor with a portfolio of hospitality, residential, commercial and retail properties in Qatar. It will sponsor the Reit and inject mainly hospitality assets – including hotels and service apartments – into the trust. Total gross floor area in the initial portfolio could come up to around 164,000 square metres.
ARA group CEO John Lim told BT that Regency will maintain a stake of around 30-40 per cent in the Reit, with the balance to be floated on the market. The eventual amount to be raised would depend on market conditions.
The partners chose to list the Reit in Singapore because of the large and deep Reit market here, Mr Lim said. Singapore also has ‘the most established guidelines in the region’, while the Middle East has yet to draw up a code for Reits, he added.
Mr Lim is positive on Qatar’s potential. As a member of the Gulf Cooperation Council, Qatar is the world’s largest exporter of liquefied natural gas and third largest holder of natural gas reserves.
Dubai’s recent debt woes have introduced doubts to the region’s stability but Mr Lim believes that Qatar may benefit. ‘Given the Dubai situation, we sense that there is an opportunity, that in fact a lot of expatriates are actually moving from Dubai to Doha.’ Doha is the capital of Qatar.
CB Richard Ellis Middle East managing director Nicholas Maclean also told Reuters: ‘Qatar sees an opportunity to take some of the market share from Dubai’.
He noted that Qatar has been building offices and hotels to draw firms building a presence in the Middle East.
According to CIMB analyst Janice Ding, the Syariah compliant Reit could see fairly good interest from investors in the Middle East and Malaysia because there are few such investment vehicles around.
But she added that some investors might also be more cautious because they are less familiar with the property market in Qatar.
ARA gained one cent yesterday to close at 87 cents. According to Mr Lim, the real estate fund manager will continue to build on its Syariah compliant product offerings.
REITs – OCBC
The virtuous and the not-so-virtuous
Policy and leverage appetite shapes 2010. We believe the Singaporelisted REIT sector’s 2010 performance will be influenced by opposing systemic forces. A favorable policy climate is likely to sustain a high liquidity environment. While some S-REITs may book negative revaluations in 4Q09, the ‘Bernanke Put’ could potentially create a floor for asset values in 2010. On the flipside, the rules for leverage have changed and increased conservatism is the new normal. Over-leveraged players (by today’s standards) may need to reduce gearing through equity fund-raising or asset sales. This de-leveraging can potentially occur not only on the REIT level, but also on the sponsor, manager, and institutional investor level.
The virtuous and the not-so-virtuous. 2010 will not be an ‘easy’ market, in our view, as we expect greater variance in performance among the individual REITs. We believe the sector can be broadly divided into two camps differentiated by leverage, sponsor strength, and sub-sector specific differences in forward earnings performance. Investment opportunities are available in both camps but of different varieties: the stronger REITs may enjoy yield compression and price-to-book normalization, and can potentially tap into a virtuous cycle of accretive acquisitions. On the other hand, the weaker REITs could be trapped in a vicious cycle of declining asset value, refinancing difficulties, and a consequent need to de-leverage. For those REITs with outstanding challenges, we advise interested investors to wait until after a resolution is proposed and the extent of any dilution is clear.
Limited upside, risks to the downside. We use 2006 valuations as a sanity check on the current recovery. The sector trades on average at 0.78x book, still below the 0.89x average in 2006. The potential 13.4% increase from current levels is offset, however, by book value risk from 4Q09 revaluations. A 6.9% potential upside from a distribution yield perspective is also offset by a mixed earnings outlook. With an unexciting risk-reward ratio for 2010, we maintain our NEUTRAL rating on S-REITs. Within our coverage universe, we have BUY ratings on Mapletree Logistics Trust [MLT, FV: S$0.78], Ascott Residence Trust [ART, FV: S$1.25], and Suntec REIT [FV: S$1.40]. Our top picks for the sector are ART and MLT, for ART’s positive earning outlook and MLT’s earnings stability, and for the possibility of yield-accretive acquisitions at both REITs. Key risks to our thesis include an increase in interest rates (which we believe would impact the blue chips the most), a double-dip recession and the threat of a new asset bubble.
REITs – CIMB
Big caps grow expensive
• We downgrade the SREIT sector to Neutral from Overweight on a more negative view of sector heavyweights, CMT (fund flows away to CMA), CCT (negative rental reversions), A-REIT (falling industrial occupancy) and MLT (limited organic growth). Nonetheless, we believe that share prices have more room for appreciation as the sector P/BV of 0.83x remains below its mean level of 0.92x since inception (2002) till now, even after the sharp recovery from trough levels in March.
