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.

Reit model under pressure

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.

Safety in Reits? Don't count on it: analysts

Yields are attractive but they are subject to movements in cyclical property market

By EMILYN YAP

(SINGAPORE) High yields and strong results are making real estate investment trusts (Reits) stand out in a volatile market. But there is debate over their potential as defensive plays, with some market watchers cautioning that Reits are not necessarily safer bets because of their link to the cyclical property sector.

Most Reits turned in impressive results for the quarter ended June 30, 2008. The 18 which reported their performance before last Friday all achieved higher distributable income and distribution per unit (DPU) over the same period last year.

Distribution yields reported by the Reits, based on annualised DPUs and last Friday's closing prices, ranged from 4.8 per cent to 11 per cent. Reits which offered yields above 10 per cent included MapleTree Logistics Trust, healthcare-related First Reit and Lippo- MapleTree Indonesia Retail Trust.

Overall, the Reits had an average distribution yield of around 7.8 per cent, offering a spread of over 4.6 percentage points above the 10-year Singapore government bond yield of 3.14 per cent on Friday. Compared with one-year fixed deposit rates which start from around 0.8 per cent, the Reits offered an even wider spread.

Analysts say Reits have largely performed in line with expectations. Their good performances have won them fans - with many trading at discounts to net asset values and thus offering relatively high yields, OCBC Investment Research said in a recent report that investors could 'take a fresh look at S-Reits as defensive vehicles offering stable cash flows and high yields'.

However, others pointed out that Reits still may not match up to traditional defensive plays, including high-yielding blue chips like telcos and banks. While Reits do offer high distribution yields, the sector is influenced by movements in the property market, which tends to be more cyclical compared with, for instance, the telecommunications industry, or even banking, they say.

Distribution yields are also a function of Reits' unit prices, so yields may look high simply because unit prices have dropped, explained one analyst. Considering both capital gains and distributions to investors, Reits have not done as well compared to around a year ago, he added. The FTSE ST Reit Index has fallen by more than 10 per cent since it was launched on Jan 10 this year.

Reit fans, on the other hand, argue that few sectors are completely resistant to economic slowdowns. Also, some Reits may be more resilient because they can lock in leases over several years, which helps stabilise earnings.

Where there is agreement among most of the market watchers BT spoke to is that Reits will continue to generate steady operating results. For those which have locked in leases or are able to gain from higher rental reversions on lease renewal, 'there is a lot of predictability in terms of their earnings and distributions,' said Daiwa Institute of Research analyst David Lum.

With credit conditions staying tough, however, much of the earnings growth will have to come organically. Reits may still acquire properties but they will have to be more selective, analysts say.

Analysts' top Reit picks include Suntec Reit. 'With 32.6 per cent of total office net lettable area up for renewal in FY09, we believe Suntec is well-positioned for rental reversion with current $14 psf signing rents versus passing rent of around $6.30 psf,' said a Citi Investment Research report last week.

CapitaCommercial Trust was another popular choice. Goldman Sachs reiterated its 'buy' call on the Reit, favouring its strong organic growth and 'leadership among office Reits'.

Reits get downgrade on financing fears

REAL estate investment trusts (Reits), once an investors' darling, are feeling the heat of the credit crunch and the expected rise in bond yields.

A number of analysts have downgraded the sector on concern over the funds' ability to secure future financing, whether through the structured debt or equity markets or through asset sales.

A rise in bond yields, widely expected thanks to rising inflation, will raise the risk free rate which is used to value the securities, pulling the fair value prices lower.

Yields of about 20 Reits have risen to an average of nearly 8 per cent on forecasted 2008 distributions, based on consensus estimates captured by Bloomberg. That offers a spread of about 4.6 percentage points over the 10-year Singapore government bond yield, which currently stands at about 3.379 per cent.

While that sounds very attractive, yields do not tell the full story. A source who declines to be named points to 'macro' risks, including that of valuation.

'There is a risk of slowing demand for office and industrial space, so there is a possibility of (more) downgrades over the next few months. It's all very fluid and we need to be very conscious of the macro risks.'

