DMG Research said on Thursday that February's property sales numbers 'surprised on the upside', with a total of 2,413 units sold by developers in the month.

Analysts see value diminishing in the sector with revised net asset value discount on developers narrowing.

'We also remain less sanguine as stronger than expected continued price appreciation may in turn raise policy risks, leading to sustained sector re-rating unlikely,' said DMG analysts.

The research house remains neutral on developers but reiterates its sell recommendation on SC Global due to low asset turnover and high leverage.

Additionally, suburban retail Reits such as CapitaMall Trust and Frasers Centrepoint Trust are now looked upon more favourably.

Reit, stock yields reflect risk nature

IT seems the onset of the dragon year has driven home the notion that risk and return on assets are directly correlated.

Notably, Singapore-listed real estate investment trusts (Reits), which are generally perceived to be defensive counters characterised by their lower price volatility, have yielded relatively conservative returns year-to-date as compared to their higher beta Straits Times Index (STI) peers.

According to data from Bloomberg and the Singapore Exchange (SGX), since the start of 2012, Reits – comprising 22 locally listed counters – have raked in an average return of 8.2 per cent compared to the stocks of the STI which have yielded 15.5 per cent over the same period. The average price volatility for Reits is 19.9 per cent and for the basket of STI stocks is 29.6 per cent.

Theoretically speaking, it is generally believed that the higher the risk associated with an asset, the greater its potential upside, and vice versa.

Investors can typically estimate the level of risk associated with the counter by measuring its recent volatility in price, before tailoring their investment choices to suit their risk appetites accordingly.

However, there might be variations of risk and return among the various asset classes in addition to how risk can be measured, cautioned the SGX.

For instance, risk and return can vary with the pricing and fundamentals of each asset.

In addition, investors should also be aware that historical prices and volatility numbers should not be taken as a guarantee to future performance, as history will never be representative of what the future might bring.

4Q11 RESULTS ROUNDUP

•Results within expectations

•Performance likely to remain stable

•Sound fundamentals remain intact

Healthy quarterly results.

Industrial REITs continued to turn in encouraging sets of results for the financial quarter ended Dec 2011, in line with our expectations. Robust YoY growths of 4.3-14.4% in NPI and distributable income were registered across the REITs, driven by acquisitions, completion of development projects and positive rental reversions. On a QoQ basis, we observe that the REITs also delivered modest growth in their DPUs, as they continued to benefit from better operating performances and contributions from their recent acquisitions.

Expecting stable performance.

Going forward, we believe industrial REITs are likely to maintain their financial performances. While the uncertain global economic outlook and seventh consecutive monthly contraction in the manufacturing sector have likely caused industrial REITs to set more cautious tone on their outlook, we note that all the REITs have already been taking proactive measures to limit any negative impact from a potential market downturn.

Financial position still healthy.

A look at the industrial REITs’ operating performances also shows that their portfolios are still healthy thus far. As at 31 Dec 2011, the aggregate leverage for the industrial REIT subsector averaged at 34.6%, up by a slight 1.9ppt QoQ. However, industrial REITs are in a markedly better financial position now, in our view. Average subsector interest cover was maintained at a strong 6.3x, while borrowing cost of 3.1% was lower than the rates seen during the credit crunch.

Maintain OVERWEIGHT view.

For 2012, we note that only an estimated low S$276.6m (4.5%) of the industrial REIT subsector borrowings are due to expire. This translates to limited refinancing risks for the REITs. We are maintaining our OVERWEIGHT view on the industrial REIT subsector, as we believe fundamentals are still sound and financial performances are expected to stay resilient. CACHE remains our preferred pick, due to its relatively more robust portfolio, healthy aggregate leverage and attractive FY12F DPU yield of 8.9%.

SMEs blame Reits for growing rental pains

JTC asked to review its current policy of divesting industrial space to private entities

Rising rentals for commercial and industrial space have emerged as a pressing issue for small and medium enterprises (SMEs), and the fingers are pointed squarely at the dominance of real estate investment trusts or Reits as landlords.

The Reits’ drive to enhance yields and returns for unit holders – which usually translates into rental hikes – have left many SME owners, who feel they have limited alternatives here, fuming.

It has also led to calls – including a recommendation by the newly formed SME Committee – for JTC Corp to review its current policy of divesting industrial space to private entities like Reits and return to its previous role of an industrial landlord, so that it can provide ready and affordable industrial space to SMEs.

‘Rentals and capital values of properties are going up, impacting business costs for SME owners and eating into their bottomline,’ said Lawrence Leow, chairman of the SME Committee.

