REITs – BT
Reit players see growth via acquisitions in region
This will be driven by market liquidity and reduced capital cost
ASIAN real estate investment trusts (Reits) are poised to grow through acquisitions, industry players said at a forum yesterday.
The industry players, who were speaking at a panel discussion at the annual Real Estate Investment World Asia conference, said the expected growth will be driven by the lower cost of capital and ample liquidity in the market.
‘The cost of capital is getting back to an area where it makes it more attractive for Reits to acquire assets,’ said Jason Kern, head of real estate advisory at Hongkong and Shanghai Banking Corporation (HSBC).
Mr Kern noted that the Reit market in Asia has picked up in the past year, with six new Reit listings over 12 months. According to data from HSBC, there are currently 98 Reits with a total market capitalisation of US$97 billion listed in Asia.
Nicholas McGrath, chief executive of the manager of Singapore-listed AIMS AMP Capital Industrial Reit, agreed that the cost of capital had fallen and added that there is a lot of liquidity in the market.
The panellists also said that they expect more Reits to launch their initial public offerings (IPOs) in the coming months.
Kevin Xayaraj, chief executive of Singapore’s first Syariah-compliant Reit, Sabana Reit, expects more similar Reits to be floated this year. Sabana Reit was listed on the Singapore Exchange in November 2010.
‘With the success of the IPO, I think there will be a lot of Syariah-compliant Reits coming to Singapore and the rest of Asia,’ he said.
But Peter Churchouse, managing director of Portwood Capital, noted that there are still some major obstacles that prevent the Reit industry in Asia from expanding as quickly as it would otherwise have.
There is still a sense among investors that some landlords use Reits as vehicles to ‘dump’ unwanted and unattractive assets, Mr Churchouse said.
In addition, Reits are also not high-growth instruments, so investors who look for capital gains are not as keen on them. Mr Churchouse noted that the Reit sector now accounts for only 12-15 per cent of total invested real estate in the Asia-Pacific. He said he would like to see the proportion climb to 30-40 per cent in the future.
For Singapore, ratings agency Moody’s Investors Service this week reiterated its ‘stable’ outlook on Singapore-listed Reits (S-Reits) for the next 12-18 months.
‘We expect S-Reits to use their well-capitalised balance sheets to continue acquisitive strategies and assume they will fund potential acquisitions with a mix of debt and equity while maintaining leverage within targeted limits of 40-45 per cent,’ the firm’s analysts wrote in a note.
FCT – DMG
Drop in share price presents buying opportunity
Reiterate our top pick for S-REITs. Against the uncertain outlook revolving around weak US and China data, European debt crisis, and China’s property cooling measures, we reiterate our OVERWEIGHT stance on S-REITs which offer a current dividend yield of 6.9%. Our top pick within the space remains Frasers Centrepoint Trust (FCT) which owns prime suburban malls that are experiencing strong positive rental reversion. Despite the Asset Enhancement Initiatives (AEI) at Causeway Point (CWP) which saw occupancy fell to 69% during 1Q11, FCT’s DPU were not affected much due to contribution from its Northpoint 2 and Yew Tee Point which were acquired in Feb 2010. Backed by 1) strong pre-commitment for CWP’s space being redeveloped under AEI, 2) strong rental reversion, and 3) potential acquisition of Bedok Point in 2H11, we believe FCT is primed for growth at cheap valuation. Maintain BUY with TP of S$1.77 based on DDM (COE: 8.8%; TGR: 2.0%).
CWP AEI expected to be completed by Dec 2012. In addition to positive rental reversion from new leases expected at +11-12%, the progressive completion of CWP AEI will add to FCT’s DPU growth. Construction of CWP is currently 33% completed. Despite full completion requires another 1.5 years, the space undergoing refurbishment has been 99% pre-committed, indicating the strong demand for the mall space. Upon completion, the average rent is projected to rise 20% from S$10.2 to S$12.2, giving rise to ROI of 13.0%.
Undemanding valuation given clear growth profile. At S$1.49, FCT is trading at a yield of 3.8% to Singapore’s 10-year bond yield of 2.3%, which is significantly higher than its pre-crisis mean spread of 1.8%. Coupled with its clear growth profile going forward (positive rental reversion, completion of CWP AEI, and acquisition of Bedok Point), we favour FCT as our top S-REIT pick for 2011.
Industrial REITs – DBSV
Another prized portfolio
• Rare opportunity for industrial S-REITs to acquire a sizeable portfolio of industrial assets in Singapore
• Qualities aplenty; earnings accretion is significantly higher for MINT vs A-REIT
• BUY MINT (TP S$1.21), Maintain HOLD for A-REIT (TP S$2.14) on valuations
Rare opportunity to acquire a sizeable Singapore-based portfolio of industrial properties. Recent media reports highlighted that Mapletree Industrial Trust (“MINT”) and Ascendas REIT (“A-REIT”) have been short-listed in the final bidding for JTC’s tender exercise of 21 flatted factories and amenity centers. This is a rare opportunity for both REITs to acquire such a sizeable portfolio of 3.5m sq ft NLA of well located assets in Singapore. In terms of NLA, the target assets will account for c13% and c 21% of AREIT’s and MINT’s current portfolios respectively.
Location is a strong selling point. Within the industrial hubs in Eastern Singapore, the properties are located close to established housing estates and typically enjoy strong demand for space from tenants. We understand that current average occupancy is high at c96%. We expect the portfolio’s operational performance to remain robust with growth from expected positive rental reversions in current industrial up-cycles on top of improving occupancies. In addition, there are also opportunities for re-development that will be earnings accretive, subject to regulatory approval.