He adds: 'There has been a rapid decline in the amount of (property) transactions in the physical market . . . If the asset price drops, you are dealing with a portfolio whose value is at risk.'

In a July report, Merrill Lynch said that it was cutting its price targets for Reits by about 16 per cent. It also reduced distribution per unit estimates by 5.3 per cent for fiscal year 2009 and 6.4 per cent for FY2010. 'While valuations are undemanding by historical standards we believe the availability and cost of debt and equity continue to present challenges for the S-Reit sector. We remain cautious on the medium-term outlook for the sector which is highly reliant on capital markets for growth and is sensitive to interest rate movements.'

In Merrill's analysis, the average debt expiry profiles for the Reits is about 2.6 years, which is half that of developed markets. This suggests earnings would suffer a hit as early as 2009, as expiring debt is rolled over at higher rates. It expects the average cost of debt to rise from 3.6 per cent currently to 4.9 per cent in 2010.

In its valuation assumptions, Merrill has raised its cost of debt and risk free rates by more than 100 basis points to 5.5 and 5.4 per cent, respectively. It has, however, a 'buy' rating on a number of Reits, including Macquarie Prime, Capitamall, Capitacommercial Trust and Ascott Residential.

Rating agency Moody's sounded a warning bell on Reits in May when it gave a negative rating outlook for Reits over the next 12 to 18 months, due to concern over 'short-term refinancing risks', among other factors. The sector, it said, retains little cash and tends to use a relatively high proportion of short-dated bank facilities instead of committed long-term funds. They often do not have committed facilities in place for capital expenditure or acquisitions, said Moody's.

This type of funding structure 'can introduce elements of instability and uncertainty into the capital structure of those S-Reits with a lot of short- term debt, which is unusual for investment grade issuers'.

Moody's pointed out that in the past, S-Reits did not spend enough time cultivating strong bank relationships as they had easy access to equity and CMBS (collateralised mortgage-backed securities) funding.

Moody's senior analyst Kathleen Lee and her team wrote that they had talked to banks on their appetite for lending to the S-Reit sector. 'Our impression from these discussions is that funding remains available, but that the banks have become more selective about borrowers, the maturity of such lending and the price charged.' In the first quarter, the team reckons that banks raised their pricing by 50 to 100 basis points for short term loans and refinancing.

On a more positive note, a Deutsche Bank July 1 report by strategist Gregory Lui and analyst Elaine Khoo points out that valuations look attractive at a 6.8 per cent forecast 2008 yield and 18 per cent discount to net tangible assets.

The report said that Reits have retreated by about 35 per cent from mid-2007 despite a less volatile business model. At the time of writing the sector was traded at a 321 basis point spread over the nominal 10-year government bond yield, which then stood at 3.9 per cent. On a real yield basis, the spread was even more attractive at more than 11 per cent. Three-quarters of the funds were trading below book NTA, and up to 50 per cent discount.

Inflation, in any case, is expected to feed through to rental costs, say the analysts. 'Current supply/demand pricing dynamics . . . suggest that the industrial and retail sectors are better positioned to pass on inflation. Industrial rents are only starting to recover from a low base and are still 26 per cent below peak levels, while both the manufacturing and services sectors have continued to expand over the past 10 years.'

Industrial rents trended upwards at a 15-16 per cent annualised rent this year. Retail rents could also benefit from inflation as a larger proportion of leases now include a step-up component, said the report.

Mr Lui and Ms Khoo wrote that borrowing rates are set to rise, based on the swap offer rate which has risen by 30-143 basis points. 'The Reits by and large have exercised prudent interest rate risk management and have more than 75 per cent of total debt fixed or hedged, which also means that the impact of higher rates will be moderated.' They added that for most Reits, balance sheets are generally robust with gearing 'below or at optimal levels'.

K-Reit feeling effects of financial crunch

K-REIT Asia is going to find it a bit tough to raise the money it needs. The real estate investment trust (Reit) is looking to raise up to $700 million in a rights issue, in part to repay some of the $942 million bridging loan it took from Keppel Corp when it purchased its one-third stake in One Raffles Quay last year. The trust indicated in a recent circular to shareholders that it intends to price the new units at up to 20 per cent discount to the market price. However, K-Reit is seeking to issue only 420 million new shares. The limit is in place to ensure that at least 10 per cent of the total issued units are held by the public after the rights issue.

