Commercial Properties & REITs - General News

[winston]

From DBS:-

A tale of two Rs
Sector debt refinancing and recapitalising issues are likely to be the major drivers of the S-reit sector in 2009. As credit markets remain tight, access to credit takes priority over cost of funding. We see recapitalising prospects gathering momentum when asset writedowns begin. We see this as necessary to the sector but size and timing is uncertain under current market conditions.

Valuationwise,these developments appear to have been largely anticipated in the share price, however, the uncertainty could hamper share price outperformance in the near term. In terms of strategy, we prefer well-sponsored reits with good access to capital as well as those in the more resilient sectors such as retail, industrial and healthcare.Maintain buy on Parkway Life Reit and Areit and upgrade FCT on the back of attractive valuations.

Refinancing speed bumps linger: An estimated one third of the Sreit total indebtedness or $4.9b is due to be rolled over in 2009. The tight credit market environment would mean that access to funding would be crucial while increasing competition for funds would lead to an increase in cost of debt. Overall interest cost in the Sreit sector would rise above 4% from the present 3.2%. For every 50bps hike in average interest cost, DPU would be eroded by 10-15%.

Resetting the bar: We expect asset writedowns to begin as early as this year-end. Recapitalising issues are likely to gather momentum in the coming year, however, timing is uncertain as Sreits weigh the need to strengthen balance sheet against the commercial perspective of shareholder value dilution and investor appetite. Post funding, average DPU yield is estimated at 9% and P/adjusted book NAV of 0.75x, indicating that this possibility is reflected in the share price.

Amongst Sreits, those with gearing closer to the 50% LTV mark and riskier sub-sectors such as office would have greater recapitalisation possibilities. This includes FCOT with a current loan to asset ratio of c49%. In the longer run, the higher geared reits such as CMT, Areit, CCT may look to strengthen balance sheet when equity markets recover.

Be selective: Given the headwinds from refinancing and recapitalisaton rises as asset writedowns, particular in the office segment, filter through, our strategy would be selective. In terms of large cap stock picks, we prefer Areit for its long lease tenure. In the mid cap sphere, we favour Parkway Life Reit and FCT with their resilient business model and attractive valuations. Strong balance sheet and low gearing also reduces the need for recapitalising.

[millionairemind]

Published January 5, 2009

Reit model under pressure
By UMA SHANKARI

SINGAPORE-listed real estate investment trusts (Reits) are now victims of their own success.

Over the past three years, most Reits here have taken an aggressive growth path, snapping up expensive properties and pushing up rentals in their properties as they took advantage of the property boom. This has allowed them to increase net property incomes and deliver good dividends to their unitholders.

But now, the good times have come to an end, and it is unclear how these Reits will deliver the kind of returns shareholders have gotten used to.

When reporting their Q3 results, the Reits admitted that growth through acquisitions will slow, what with the current credit squeeze making merger and acquisitions (M&As) more difficult and expensive across all sectors. The Reits said they will look to organic growth, such as enhancing their existing lettable space in search of higher rents.

But how much organic growth there can be under these conditions is debatable.

Retail Reits, for example, increase their property incomes in three ways - from acquisitions, through rental increases after they enhance their properties, and increased sales from their tenants, which they typically take a cut of.

But now, all three avenues for property income growth appear to be blocked. Acquisition growth, as mentioned, is no longer as viable. Retail sales are expected to take a beating this year as consumers cut back on spending as concerns over job and wage security take hold. Because of this, landlords, who typically take a percentage of turnover as part of the rent, will also see takings fall.

And rents will fall, as tenants try to bring landlords back to the negotiating table to ask for more manageable rates. 'A prolonged depression in consumer spending could affect retailers' ability to service their rents and we think it is possible that more retailers would renegotiate for lower rental rates, and retail mall managers may have to give in to avoid a high turnover in tenants,' noted OCBC Investment Research in a recent report. As one market observer put it, 'Reits can't really squeeze the tenants anymore or they will just simply close shop.'

In 2009, CB Richard Ellis reckons that prime Orchard Road rents could contract 5-10 per cent in just the first half of the year. At prime suburban malls, a 2-3 per cent decline is likely, the property consultancy said. Prime Orchard Road rents fell 1.9 per cent quarter-on-quarter in Q4 2008, while prime suburban rents shed one per cent, the firm's data showed.