• Acquisitions and development projects will take centre stage in 2010. We believe that easy credit conditions coupled with recapitalised balance sheets and compressing dividend yields will revive acquisitions and project development in 2010. However, these will likely be less accretive than those in pre-Lehman times due to: 1) cash calls made in 2009 by a number of sponsor-backed REITs; 2) a more conservative outlook on asset leverage by REIT managers, which would result in a smaller quantum of acquisitions, or further equity-raising for acquisitions; and 3) insignificant spreads of asset yields over dividend yields, resulting in marginally DPU-accretive deals
• Asset inflation could lead to sector re-rating. An easing credit environment is drawing more institutional buyers of properties into the market. If the competition for investment assets intensifies, asset inflation is a possibility in the medium term.
• Negative reversions could set in. Most REITs will take time to catch up with market rents and occupancy due to standard leases set in place. We expect office, industrial business park and prime retail rents and occupancy to deteriorate further later in 2010.
• Suntec REIT our top pick for 2010. Our top pick for the sector is Suntec REIT for catalysts coming from the opening of two new MRT stations at Suntec City, and the Marina Bay integrated resort. Suntec REIT’s valuation of 0.65x P/BV is below the sector average of 0.83x, and also below its closest peer CCT’s 0.75x. However, 2010 dividend yields are higher than the sector’s 7.4% and CCT’s 5.8%.
• AREIT our top short. AREIT remains the most expensive REIT in the sector at 1.2x P/BV. We believe all the positives have been priced in. Downside risk is high as the attraction of low quasi-office rents in the Business Park and Hi-Tech segments gradually diminishes with a sharp fall in office rents.
REITs – BT
S-Reits’ proposal for distribution reinvestment plans positive: Fitch
FITCH Ratings says a recent proposal by some Singapore-listed real estate investment trusts (S-Reits) to introduce distribution reinvestment plans (DRPs) for unitholders is positive from a ratings standpoint.
But the ratings agency pointed out that S-Reits’ effectiveness in retaining cash remains limited.
In a new report, Fitch says that while DRPs improve credit profiles, they are not expected to lead to a positive rating migration in the S-Reit sector.
Analyst Peeyush Pallav says that participation in a DRP by a large proportion of an S-Reit’s unitholders can improve the Reit’s liquidity profile.
‘The retained cash can be utilised for debt repayments, or for meeting capital expenditure requirements, and serve as a source of additional liquidity for the S-Reit,’ he writes in the report. ‘This can be especially beneficial for S-Reits operating in property sectors with more volatile cash flows, such as hotels.’
DRPs can also be an efficient means of raising new capital for S-Reits in general, Mr Pallav reckons.
Several S-Reits included DRP provisions in their listing prospectus that allow them the flexibility to implement a DRP if need be. Such plans propose distributing quarterly dividends for an S-Reit either in the form of units, cash or in a combination of both, with the choice being up to individual unitholders.
At least two S-Reit managers have considered implementing a DRP this year – Saizen Reit and Cambridge Industrial Trust.
Saizen Reit this year proposed paying dividends for its fiscal second quarter in units instead of cash, but abandoned the plan after talks with the Singapore Exchange. But analysts believe that new Reit regulations could allow DRPs in future.
For example, a proposal for a DRP was approved at Cambridge Industrial Trust’s extraordinary general meeting on Oct 30.
However, Mr Pallav says that there are still many considerations. For one thing, DRP proposals may attract lesser participation from institutional investors that consider S-Reits to be dividend-driven investments.
Fitch also believes that the presence or absence of a DRP is not expected to be a primary rating driver, as putting the option in the hands of the investors means that they may choose not to participate in the DRP, especially when the prevailing market sentiment is negative and equity markets are unfavourable.
Separately, Moody’s Investors Service is looking to see if commercial mortgage-backed securities (CMBS) sponsored by S-Reits have enough liquidity arrangements in place to cover potential cashflow disruption in the event that an S-Reit is subjected to bankruptcy proceedings.
Depending on the type of bankruptcy proceedings to which an S-Reit is subjected to, there may be cashflow disruption, the ratings agency believes.
‘To ensure timely payment on the CMBS notes, CMBS transactions should have certain liquidity arrangements to cover the potential cash flow disruption, such that the rating of the CMBS notes’ linkage to that of the S-Reit can be minimised,’ Moody’s analyst Jerome Cheng said in a recent note.
Moody’s assessment is that at least 12 months of liquidity is needed to minimise the rating linkage. Ratings of those CMBS transactions with insufficient liquidity protection will be linked to that of the S-Reit.
Currently, Moody’s has outstanding ratings of Aaa to Aa3 on seven CMBS transactions sponsored by seven S-Reits, all with investment-grade ratings.
Right now, three of the seven outstanding Moody’s-rated transactions have no general purpose liquidity in place, while the remaining four transactions have liquidity facilities covering six to nine months of stressed debt service payments, Moody’s said.