Earnings accretion expected. At current gearing of c33% and 36% respectively, we believe both MINT and A-REIT have the financial capacity to acquire. In our scenario analysis, we assume A-REIT and MINT each be awarded a tranche of properties at S$300m @ 7% NPI yield. We estimate DPU accretion of c4% for A-REIT and c15% for MINT, assuming debt cost of 3.0%. In addition, an assumed equity fund raising exercise for MINT would unveil estimated DPU accretion from +6% to +14% (TP +1% to +10%) assuming between 20-70% of funding through new equity raising.
BUY MINT, TP S$1.21 offers total return of 11%, HOLD AREIT on valuations. We are positive on A-REIT and/or MINT as possible winners in this tender exercise, which will provide re-rating catalysts for stock prices. While the portfolio offers income diversification to A-REIT, it has greater strategic fit with MINT, which already manages a portfolio of similar-type flatted factories. In addition, a “win” would have a greater impact on MINT’s earnings an
SREITs – BT
Stable outlook for S-Reits: Moody’s
CREDIT rating agency Moody’s Investors Service has maintained its stable outlook on real estate investment trusts in Singapore (S-Reits) over the next 12-18 months, on expectations of rising rents and loose credit conditions.
That many rated S-Reits carry investment-grade ratings ‘reflects issuers’ relatively stable operating incomes, high-quality assets, and low development risk’, said Moody’s analyst Alvin Tan in a report yesterday.
Moody’s expects Singapore’s economy to expand by 6.3 per cent this year, which should lead to increasing rental rates and high occupancies.
It noted, however, that the rate of rental hikes could be slower than that previously. This year’s economic growth is likely to pale in comparison to last year’s 14.5 per cent and a supply of new properties will also be coming onstream.
‘In our base case assumptions, we expect rental rates in the suburban retail and industrial segments to remain stable in 2011 and 2012, due to Singapore’s moderate economic growth and these rentals’ relative stability during the last economic downturn,’ Mr Tan said. In contrast, rents for the urban retail and commercial segments are expected to be more volatile, he said.
Apart from rising rents, a benign environment for refinancing will also benefit S-Reits, Moody’s noted. There is ample liquidity in the market and strong backing from sponsors for most S-Reits, Mr Tan said, adding that Moody’s expects interest rates to continue staying low this year.
He pointed out that most S-Reits have kept leverage in the 30-40 per cent range, which still compares favourably with their higher long-term targets of 40-45 per cent. Moody’s expects S-Reits to continue making acquisitions, funding these with a mix of debt and equity, while maintaining gearing within targeted limits.
‘We view industrial S-Reits, such as A-Reit (Ascendas Reit) and MLT (Mapletree Logistics Trust), as more likely to pursue growth by acquisition, because industrial properties have lower transaction values and higher yields compared to other asset classes,’ Mr Tan said.
‘By contrast, S-Reits focused on office properties continue to face challenges in finding yield-accretive properties due to high asking prices and low yields in this segment of the market.’
TCT – BT
Treasury China allays fears over supply glut
Trust upbeat on office, retail rentals, citing strong demand in China
TREASURY China Trust (TCT) expects further upside in office and retail rental rates on the back of strong demand in China and dismisses concerns over a potential office supply glut in Shanghai raised by a brokerage report.
TCT chief executive Richard David said the group is looking at 10-12 per cent rental price growth this year, similar to the growth pace in the past three years.
A 21 per cent rise in Shanghai’s Grade A office rents projected by Jones Lang LaSalle in a report late last year also looks achievable.
‘Based on transactions that we have done in the first half of this year, we don’t think this is an unrealistic number,’ Mr David told BT.
‘What we are seeing over the last 12 months in our portfolio is stronger rental growth, so as we are headed for the next 12-24 months, there are leases up for renewal and I think we are in a very good position.’
A recent report by Phillip Securities cited office supply glut in Shanghai as the main threat to TCT, given that one million square metres of new office supply is expected to come onstream this year – about three times the average historical annual supply.
Apart from concentration risk in Shanghai, Phillip Securities also cited higher borrowing costs amid an interest rate hike and credit tightening in China as factors weighing on TCT.
‘These are legitimate questions to answer,’ Mr David said. Fund managers and investors have sought updates from the group since. But there are several mitigating factors, he said.
TCT’s properties are located in the less cluttered district of Puxi, where only 21 per cent of the new office supply are located, he added.
High capital costs and disruptions to business also hold companies back from relocating to new office space.
The bigger risk to TCT, Mr David reckoned, is any major loss of staff to deal with rental renewals effectively.
‘That’s probably more of an issue for me than to worry about the guy who is building 50,000 sq m down the road because he should be worried about us. I’m not worried about him, because I know we have a very compact business structure.’
Mr David also explained that TCT’s borrowing costs is cushioned from the impact of rising interest rates in China, as only 15 per cent of its debt are in yuan and 85 per cent of its debt are US dollar loans.
TCT’s current portfolio comprises Central Plaza, City Center, and Treasury Building in Shanghai Puxi and the 74,000-square-metre development space in Beijing International Logistics Park.
With its Shanghai properties enjoying over 90 per cent office occupancy, the business trust is seeking expansion space for its tenants.
It has also set aside one billion yuan (S$190 million) for acquisitions of retail assets it has identified in Shanghai and Xi’an.
The recent acquisitions of a 55 per cent interest in Central Avenue Mall in Qingdao and a 100 per cent interest in Huai Hai Mall in Shanghai are expected to boost the group’s gross revenue by 15 per cent, Mr David said.
TCT had, in the first quarter ended March 31, achieved gross revenue of $19.45 million, 1.9 per cent above forecast, and a net property income of $12.45 million, exceeding its forecast by 8.6 per cent.