The same trend holds true for the office and industrial sectors. CBRE's data showed that average Grade A and prime office rental values in Singapore are estimated to have slipped about 20 per cent in Q4 2008. More falls are expected this year. Likewise, rents for industrial space could see double-digit percentage falls, analysts have said.

With retail, office, and - to a lesser extent - industrial Reits, having raised rentals quickly over the last few years, tenants are finding themselves in a tough spot during these trying times. Office rents, for example, nearly doubled in 2007, rising 96 per cent in the Grade A category and 92 per cent for prime space. That was on top of gains of 53 and 50 per cent respectively posted in 2006.

What this means is that tenants, who have been paying jacked-up rentals over the past two years, will in some cases lack the reserves to withstand the current crisis. They are also more likely to push for substantial rental decreases, which could affect the Reit model.

Jannie Tay, president of the Singapore Retailers Association, called for a drop in retail rents - in light of weaker sales - as early as September last year. Recently, she again asked retail landlords to cut rents by between 30 and 50 per cent. Reits are going to face pressure to give in.

[kennynah]

this reminds of the similar "noise" associated with trending... think back Crude Oil... when it was 90 back in 08, before the final surge to >140 pbl, there were calls for this commodity to rise further...and it did...but only up to a point and that took some months to materialize... all the while, that "noise" level gotten louder and louder...and it was screaming loud when GS called for a 200pbl target price. that was the tipping point.

now, for the past 2 months of so, REITs have been touted as a sell, which has been happening, given a downward revision on GDP for 09 and also some poor stats on our xmas retail sales.

this "noise" level does not appear to be loud enough to be calling a bottom on REITs prices, nor should we be trying to call any bottom... only that history has told us, when the pain is greatest, is when things will shore up... the tipping level is when? who knows, but only to the experienced I/T....and experience is gathered by being observant...we should, if we wana profit from this difficult markets.

so, i will be monitoring this thread and looking out for signs of recovery....when the "noise" becomes unbearably loud and then....suddenly.... ghostly quiet....

[ucypmas]

Jan 13, 2009
Pay dividends in units?
By Elizabeth Wilmot

IN WHAT appears set to be a first here, the manager of Saizen Real Estate Investment Trust (Saizen Reit), has proposed paying dividends in the form of Reit units - rather than cash.
Investors here may have reason to be worried as one of the key attractions of such Reits lies in their regular dividend-style cash payments.

Japan Residential Assets Manager said the proposed terms and conditions of the scrip dividend scheme, as it is called, are subject to the approval of unitholders.

It is unclear at this point whether unit-holders might be able to elect whether they wish to receive part or all of the dividend in the form of units - or if they could elect to take cash instead.

This announcement follows a Dec 31 statement in which the Reit said it might significantly reduce or suspend dividend payouts in cash, in the light of the current financial crisis.

Saizen Reit is likely to be the first Reit in Singapore to offer such a scheme.

The manager said in its statement that the scheme would provide 'flexibility for Saizen Reit to pay out part or whole of a dividend by way of new scrip dividend units (in the event that a dividend is announced) and allows cash to be conserved for loan repayments'.

It also said that 'the adoption and implementation of the scrip dividend scheme will enlarge Saizen Reit's capital base, improve the liquidity of units and strengthen its working capital position.'

In the Dec 31 statement, the Reit had proposed a rights issue in a bid to raise S$44.75 million to pay off loans and fund its operations.

However, it assured unit-holders that it had sufficient cash resources to fully repay the 5.28 billion yen (S$84.12 million) loans which fall due this month and in April this year.

The Reit manager will in due course be submitting an additional listing application to the Singapore Exchange (SGX) to seek the listing of the new scrip dividend units issued under the proposed scheme.

The details of the scheme will be set out in a circular to be sent to unitholders at a later date. Saizen Reit will also convene an extraordinary general meeting in order to seek the approval of unitholders for the proposed scheme.

The Reit's manager has also advised anyone who wishes to invest or trade in the units of the Reit, to exercise due caution and to consider the recommendations of the directors set out in a circular which will be sent out at a later date.

Saizen Reit units closed 0.5 cent lower at 10.5 cents on Tuesday.