Keppel Corp and sponsor Keppel Land, who together own 72.7 per cent of K-Reit, have both given irrevocable undertakings to take up their respective allocations of the rights units. Both companies will also make applications for excess rights units that are not subscribed - essentially underwriting the fund-raising exercise. The 420 million share cap ensures that in the worst-case scenario where no other shareholder subscribes to the rights units, KepCorp and KepLand will still end up with less than 90 per cent - allowing K-Reit to avoid delisting.

While the circular helps to allay some concerns in the market with regard to potential delisting and consolidation by parent KepLand, there is a shortfall between how much the trust is hoping to raise (up to $700 million) and how much it could actually raise from a rights issue of 420 million shares.

In the circular, K-Reit used $1.20 (20 per cent off the market price of $1.50) for illustrative purpose. Assuming a rights issue of three new units for every two existing units, K-Reit will be issuing 372.1 million rights units and raising about $446.5 million in gross proceeds. K-Reit will come close to raising $700 million only in the highly unlikely scenario that it issues 413.5 million rights units on a five-for-three basis at $1.68 apiece, which will give it gross proceeds of $694.6 million.

For this to happen, the prevailing market price will have to be $2.10 - assuming a rights issue price which is at a 20 per cent discount to the market price.

K-Reit's stock closed at $1.47 last Thursday, the last day of trading before the extended weekend break. Analysts believe that it is unlikely that the stock price will cross the $2.00 mark over the next few months amid a generally sluggish market. K-Reit said in its circular that the entire exercise is expected to be completed no later than mid-May.

Looking at the expected shortfall between what the Reit hopes to raise and what it probably could raise, it wouldn't be wrong to assume that K-Reit might have to look at additional sources of funding. However, it is unclear what K-Reit plans to do if the rights issue falls short of the amount it needs. K-Reit said in its circular that, given current market conditions, a rights issue is the 'most appropriate' method of raising equity.

Raising funds from other sources will undoubtedly be hard in a squeezed credit market. Industry players have pointed out that the two upcoming integrated resorts (IRs) have mopped up much of the credit available in the market, making it much harder for smaller players to get loans and refinance debt. Also interesting is the fact that K-Reit seems to be looking to parent companies KepCorp and KepLand to tide it over the current financial crunch. If minority shareholders choose not to take up their rights units, KepCorp and KepLand are ready to step in, even though this might mean that K-Reit could suffer from poor liquidity and low trading volumes in the future.

Buying up all unwanted units will also raise KepLand's stake in K-Reit. KepLand has said it intends to go asset light by divesting all its investment properties. By increasing its stake in the Reit, it is doing the opposite. Perhaps then it is time for KepLand to reconsider plans to keep K-Reit listed; going private will probably allow K-Reit to raise funds more easily in a tight credit market.

As for K-Reit, the rights issue will lower its gearing from the present 53.9 per cent (which is approaching the maximum allowable limit of 60 per cent) to 32.7 per cent - assuming the trust issues 372.1 million rights units at $1.20 each. But raising funds for future acquisitions may continue to be a problem if the Reit has to go back to the market once again.

Allco Reit fails in legal bid to head off ratings downgrade

Allco Commercial Real Estate Investment Trust (Allco Reit) has failed in its attempt to obtain a court injunction to head off a downgrade by Moody's Investors Service.

And the ratings agency has gone ahead to downgrade the Reit, as well as signal the possibility of a further cut in ratings.

Allco Reit, represented by Senior Counsel Alvin Yeo of Wong Partnership, had applied for an injunction from Singapore's High Court to prevent Moody's from issuing a downgrade on the trust.

It is believed the Reit sought the injunction as it felt that a ratings downgrade would have interfered with its fund-raising efforts.

The application for the injunction had been initiated by British and Malayan Trustees on behalf of Allco Reit.

