Millennium & Copthorne Hotels may launch Reit

(KUALA LUMPUR) Millennium & Copthorne Hotels plc (M&C), a London-listed firm which operates more than 112 hotels in over 18 countries, may launch a billion-ringgit property trust in Malaysia comprising local and foreign properties, says a report in Malaysia’s Business Times.

M&C may also consider launching the Reit in Singapore or other Asian countries but this will depend on opportunities in the markets, chief operating officer Michael Sengol said.

‘A listing in Malaysia is also possible. Options are open and it’s a long-term plan. There is nothing concrete yet,’ Mr Sengol told Business Times in an interview in Kuala Lumpur recently.

M&C, a unit of Singapore’s City Developments Ltd (CDL), which is part of billionaire Kwek Leng Beng’s Hong Leong group, is one of the largest owned and managed hotel groups in the world.

In Malaysia, it owns the newly refurbished Grand Millennium Hotel (formerly The Regent KL), and Grand Millennium Penang.

According to Mr Sengol, the hotel in Penang may be redeveloped or refurbished in the near future to cater to the lifestyle of travellers.

Next month, M&C will launch Millennium Residence, a 57-storey five-star serviced condominium in Kuala Lumpur, its first in Malaysia.

‘We have not stopped venturing here. We are still exploring. Malaysia now contributes a small percentage to group revenue. With further expansions here, we hope contribution would be significant in the near future,’ Mr Sengol said.

Meanwhile, M&C is planning to develop its no-frills hotel operating business in Malaysia and Asia through Tune Hospitality Investments Dubai, a US$50 million joint-venture property fund.
Hong Kong-listed City e-Solutions (CES) Ltd, a unit of CDL, and Istithmar PSJC, the investment arm of state-owned Dubai World, will each have a 40 per cent stake in the venture. The rest will be held by Tune Hotels.com, Malaysia’s first no-frills hotel operator. The fund will be used to develop and own a portfolio of 30 ‘no-frills’ hotels in Malaysia, Indonesia, Thailand, Singapore and the Philippines.

Reits may well have to go down development path

REAL estate investment trusts listed in Singapore (S-Reits) must look at developing their own assets going forward, instead of just buying from sponsors or third-party vendors.

Right now, most of them are suffering from a double whammy – potential assets are lacking and capital is getting more expensive.

Too many Reits are competing for a fixed number of assets in Singapore. Since the first S-Reit was listed in 2002, the market has grown by leaps and bounds. Currently, there are 20 Reits listed on the Singapore Exchange.

In addition, foreign funds are also snapping up commercial properties, making assets even scarcer. These funds are also eyeing assets identified by developer-sponsored Reits as being in their asset pipelines.

For example, CapitaCommercial Trust (CCT) did not buy CapitaLand’s Temasek Tower and Chevron House. Market watchers said that a third-party buyer’s offered price must have been at a level that was not accretive to CCT. This means that a sponsor’s portfolio is a guaranteed asset pipeline for a Reit only if no third party is willing to offer a higher price – an unlikely scenario in a hot property market.

Compounding the problem is the jittery market, which makes raising funds for acquisitions difficult.

For example, K-Reit Asia recently decided not to proceed with a convertible bond and unit issue to finance its one-third purchase of One Raffles Quay, citing weak equity and credit markets. Parent company Keppel Corp instead provided a revolving loan facility of up to $960 million.

This pushed up the Reit’s gearing to a relatively high 55 per cent – not far from the regulatory cap of 60 per cent – giving K-Reit little room to fund future acquisitions with debt.

Citigroup recently downgraded K-Reit Asia to a ‘sell’ from a ‘buy’, citing stalling acquisition growth. The bank also cut the stock’s target price to $2.17, from $2.87 previously.

‘Acquisitions will be constrained by limited debt headroom of about $100 million,’ the bank said in a research note.

Analysts have identified four other S-Reits – Allco Reit, Mapletree Logistics Trust, Cambridge Industrial Trust and Saizen Reit – as also having relatively high gearing.

Faced with these constraints, many Reits here will sooner or later have to go down the development route.

‘So far, A-Reit is the only Reit that has pursued this route with some success,’ notes OCBC Investment Research. ‘Going forward, with less opportunity for growth, we anticipate to see more S-Reits take on development projects.’