[millionairemind]

Published January 20, 2009

MAS gives Reits a New Year gift
Refinancing of maturing debt facilitated; clarity on leverage ratios

By KALPANA RASHIWALA

(SINGAPORE) Reit managers here have been given more breathing space on borrowing limits by the Monetary Authority of Singapore (MAS), which has clarified how downward revaluations of properties should be treated.

Basically, MAS has said that Reits need not worry if their leverage has increased because properties have been revalued and are now worth less.

Under MAS's Property Fund Guidelines, an S-Reit's total borrowings and deferred payments (the 'aggregate leverage') should not exceed 35 per cent of its deposited property. This maximum limit is set at a higher 60 per cent if the Reit obtains a credit rating and publicises it.

In a circular to Reit managers and trustees earlier this month, MAS confirmed that if the aggregate leverage has gone up because of a decline in property values, it will not amount to a breach of leverage limits. MAS also made the important point that refinancing of existing debt by a Reit is not to be construed as incurring additional borrowings.

'So if at the point of refinancing, a Reit has to revalue its assets (which lenders will require), and so long as the refinancing is of existing debt, MAS will not consider this as additional borrowing and hence the Reit will not be in breach of the statutory leverage limit,' says Giam Lay Hoon, group general counsel of Oxley Capital Group, which owns a stake in the manager of Cambridge Industrial Trust.



MAS also said that it will permit Reits to raise debt for refinancing purposes earlier than the actual maturity of the debt to be refinanced, without having to include such funds raised in the aggregate leverage limit. However, this is 'provided that the funds are set aside solely for the purpose of repaying the maturing debt'.

'The trustee must place these funds in a separate trust account which shall be drawn on only to repay the maturing debt,' MAS said in its circular.

Oxley Capital's Ms Giam welcomed MAS's responsiveness to tight credit market conditions. The CFO of a Reit manager told BT that the MAS clarifications would 'give some breathing space for some Reit managers with high gearing and with properties in danger of being substantially depreciated'.

This, he said, would ease the pressure on these Reits to recapitalise through raising fresh equity and reduce pressure on the unit price of these Reits.

'However, ratings agencies will continue to be nervous about property depreciation as that may reflect sliding rents and occupancies and a rise in tenant-default rates,' he added.

Stan Ho, Fitch Ratings' senior director and head of Non-Japan Asia structured finance, stressed that 'any downward revaluation of the underlying property would raise the loan-to-valuation ratios as far as banks lending to Reits are concerned, and this would need to be considered in our ratings for Singapore Reits'.

Kathleen Lee, vice-president and senior analyst at Moody's Singapore, also pointed out that while a downward revaluation may not breach MAS's statutory aggregate leverage limit for S-Reits, 'lenders to Reits can set their own covenants and a downward revaluation could trigger a breach of some of these covenants and that could also lead to a re-rating of the Reit'.

In a separate development, MAS is understood to have sought feedback recently on whether the current minimum distribution payout ratio for S-Reits should be lowered, from 90 per cent of distributable income currently to, say, 75-80 per cent. Some Reit managers are lobbying for the cut. 'Cash is a premium today and Reits may want to conserve their cash for a host of reasons, including servicing loans, reducing debt or just as general ammunition,' an industry player said.

However, a rival disagreed, arguing 'this would go against the fundamentals of why the S-Reit market was created'.

Reits have a high degree of transparency and investors have a high level of certainty of distributions from Reits. 'So when you give more flexibility to the Reit manager in terms of how much of distributable income it has to pay to unit holders, it creates more uncertainty for the investor. Investors like clarity,' he added.

[iam802]

In a separate development, MAS is understood to have sought feedback recently on whether the current minimum distribution payout ratio for S-Reits should be lowered, from 90 per cent of distributable income currently to, say, 75-80 per cent. Some Reit managers are lobbying for the cut. 'Cash is a premium today and Reits may want to conserve their cash for a host of reasons, including servicing loans, reducing debt or just as general ammunition,' an industry player said.

This deserves to be highlighted as well.

If they do change from 90% to 75-80%, basically shareholders will be at the losing end. (<< at least this is what I see).