According to Abdul Rohim Sarip, president of the Singapore Malay Chamber of Commerce & Industry (SMCCI), rental forms between 40 per cent and 50 per cent of operational costs for small businesses. So the increase in rental costs has had a significant impact on their bottom-line.

‘About 40 per cent of these companies (from the retail and manufacturing industries) who seek advisory assistance from EDC@SMCCI have difficulty in sustaining their operational costs and are in need of short-term loans from banks, which is another challenge,’ he added.

Noted Low Cheong Kee, managing-director of Home-Fix DIY: ‘Reits are commercial entities. They will do what they can to keep upping the rent at every renewal whereas JTC had a national agenda to stabilise rent.’

JTC, a statutory board, oversees the development of industrial infrastructure in Singapore. There is clearly frustration among SME owners. An SME owner who did not wish to be named told BT she is currently in negotiations with her landlord, a Reit trust manager, to renew her lease for an additional three years. The new lease agreement is for $28,000 per month, plus 3 per cent of the store’s monthly gross turnover (GTO). She currently pays $17,000 for her 1,000 sq ft unit.

Another SME owner said his rent for a 50,000 sq ft business space in Tuas increased by 56 per cent from $50,000 to $78,000 when he tried to negotiate to renew his lease for eight months.

According to official statistics, rental rates of multiple-user factory space increased 16.2 per cent year on year in 2011, while rental at multiple user warehouse rose 13.3 per cent.

Retail rents also rose on Singapore’s success as a world-class shopping and event destination, but are expected to stabilise in 2012 due to a more muted economic outlook and oncoming supply. Average rents at prime Orchard Road malls went up 4.6 per cent year on year last quarter, while those at prime suburban malls edged up 2.2 per cent, according to CBRE Research.

What rankles too is the perception SMEs have that the odds are stacked in favour of the landlords.

Retailers argue that the practice of requiring tenants to reveal their GTO figures gives landlords an unfair advantage when negotiating rents. Said an SME owner: ‘The current retail market is unbalanced in favour of landlords . . . (since) in the prime retail spaces, you will find that 80 per cent to 90 per cent of landlords insist that their tenants reveal their monthly sales numbers.’

There is also the problem of landlords working in a clause that allows them to terminate tenancy agreements. ‘So even though the lease may be signed for two to three years, and there’s no breach of contract, landlords still have the right to terminate the tenancy of the tenant simply because the landlord feels that another tenant might be able to bring in a better image, sales, or rental . . . So your future is never secure,’ he said.

Greenpac’s chief executive Susan Chong not only had the plus-two-years clause of her lease terminated following the sale of her factory building to a Reit, but is also unable to negotiate a renewal on her existing lease with the new owner. According to Ms Chong, she has been trying to arrange for a lease renewal since October last year. Her lease expires in April.

Her frustration is palpable, given that she only requires the space for an additional eight months. ‘I’m currently building my own factory so I’m asking that they either allow me to rent for an additional eight months, or a year,’ she said. While she will only require the facilities for the next eight months, she is willing to renew the lease for a whole year, she emphasised. But thus far, the landlord’s response to requests to negotiate has been a firm no, citing potential tenants who are looking to lease the property for a minimum three-year term.

Reit managers are quick to point out that rents are a function of market forces, and that they are simply looking to achieve market rates. They say tenants have a choice as to where to locate their business and it would be impossible for Reits to charge rental rates above what the market can bear and what other landlords are charging.

‘Industrial Reits collectively own about 15.8 per cent (about six million sqm) of the total stock of about 38.2 million sqm of industrial property stock as at 2011. Are they able to dictate rental rates?’ asked an Ascendas Funds Management spokesperson rhetorically.

‘Recent media headlines of high percentage increase in rental rate in certain segments of the industrial property market is a result of catching-up to market rent level as a result of the change from public to private ownership,’ the spokesperson added.

According to a CapitaMall Trust Management Ltd spokesperson, rental reversions for malls in CMT’s portfolio averaged 2.1 per cent a year in the last two years.

‘In that same period, our tenants’ sales have increased even faster – by more than 6 per cent a year – showing that our tenants continue to do well in our malls,’ it added, crediting its strong track record in asset enhancement, which has helped increase shopper traffic and thus tenants’ sales.

Still, business owners look back to the time when JTC was a benevolent landlord. Allen Ang, group managing director of Aldon Technologies Services, pointed out that JTC initiated a rent reduction of 15 per cent during the 2009 financial crisis.

Rent now makes up about 11 per cent of the group’s overhead costs. ‘This is a substantial sum in an operation like ours. Considering our operations/business and industry norms, ideally the rents should stay at around 7 per cent to 8 per cent,’ Mr Ang said.