But the Reit's injunction was set aside yesterday morning by Justice Choo Han Teck. Allco Reit had intended to appeal the decision, but the High Court announced several hours later that the trust had decided to withdraw its appeal.

Moody's subsequently went ahead with its downgrade of Allco Reit, announcing its rating yesterday afternoon. The agency lowered the trust's corporate family rating to 'Ba2' from 'Ba1' - and retained the ratings on review for further possible downgrade.

It said that the review would focus on issues raised by Allco Reit's announcement on March 9, the progress and terms of its refinancing efforts for debt maturing in coming months and other material developments affecting Allco Reit.

Representatives from Allco Reit, when contacted, declined to comment on the court proceedings. But the Reit's manager, Allco (Singapore) Limited, subsequently issued a statement on the Singapore Exchange's website, confirming the ratings downgrade and ongoing review of that rating by Moody's.

Allco Reit's concerns about the impact of a ratings downgrade on its fundraising efforts were heralded by Fitch Ratings last week. Fitch had signalled that the credit ratings of Singapore property trusts may change because of expected mergers and acquisitions.

Fitch had expressed concern that the global credit crunch sparked by US mortgage defaults may impact the ability of Singapore Reits to take advantage of any acquisition opportunity and that it would certainly limit the number of any interested parties in any asset disposals.

Allco Reit had earlier this month said that it may sell its Australian assets - properties valued at A$483 million (S$617 million) - which include its 50 per cent interests in Perth's Central Park office tower and Centrelink Headquarters in Canberra. The Reit is also invested in Allco Wholesale Property Fund which in turn has interests in several properties in Sydney.

Its three key properties - China Square Central and 55 Market Street in Singapore, and Central Park in Perth - had a combined value at the end of December of $1.13 billion, based on the latest revaluation.

Analysts still upbeat on Reits but investors wary

FOR some time now, analysts have been saying that real estate investment trusts (Reits) are a good shelter in stormy markets, given their attractive and steady yields. But investors are still not biting, as concerns remain about Reits' ability to raise capital or refinance debt.


The FTSE ST Reit Index closed yesterday at 735.96, about 13 per cent down since the index was launched on Jan 10. It has slumped this month since hitting 798.91 on Mar 4.

Even so, analysts have continued to issue positive calls. In a report released on Monday, DMG & Partners said Singapore Reits (S-Reits) were good value given the widening yield spread against the 10-year SGS (Singapore Government Securities) bond. S-Reits offer on average yields of 6.4 per cent, compared with 2.08 per cent for 10-year bonds, the report said.

An earlier report by Goldman Sachs also put an 'overweight' call on the sector. Analyst Leslie Yee said that mergers and acquisitions are likely to be positive for Reits. Large Reits will have another avenue for growth, and investors in those Reits bought out can cash in on premiums paid for an acquisition.

And last Friday, Credit Suisse initiated coverage on three retail Reits, saying that growth in that sector will be supported by strong consumption expenditure and buoyant tourism. 'Central retail supply can be readily absorbed while suburban supply is not excessive,' Credit Suisse said.

But Reit share prices suggest that investors are still skittish. DMG analyst Terence Wong said: 'Right now cash is king. In a bear-like situation, it's not unusual that people are selling everything they can,' he said. 'But our calls are mid to long term.'

Although their reports were generally upbeat, analysts said that worries remain. Despite falling Sibor (Singapore interbank offered rates), corporate spreads are widening, making it more difficult for Reits to fund expansion by issuing debt, or to refinance existing debt. Allco Reit was downgraded yesterday by Moody's to Ba2 from Ba1, following an earlier cut in January from Baa3.

Credit Suisse acknowledged in its report that 'Reits have not been defensive, as investors have previously factored in exuberant growth expectations that were disappointed by slowing acquisition growth. The consequent high required yields are a paradox of their own'.

The house said it preferred domestically focused plays with large market caps, strong sponsors, high asset quality and low gearing. It has 'outperform' calls on CapitaMall Trust and Frasers Centrepoint Trust and is 'neutral' on Macquarie MEAG Prime Reit (MMP Reit).