[financecaptain]

From OCBC Research :-

S-REITs: MAS may lower required distribution payout ratios

Summary: The Business Times reports that the Monetary Authority of Singapore recently sent REIT managers and trustees a circular clarifying that an increase in aggregate leverage due to a downward revaluation in property values will not amount to a breach of leverage limits. It also said that REITs can raise debt for refinancing purposes earlier than the actual maturity of existing debt, without having to include such funds raised in the aggregate leverage limit. While the clarification is useful, it is not game-changing: we still believe REIT decisions on equity recapitalizations are driven by the market – and especially their lenders’ – tolerance for debt. More significantly, the Business Times also reported that MAS is understood to have sought feedback on whether the minimum distribution payout ratio for S-REITS should be lowered from the currently required 90% of distributable income. The newspaper said that “some REIT managers are lobbying for the cut”. While this may create income uncertainty for investors, we think the first priority is to ensure REIT survival and dividend sustainability. We do note that a minimal cut from 90% to say, a 75% payout ratio requirement is not a silver bullet for S-REITs with significant liquidity issues. But REIT managers may like to have as much flexibility, and (cash) ammunition they can get in the current environment. We maintain our NEUTRAL rating on the sector. (Meenal Kumar)

[millionairemind]

February 4, 2009, 4.52 pm (Singapore time)

Lobby group says Singapore Reits need help with debt

SINGAPORE - A group representing Asian property investors and developers has asked the Singapore government to step in if necessary to help the city-state's real estate investment trusts (Reits) refinance an estimated S$4 billion in debt due this year.

'Real estate is a capital-intensive business but at present there is effectively no capital,' the Asian Pacific Real Estate Association (APREA) said in a background paper seen by Reuters on Wednesday.

'Government assistance is needed to help restart the credit markets for commercial real estate mortgages.'

Peter Mitchell, the association's chief executive, told Reuters that APREA has submitted several papers asking Singapore authorities to consider direct steps to help Reits and property firms roll over maturing loans and bonds to inject confidence into the market.

Many companies worldwide have had difficulty getting new loans and refinancing existing debt as the global credit crisis makes lenders more wary about taking on risk. At the same time, the global economic downturn is clouding the business outlook, eroding corporate revenues and reducing the value of assets such as property, putting even more pressure on firms such as developers and Reits.

Mr Mitchell cited moves taken by other governments such as Australia's recent decision to create an A$4 billion (US$2.58 billion) crisis fund to support lending in the commercial property sector.

The association estimates Singapore-listed property firms including Reits have about S$12 billion (US$7.96 billion) in loans and bonds that will become due before the end of this year.

The group's other proposals to help Singapore-listed Reits include allowing a temporary tax waiver on undistributed earnings to help them conserve cash, and for the central bank to accept real estate loans as collateral in repurchase agreements with banks.

Singapore Reits tend to pay out 100 per cent of their net income as retained earnings which are subject to tax, leaving them with little buffer in turbulent times.

APREA is a Singapore-based lobby group whose 120-plus members include sovereign wealth funds such as Abu Dhabi Investment Authority and Singapore's GIC Real Estate as well as private firms such as Australia's AMP Capital and the Philippines' Ayala Land. -- REUTERS

[winston]

From Phillips:-

S-REITS
Revisiting the REIT model
12 February 2009

The REIT model works well in an environment where interest rates are low and the economy is booming, both for the REIT sponsors as well as investors. The value proposition to the REIT sponsors is that they are able monetize their developments and get the cash flow to fund new projects. For the investors, they get to receive regular dividend payouts akin to a fixed income instrument, and yet enjoy the upside potential of the share price.

Not too long ago, the foremost objective of REIT managers is to grow the portfolio size so that they can deliver increasing dividends to the investors. The issue then is the lack of acquisition opportunities. Fast-forward to today’s credit crisis, only a few REIT managers talk about acquisitions despite valuations being lower now. Ability to secure financing is the topmost worry.

In the last quarter, the REIT sector has been plagued by refinancing risk although some of the managers have proved otherwise as they secured new fundings. We believe that in the coming quarters, the market will be taking into consideration the sustainability of revenue and possible tenant defaults.

DPU maintenance or DPU erosion
We believe the fundamentals supporting the entire landscape have turned 180 degree. REIT model works best when cost of funds is low and cash flow generated from rentals provides a steady and recurring dividend to investors. Today we are facing the opposite; high cost of funds and potential shock to rental income.