In particular, developers looking to list Reits in 2008 should look at setting up stapled trusts. Right now, there is just one such Reit listed here – CDL Hospitality Trusts, which consists of a hospitality Reit and a business trust, although the business trust is dormant at present.

In a stapled trust in which both parts are functional, investors will get stable returns from the Reit, which could be solely used as a vehicle for holding assets.

The stapled business trust, on the other hand, can take on development jobs and guarantee a pipeline of assets for the Reit. Such a product should prove to be popular with investors, and will also be a fresh and differentiated offering in Singapore’s Reit market.

Pressure building up in crowded S-Reit sector

Mergers seen as one response to slowing growth as assets, funding get scarce

THE Singapore real estate investment trust (S-Reit) market is expected to face waning investor appetite and a short supply of potential acquisitions next year.

The S-Reit sector could also enter a consolidation phase, triggered by the implementation of a takeover code for Reits, analysts say.

‘Reits are under pressure at the moment,’ said Mark Ebbinghaus, the head of Asian real estate at investment bank UBS. ‘Many Reits have been sold off because of money leaving Asia.’

S-Reits have taken a beating over the past few months as large chunks of capital fled Asia on the back of the US sub-prime crisis. Many Reits are now trading at about 20 per cent below their June or July peaks.

Despite this, the sector will grow, with analysts predicting that at least three to five Reits will be listed in Singapore next year. This compares to five Reits in 2007 and seven in 2006.

Mr Ebbinghaus, for one, expects at least five Reits to go public here next year. The Reits are more likely to come to the market in the second half of 2008 as global financial markets recover, he said.

Others see a smaller number. ‘Going into 2008, we can expect at least a further two to three Reits to come into the market,’ said OCBC Investment Research analyst Wilson Liew.

However, he cautioned that the success of these new Reits is not assured. To do well, the Reits have to offer ‘something new’ to differentiate themselves from the others in a now fairly crowded market space, Mr Liew said.

The S-Reit sector has grown substantially since the first trust – CapitaMall Trust (CMT) – was listed back in 2002. Right now, there are 20 Reits listed on the Singapore Exchange. Their combined market capitalisation is about $27.2 billion.

This compares to 15 S-Reits with a total market capitalisation of $24.4 billion at end-2006.

Right now, most S-Reits are based on properties in Singapore. A few are based on properties in China, India, Indonesia and Japan.

More diversity is needed, market watchers said. ‘A Reit based on properties in Thailand or Vietnam could do well,’ said Mr Ebbinghaus.

The S-Reit sector has to some extent become a victim of its own success, said OCBC’s Mr Liew.

‘The success of early Reits encouraged more players into the market, all hoping to replicate the same growth strategy,’ he said.

This quickly led to an asset squeeze, made worse as other new players – such as private equity and property funds – entered the market. The buying spree mopped up all the quality properties, pushing up valuations while bringing down yields, Mr Liew said.

BT understands that some Reit managers are putting off buying assets from the sponsor companies due to the high capital values of properties, which reduces the yields.

Acquisitions are slowing down as some S-Reits are also having trouble raising funds to buy the properties they want amid poor market conditions.

One theme for 2008 could be merger and acquisition activity in the S-Reit market.

Singapore’s Securities Industry Council (SIC) announced in June this year that it will extend the Singapore Code on Takeovers & Mergers to Reits. Now, anyone who acquires 30 per cent or more of any Reit must make a general offer for the remaining units.

Underperforming Reit managers could also be removed under the code. Guidelines allow for the removal of a Reit manager if at least 50 per cent of unit-holders are present and the majority votes for it.

OCBC Investment Research said that the industrial sector is most likely to see some consolidation. ‘The candidates could be either Mapletree Logistics Trust (MLT) or A-Reit buying and/or merging with Cambridge,’ Mr Liew said.

How well the S-Reit market will do going forward will depend on how quickly global financial markets can recover next year, observers said.

CIMB economist Song Seng Wun noted that Singapore is heading into a turbulent patch in 2008, although the country’s economic engine has never been in a better shape. ‘While we have faith in the domestic drivers, we note that external threats to growth are real and visible,’ he said.

Reits listed here have raised some $4.0 billion this year, compared to $3.2 billion in 2006, according to data compiled by UBS.