Kim Eng Research in a report earlier this month noted that investors seem happy to stomach premium valuations for domestic-focused Reits that focus on retail and office space like Frasers Centrepoint, CapitaCommercial and CapitaMall.

DMG's report recommended Suntec Reit, Frasers Centrepoint Trust and Cambridge Industrial Trust. 'We would prefer to go for low-geared Reits (20 per cent to 50 per cent) which have lower holding costs and are more able to wait for credit markets to improve.'

Outlook for S-Reit market remains positive despite sub-prime fears

Increased volatility in Reit prices will attract more investors in 2008

By CHRISTOPHER TANG

SINCE consumer confidence is the most fickle of all economic factors, the retail trade is a good barometer for the health of an economy.

For 2007, this barometer has been in the 'extremely healthy' range. Sales have been up - to the tune of 14.4 per cent as of June 2007 - and so has rental of retail space.

We expect retail to continue nicely right through 2008. For one thing, retail malls - led by the professionally run retail Reits - are investing in physical enhancements to improve and maintain competitiveness.

The enhancements inject a new vibrancy, creating a better experience for the shoppers and improved business for the tenants. For example, thanks to Anchorpoint's $12 million repositioning as a village-mall, shopper traffic and tenant business have improved substantially.

The malls are not the only innovators. Retailers, too, are coming up with new concepts. For instance, the Tung Lok Group created their first kitchen-concept eatery in the new Anchorpoint with Zhou's Kitchen. Similarly, Charles & Keith, G2000, FOS, Club Marc, City Chain, Capitol Optical, Pedro and Giordano have also created unique outlet concepts.

With the advantages of Reits, there will be increasing securitisation of the Singapore retail scene through 2008, with more properties being injected into a Reit structure.

Singapore's Reit scene is only about five years old but the market has grown. By September 2007, there were 18 listed Reits with a total market capitalisation of $29.5 billion, which made Singapore the third-largest Reit market in the Asia-Pacific and the seventh largest worldwide.

We expect more Reits to be launched in the medium term, with at least one or two being retail Reits or Reits with retail components.

The two retail Reits listed at present - Frasers Centrepoint Trust and CapitaMall Trust - are also growing aggressively in the region, particularly in Malaysia and China.

Institutional and retail investor appetite for Singapore Reits continue to be strong.

Reit prices took a bit of a correction in the second half of 2007 when prices fell by about 25 per cent as a result of the US sub-prime fears. I believe the increased volatility will attract more investors to Reits in 2008. Reits are a defensive investment instrument - providing a consistent underlying yield and yet providing exposure to the on-going recovery and long-term growth of the Asian economies and property markets.

Investors will gravitate towards Reits with quality assets. In this respect, suburban malls are very resilient. After all, Singaporeans will still need to shop for their basic necessities. Suburban malls in Singapore managed to ride through the Sars epidemic as people cut back on luxury goods and focused on daily essentials. There exists a very inelastic demand at the suburban mall level.

Investors will also look to Reits with proven track records. Typically, institutional investors have found Reits associated with strong sponsors attractive because of their ability to leverage on the synergies with the sponsor for growth opportunities.

Ultimately, the outlook on Singapore's overall Reit market remains very positive, with market experts expecting it to double by 2010. Retail Reits should continue to remain stable and sensible investment options, even in the current sub-prime environment.

Record year for the industrial property market

Rents and occupancy levels improve for all industrial space in 2007: CBRE report

By UMA SHANKARI

THIS has been a record-breaking year for the industrial property market with rents and occupancy levels improving for all industrial space this year, CB Richard Ellis (CBRE) says in its latest report on the sector.

The increases reflect continued strong demand, the property firm said yesterday. The year also saw the award of several business park sites, the launch of a fourth industrial real estate investment trust (Reit) and 10 industrial sites awarded to developers and manufacturers. In addition, Ascendas also announced that its Singapore Science Park will undergo a $400 million renovation.

In the fourth quarter, average monthly rent for high-tech space rose 7.8 per cent quarter-on-quarter and 37.5 per cent year-on-year to $2.75 per square foot (psf). The rental surge can be attributed to increased demand from traditional office tenants seeking high-tech space as an alternative because of the steep rise in office rents, said CBRE.

