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

SLA to acquire 600,000 sq ft of land

The Singapore Land Authority (SLA) yesterday announced that it is acquiring some 600,000 square feet of land for the construction of the first stage of the North South Expressway – stretching from Admiralty Road West to Toa Payoh Rise.

Market observers say this is its first major compulsory land acquisition in about a decade. The last time it bought land on such a large scale was in 2001, when it acquired about 860,000 sq ft of land to build the Kallang/Paya Lebar Expressway and the second part of the Circle Line. Then, about half of the 126 affected owners of homes, shops and offices in Paya Lebar and Geylang said the amount of money offered by the SLA as compensation was not enough.

An SLA spokesman said compensation will be pegged at market value as at the date of acquisition, in accordance with the provisions of the Land Acquisition Act made in 2007.

A collector’s inquiry will be conducted by the Collector of Revenue to determine the quantum of the compensation award. Owners affected by the acquisition will also be asked to submit their claims to the Collector of Revenue.

While the acquisition this time round is unlikely to trigger the sort of discontent that was felt among property owners affected by the 2001 acquisition, market watchers said that the part lots – which are a cut of one plot of land – that are being bought over could create a tricky situation. In its statement, SLA said it will be purchasing 38 full lots and 33 part lots.

Said DTZ Debenham Tie Leung Statutory Valuation executive director Ng Poh Chue: ‘If it cuts through part of your building, then what is going to happen?’

Then there is the issue of sentimental value that owners might have for their property, added Ms Ng.

She noted, though, that the government has been ‘quite sympathetic’ to land owners in such situations, and has been known to make ex-gratia payments in certain cases. An ex-gratia payment is a payout made without the giver recognising any liability or legal obligation, and is done voluntarily.

SLA said all affected owners will be given two years from the date of acquisition to vacate the premises. Its latest acquisition comprises a mixture of residential, industrial and institutional developments.

Separately, the SLA is acquiring some 7,445 sq ft of land forming part of Sabana Shari’ah Compliant Reit’s property at 1 Tuas Avenue 4 for road works along Pioneer Road and Tuas Avenue 4 in connection with the Tuas West Mass Rapid Transit extension.

Sabana Real Estate Investment Management (Sabana), the manager of Sabana Reit, yesterday said that the plot represents about 5 per cent of the property’s total land area, and that it would not affect its existing building structures there, said Sabana. ‘The manager is of the view that as the existing building structures are not affected by the compulsory acquisition, the gross floor area of the building is not affected and there should be no impact on the rental payable by the lessee of the property.’

Sabana will engage a licensed valuer to assess and submit a compensation claim for the affected site.

SLA also stated in its notice that Sabana Reit is entitled to a one-time ex-gratia reimbursement for the preparation of the valuation report, said Sabana.

Largest Shari’ah-Certified REIT Globally

Sabana Shari’ah Compliant REIT (Sabana REIT) is a Singapore-based industrial REIT established to invest in industrial properties across Asia. It is the first fully certified Shari’ah-compliant S-REIT in Singapore and possibly the largest Shari’ah certified REIT globally. Its portfolio comprises 15 industrial properties spread across Singapore, with an aggregate GFA of about 3.29m sf.

Initiate with BUY. We initiate coverage on Sabana REIT with BUY and a target price of S$1.20 based on the dividend discount model with a required rate of return of 8% and a terminal growth rate of 2%.

Early-mover advantage to tap larger base of Islamic funds and investors. Sabana REIT is the first fully Shari’ah-certified REIT in Singapore and we believe it is the world’s largest Shari’ah-certified REIT. The REIT is also compliant with Middle Eastern standards for Shari’ah instruments and will be able to access the estimated US$1trillion Islamic financial market.

Above-average dividend yield of 8.9%. We forecast Sabana REIT will have 2011 dividend yield of 8.9%. This is 100bps higher than the average FY11 dividend yield of 7.9% for industrial S-REITs and higher than the 8.4% and 6.9% FY11 trading yields for the 2010-listed Cache Logistics Trust and Mapletree Industrial Trust respectively.

Quasi office and specialised storage play. About 59% of the portfolio comprises high-tech industrial properties, which represent a late-cycle play on the office segment as high-tech industrial space acts as an alternative to office space when office rentals start to rise. About 17% of the portfolio is concentrated in the chemical logistics space, which is a highly specialised and regulated field. In our opinion, the focused nature of high-tech and chemical warehousing properties that account for about 75% of the portfolio would result in sticky tenants.

Leasing structure provides downside protection. The triple-net master-lease structure of Sabana REIT will reduce income volatility and protect the portfolio from underlying vacancies. The tenant profile of Sabana REIT consists of 14 tenants with master-leases and one multi-tenanted facility with rental protection.