With more Reit listings on the table, the amount of capital raised next year could well be higher – provided the S-Reit market comes out of the current turbulence intact.

Not the end of the story

Retreat to Reits, trusts with visible dividend: analysts

US woes may have made markets view Reits for yield again, not growth

WITH rising uncertainty and volatile markets, investors should retreat to yield instruments such as certain real estate investment trusts (Reits) and business trusts, analysts say.

This is despite their weakness in recent months – according to a Goldman Sachs report last week, an index of Singapore Reits (S-Reits) has slid nearly 15 per cent in the last two months.

‘Price performance of Reits following primary and secondary equity offerings this year has generally been weak,’ it noted.

There might be several reasons for this weakness: broad market decline due to the credit crisis; widening yield spreads; or softer expectations for the property sector here.

But most analysts who have reduced price targets have done so because of higher cost of capital, which makes it more expensive for Reits to acquire. Weak market sentiment, too, affects acquisitions if there is lack of liquidity to fund equity raising, according to DBS Vickers.

As most Reits here have traded as growth propositions, rather than the stable dividend-payers they were designed as, the higher cost of acquisitions leads to loss of value.

Still, ‘with markets looking at increasing odds of a US recession and higher spreads for debt instruments – that is, a repricing of risk – the markets may have also decided they want to return to Reits as yield plays rather than growth plays’, said Lim Say Boon, chief investment strategist of wealth management at Standard Chartered Bank.

Indeed, analysts advise investors to buy into the visible cash flows and high dividends that Reits and trusts represent.

Despite higher cost of capital, ‘the strong Singapore structural story remains intact’ and S-Reits offer ‘defensive characteristics overlaid with growth’, said Goldman.

Others seem to agree. Suntec Reit, in particular, has drawn attention, with both BNP Paribas and Citigroup issuing ‘buy’ calls.

‘Concerns over prior yield compression and the narrowed spread against risk-free instruments have been overstated,’ said BNP’s Jonathan Ng.

Going by his forecasts, at Suntec’s closing price of $1.58 last Friday, its dividend yield spread against 10-year government bonds stood at 307 bps, higher than a previous peak of 291 bps in June last year.

Offering FY08 yield of 6 per cent, ‘the stock now trades at oversold levels’, said Mr Ng.

Other Reits offer still higher yields (see table). And we haven’t even come to the business trusts, which, according to some forecasts, are trading at FY08 yields of up to 10-plus per cent.

Nonetheless, investors should look hard at the underlying assets of Reits, not just at the yield they are offering, said Brian Tan, a wealth manager at FPA Financial. ‘Yields may be attractive but they can support the price only up to a certain extent,’ he said.

The comment is pertinent for the shipping trusts, namely Rickmers Maritime, FSL Trust and Pacific Shipping Trust. Despite high yields, these have performed poorly ‘generally due to the weak US dollar as shipping trusts generate US$-based cashflows’, DBS Vickers Research said.

Within the Reit universe, too, analysts differ on which stocks stand out.

Goldman prefers those with exposure to Singapore rather than overseas.

The yield spread of Reits like the CapitaRetail China Trust or Ascendas India Trust is negative, because the risk-free rates in China and India (at about 5 per cent and 8 per cent respectively) are higher than the Reits’ FY08 yields of 3.8 per cent and 4.2 per cent respectively, it points out.

Retail Reits should trade at the lowest one-year forward yields thanks to their low risk at this point, while industrial Reits should trade at the highest yields given low rental growth and shorter land leases, it said.

Citigroup strategist Lim Jit Soon advises clients to focus on stocks with good visibility and attractive yields. Top calls include Rickmers Maritime and Suntec Reit, as well as stocks like SPH and ST Engineering.

Meanwhile, another reason to look at high-yield stocks is that the local risk- free rate is expected to slide further – raising the yield spread – as economists expect the US Federal Reserve to lower its benchmark interest rate over the next year.

Singapore’s open economy means the government does not directly set the interest rate.

A 100bps decline in the Fed Funds rate will lower three-month SIBOR (2.56 per cent as at November 2007) by about 50bps, though this may take time to materialise, due to currency sterilisation and tight liquidity, according to Citigroup economist Zheng Kit Wei. But interest rates are ‘not the only factor driving asset markets’, he added. ‘Overall confidence and sentiment plays a part as well.’