The average occupancy rate for high-tech space has risen to 92.8 per cent now, from 91.1 per cent at the end of last year. The average occupancy rate for business parks has grown by 5.0 percentage points year-on-year to 89.0 per cent, CBRE's data showed.

'The increase in rents and occupancy rates for high-tech space is likely to continue as large injections of office and high-tech stock are not expected until after 2009,' said Bernard Goh, CBRE's director for industrial and logistic services.

Likewise, average monthly rents for factory space also increased over the year - albeit at a slower pace. Rents for factories rose five cents psf every quarter for the entire 2007. This was an improvement over 2006 when rents remained at $1.25 psf for ground floor units and $1.00 psf for upper floor units throughout the year. Occupancy rates also improved gradually during the year.

Rentals and occupancy rates for warehouse space also increased during the year.

'The increase in rent and occupancy rates for factories and warehouses was due to better economic conditions in Singapore and Asia,' Mr Goh said. Many international companies have recently turned their sights to this region on the back of Asia's growth, and Singapore's strategic location and pro-business environment have made the city-state a choice location for many companies, he said.

Rents and occupancy rates for all industrial space - especially high-tech buildings and business & science parks - are expected to continue growing in 2008, CBRE said. 'The effects of the recent US sub-prime woes might impact demand for industrial space in the short-medium term but overall, manufacturers are expected to continue investing in Singapore and so demand for industrial space will still remain healthy,' the report says.

Reits may well have to go down development path

By UMA SHANKARI

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

By UMA SHANKARI

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.

MAS tightens rules for Reits to protect retail investors

THE Monetary Authority of Singapore (MAS) has tightened up the rules for property funds to improve the odds for retail investors.

Institutional investors will no longer have discounts for subscriptions made at the time of the listing of a real estate investment trust (Reit) under new guidelines for Reits issued by MAS yesterday.

Another change limits what's allowed under fixed-term management contracts to five years.

These fixed-term management contracts have been used by fund managers as a poison pill to entrench their positions and to provide an obstacle to takeovers, as it makes it expensive to fire them.

In a statement, MAS said the revised rules 'are intended to improve safeguards for investors and to provide greater clarity and flexibility for commercial transactions'.

MAS said a majority of the respondents to its public consultation exercise in March raised objections to disallowing discounts to institutional investors.

They felt that the discounts are justifiable because such investors enter into binding subscription agreements prior to the launch of the initial public offering (IPO); institutional investors were also said to have helped ensure the success of a Reit offering, particularly in difficult markets, by providing a useful signal to the retail market about the quality of the Reit.

Those who wanted to retain the discounts suggested full disclosure, putting a cap on discounts and/or a moratorium or the sale of the Reit units.

But MAS said: 'As a matter of policy, there does not seem to be any good reason why different groups of investors should be permitted to pay different amounts for the same interests in these assets at the time of the IPO.'

MAS said it is prepared to allow discounts that are given to investors who assume equity risks different from those of IPO investors, for example if they are willing to underwrite the listing.

On management contracts which have been a contentious issue, the new guideline said the term of a compensation provision should not be more than five years and the compensation amount payable to the Reit manager should not exceed the sum of the fixed component of unearned management fees (excluding variable or performance fees) over the remaining term of the provision.

Industry players had argued that entrenchment clauses in management contracts were to help professional Reit managers who do not hold large stakes in a Reit and 'would be discouraged from establishing Reits in Singapore if there is no flexibility to implement measures to obtain appropriate compensation if they are removed as managers'.

But MAS said: 'We continue to be concerned with entrenchment arrangements that impede the market for corporate control and place significant restrictions on the ability of unit-holders to terminate management contracts.'

Ronnie Tan, chief executive of Bowsprit Capital, the manager of First Reit, said he supported not giving discounts to institutional investors.

'It's not fair for the small investors,' he said.

He added that if demand is an issue, 'Reit issuers should look at pricing rather than use discounts as a (sales) mechanism'.

'Removal of the poison pill (means) the takeover rules would be similar to other listed companies,' he said on the new rule which makes it easier to fire the Reit manager.