He has signed a third lease for a three-year term, from 2010 to 2013. The monthly rent for year one is $40,295, while monthly rent for year two is $43,498, a year-on-year increase of 8 per cent.

The SME Committee’s recommendation for JTC to review its role is an attempt to address these issues. A second recommendation calls for a one-off grant to help relocate SMEs with low value-added activities to lower-cost countries.

The recommendations, among others, will be presented to the Ministry of Finance and the Ministry of Trade and Industry ahead of Budget 2012.

Industrial properties run into headwinds

Large supply of factory space is expected to depress rents at facilities

Singapore’s industrial properties seem to be nearing the end of their strong run with growth in rents and capital values starting to taper off as worries over a supply glut grow.

Back in 2011, industrial rents and capital values produced a stellar report card, with the URA (Urban Redevelopment Authority) reporting a 16 per cent to 22 per cent jump in multi-user and warehouse price and rental indices, respectively, as rents and prices reached multi-year highs.

However, going into the Dragon Year, consultants and analysts predict softer or flat rental growth for factories, warehouses, high-specifications industrial buildings and business park properties due to oncoming supply pressure.

In fact, there is a net floor area of 9.59 million square feet (sq ft) of industrial space in the pipeline for 2012, with around 66 per cent expected to be factory space, said Colliers International Singapore Research.

The large supply of factory space, in particular, is expected to depress rents at facilities island-wide after a steady climb to recent highs on the back of robust manufacturing growth.

That said, with the dimmer outlook for the manufacturing sector now, Colliers director Chia Siew Chuin expects overall demand for space to fall.

Said Ms Chia: ‘Given the intrinsic link between the performance of Singapore’s industrial property market and that of the manufacturing sector, the weakening manufacturing sector (excluding biomedical) would likely have a bearing on Singapore’s industrial property market growth’.

Echoing the same tune, Derek Tan from DBS Vickers Research said: ‘While the industrial segment has benefited from the strong rebound in economic activity and manufacturing growth especially post-GFC (great financial crisis), the deteriorating global growth outlook in 2012, arising from the weakening economies in Europe and supply chain disruption in Thailand, is likely to dampen demand for industrial space given its close correlation with industrial output.’

Credo Real Estate executive director Ong Teck Hui agreed that the sector’s rents could face downward pressure and slide by an average of 15 per cent in 2012 as demand softens for both existing industrial space and new completions.

Cracks are also starting to show, with increasingly subdued bid prices and participation levels at industrial tenders and other sales events, suggesting growing caution among developers.

For instance, an industrial government land parcel located in Woodlands drew only four bidders and a top bid of $72 million or $142 per square foot per plot ratio (psf ppr) back in September, which was lower than the $152 psf ppr for a nearby site that attracted nine contenders a few months earlier.

Among industrial properties, the worst hit by the weakening sentiment appear to be high-specs buildings and business parks, because of their greater international exposure and worries of a vacancy overhang.

The Ministry of Trade and Industry’s (MTI) latest Industrial Government Land Sales Programme (IGLS) is also expected to further depress sentiment in the sector.

The IGLS will release more sites to meet future demand as well as pull the brakes on the industrial market. In particular, smaller configuration sites with shorter tenures have been released for the first half of the year.

In addition to all that, to better cater to industrialists’ needs for ready built industrial space, MTI also introduced a new set of conditions on all B1 and B2 IGLS parcels, which came into force on Jan 1, 2012.

One of the new conditions include developers not being allowed to strata sub-divide the development on selected sites in the first 10 years after completing the project.

Lee Sze Teck, senior manager of research and consultancy at DWG, said: ‘ The flip side of this policy is that it favours developers who build and hold industrial developments for recurring income but disadvantages those who build and sell. This will put a cap on the final tender price for such developments as the developer is bearing more risk for ten years. But in doing so, the government is hoping that rental costs will be lowered for industrialists.’

In terms of capital values, at least three consultants expect the recently imposed additional buyer’s stamp duty for the residential sector to be a boon to industrial properties. Funds may be diverted away from residential to industrial assets, providing support for the capital values of multi-user factory space and high-specs buildings in particular.

Jones Lang LaSalle noted: ‘High-tech properties with good-quality building specifications and tenants with good covenant strength are likely to continue to attract investors, creating opportunities for industrial investments beyond the current period of economic uncertainty.’

Having said that, most analysts and consultants concur that there is no escaping the effect of weaker Western economies going forward.

Said DBS Vicker’s Mr Tan: ‘Looking ahead, moderating global PMI (Purchasing Managers Index) figures and slowing manufacturing growth are expected to put a cap on further rental growth, as tenants rationalise their space requirements as production levels fall to below optimal capacity.’