Commercial rents are softening
According to the URA statistics, 4Q08 rental index of commercial property in the central area declined 6.5% from the previous quarter. In our last sector update published in November 08, we presented a historical analysis and postulated the index to fall at least 30% from its peak. If history can be a guide, we should be looking at a trough reading of 145, which is 25% away from the current reading of 193. Vacancy is now at 9.3% as compared to the trough reading of 6.8% at 4Q07. The highest level recorded was during the SARS period in 2003 whereby vacancy was 19.0%.

Industrial rents tend to be more stable as the leases are longer
Although industrial rents display much less volatility, we can observe that rents have softened in 4Q08, its first real decline since 2004.

Retail and hospitality
Retail sales index fell two consecutive months from Sep 2008 to Nov 2008. Excluding motor vehicles, the index started its decline since Aug 2008 and on a YoY basis, retail sales declined by 3.4%. Excluding motor vehicles, sales declined by 2.2%. Although collection from tourist receipt set a new record in 2008 at $14.8 billion, the trends are not very optimistic. Our argument is that if tenants’ businesses are affected in this recession, landlords will not have it easy, even if leases are signed and locked-in. REIT managers will then have an even tougher job of preventing falling DPU.

[millionairemind]

Published February 16, 2009

Reit managers fail to get payouts trimmed
Move to cut payout ratio flops as investors demand certainty: sources
By KALPANA RASHIWALA

(SINGAPORE) The authorities have turned down requests from some Reit managers to reduce the minimum payout ratio to unitholders, BT understands. This is currently set at 90 per cent of the distributable income of a Real Estate Investment Trust (Reit).

The Reit managers have also failed to get a tax holiday on undistributed income, sources say.

Some institutional investors are believed to have recently given feedback to Reits as well as Monetary Authority of Singapore that allowing a reduction in the 90 per cent minimum payout ratio would detract from a fundamental characteristic and key attraction of investing in a Reit - the certainty and stability of income to unitholders.

'Basically, there would be income volatility once you lower the minimum payout ratio, because the Reit manager will have discretion to decide how much of a Reit's income it should pay out to unitholders,' a senior executive of a major Reit manager explains.

'We have institutional investors who have told us they wouldn't like Reits' minimum payout ratios to be lowered from 90 per cent currently. It would defeat the purpose of a Reit.'

BT reported last month that some Reit managers had urged the government to trim the minimum payout to unitholders to as low as 50 per cent of distributable income, while still allowing Reits to enjoy tax concessions.

The proposals to MAS were initially championed by managers of some of the smaller Reits as a way of conserving cash in today's tight credit environment, to service debt or even try to trim debt.

At first, even managers of a few of the bigger Reits are said to have been sympathetic to such calls, if it could help their smaller counterparts temporarily tide over their cashflow problems, in the interest of helping the S-Reit industry - although these big Reits themselves may have had no intention of lowering their distribution ratios.

However, there has been concern since then that institutional investors, such as superannuation funds, insurance companies and other funds that count on the certainty of a regulated minimum distribution from their investments in the S-Reit sector, may lose confidence and pull out from this market if this rudimentary attraction of Reits disappears.

An executive of a private investment vehicle involved in the S-Reit business said: 'Investors who went into the Reit market looking for a steady distribution stream would not want the distributions on their units to be halved and used as a backdoor recapitalisation of the Reit.

'Reit managers may have no choice but to look for ways to raise equity to recapitalise their business. This means holding a general meeting to seek unitholders' mandate for the issuance of new units for the raising of new capital. The decision must come from the unitholders themselves, and not within the free reign of Reit managers, or indeed the MAS.'

The authorities are also said to have decided against granting a tax holiday on any undistributed amount of a Reit's income, even if this stays at the current maximum 10 per cent of a Reit's income.

S-Reits have to pay out at least 90 per cent of their distributable income to unitholders to enjoy tax transparency, which means exemption from paying corporate tax at the Reit level on the portion of income they distribute.

Some Reit managers had wanted the government to continue according them tax transparency, even at the lower payout ratio. A few even suggested MAS go a step further and grant Reits a tax holiday on the income that they withhold from distribution.

These suggestions had drawn flak from some quarters. A major question raised was why Reits should continue to enjoy exemption of corporate tax at vehicle level, if they trimmed their distribution payout ratios, when many other listed companies also return a chunk of their profits to shareholders, but still have to pay corporate taxes.