Industrial Reits: not that defensive says Credit Suisse

Last week, Credit Suisse issued a report on industrial Reits. Excerpts from report’s Executive Summary.

Not as defensive as perceived: We assume coverage of the Singapore industrial Reits sector with a slightly negative stance as we believe that the perception of its defensiveness (due to longer lease tenures) is misplaced.

… we have done thorough analyses on the factory, business parks and warehouses sub-segments, and conclude that we are most positive on the warehouse sector fundamentals.

… flat to low single-digit growth for factory rents driven by high occupancy, and business park rents to moderate due to the oncoming supply pressure (including new supply of decentralised office space).

Potential weak demand may slow rental growth: Singapore industrial rents have surpassed pre-sub-prime crisis peaks and are at 10-year highs.

… upside is limited from here on, given the moderating economic growth outlook, Singapore’s high exposure to the US and European economies and the appreciating currency which will reduce Singapore’s competitiveness as an industrial location of choice.

However … the few less labour-intensive, higher value-add fields, and sectors/ players with better pricing power, like biotechnology, water technology, environmental/energy sciences will likely be less impacted by cost inflation.

This should underpin rental growth for the class of industrial assets exposed to these sectors.

… expect rents in (logistics) warehouse – our preferred industrial sub-segment – to continue to remain strong on the back of fairly strong 90-91 per cent occupancies based on limited supply completion over the next three years. While supply for all factories over the next five years looks manageable, at 9-10 per cent of existing supply of 332 million sq ft NLA for factories and business parks … rents for older-specs factories could come under pressure especially given current economic uncertainties, which will likely impact SMEs and less cost-efficient companies (those at the lower end of the value chain).

… hi-tech and business park rents to moderate, due to the oncoming supply of business parks over the next four years amounting to 29 per cent of existing supply, coupled with existing high vacancies.

M&A increasingly challenging: Despite the supportive capital-raising environment, in our view, with cap rates continuing to compress on the back of rising competition for land (as industrial assets have the highest yields), … becoming increasingly challenging for a Reit to make an accretive acquisition, particularly in Singapore, where capital values today are at 10-year highs.

Based on our analyses of Ascendas Reit (A-Reit), Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MINT), we conclude that (1) A-Reit has the most debt headroom with $1 billion available for future acquisitions; (2) A-Reit and MLT both have the strongest acquisition pipeline, with $1 billion each of injection pipeline from their sponsors; and (3) MINT and MLT have the highest risk of placement, depending on the size of transaction given their gearing levels of 39.3 per cent and 40.6 per cent, respectively.

Three investable names, at this stage: After screening for market cap of over $1 billion and liquidity of US$1.5 million/day, only three of the seven industrial S-Reits are deemed investable: A-Reit, MLT, MINT.

Where be the next winner?

Depending on where the developed world heads, equities, commodities and property, or government bonds could be the investment.

There are three scenarios for the developed world (remember the BRIC and Indonesia etc still are dependent on the developed world to drive their economies). It can

– grow out of its debt burden,

–  inflate the debt away, or

–  fall back into recession, marked by the occasional default.

Each of those outcomes leads to a different portfolio.

Renewed growth would favour equities, but at the moment, this looks too hard to achieve. An attempt to inflate would be good for commodities and property but would be disastrous for government bonds. Selected equities might do well: those that can pass on the cost rises to customers. Those bonds would do best if the developed world goes into a  recession.

Hope this explains the extreme volatility of markets.

Mortgagors may get double whammy?

Looks like MAS is right to focus on weakening S$ Double dip here we come.

So morgagors may face rising interest rates (interbank rates rise to attract S$ deposits) and a recession (no jobs). True rate rises may be moderate but it all depends on how prudent “homeowners” have been in their budgeting.

I hear that advertising and marketing people are being axed as of this morning.

Mortgagors: No gd scenarios

Commentators like Tan Kin Lian have been saying for ages that interest rates cannot remain at so low levels here and that they must rise one day. Then those homeowners who overleveraged by not anticipating having more in interest would face problems servicing their loans.

Well it seems that higher interest rates are occurring finally because the central bank no longer wants an appreciating S$. It now seems to want the S$ to weaken.

The central bank is forcing the value of the S$ down, making it unattractive to hold S$ deposits. It has reversed its policy of allowing the S$ to strengthen against the US$ because it is afraid that a stronger S$ will lead to weaker exports, slower growth and a recession. It allowed the S$ to strengthen because it wanted to fight inflation, a fight that has yet to be won.

If the central bank continues to allow the S$ to depreciate, then S$ interbank rates will have to rise to attract S$ funds. However analysts are divided on how much further the central bank will force down the S$. Those with property mortgages may hope that MAS reverts to a stronger S$ policy. But then the problem is whether they then still have the jobs to service the loans. A stronger S$ could hasten the recession.

Snigger, snigger.

Update on 29 September 2011 at 2.05am

Mortgagors: Double whammy?

Buying property stocks: What can go wrong?

Maybe as part of a campaign to make us “feel good”, the constructive, nation-building local media are highlighting that stockbrokers are telling their clients that property stocks are trading at a discount to their net asset valuation (where once they traded at premiums)  or way below  their usual discount net asset valuation.

Hence there are gd buys around.

But there is the fine print that the MSM don’t report or don’t highlight. The brokers point out that they are assuming a slowdown in the economy, not a global recession. Neither they nor MSM highlight that investors are assuming the worst, a global recession, and hence are pricing the stocks at recession values i.e. investors do not believe the values brokers are pricing the assets at because they think the brokers are optimistic.

So if you believe that the world economy is only experiencing a slow-down, go ahead and buy the recommended property stocks. But if you are afraid of a recession, sit tight. The discounts will bet bigger

DBS bullish on KepLand and UOL

We believe stocks are currently priced for a slowdown but not a recession. Our strategy would be to adopt a stock picking strategy in the property sector. Within the office segment, office landlords are trading in excess of -1 standard deviation to historical RNAV discount while S-Reits are trading at less than 1 SD to the long-term yield.

We believe office stocks have more than priced in the muted outlook and valuations appear attractive currently. While we have widened target price (TP) discounts and lowered TP for landlords given the higher risks going forward, upside to our TP remains significant.

Our top picks remains Keppel Land and UOL. Keppel Land is currently trading at 46 per cent discount to RNAV of $5.57 and offers 40 per cent upside to our lowered TP of $4.18.

We remain positive on UOL, thanks to its multiple growth engines that spans commercial, residential as well as hospitality. Our TP of $4.96, based on a wider 20 per cent discount, offers 9 per cent upside. We have lowered our call on Singland to Hold due to its large 75 to 80 per cent exposure to the office sector.

DBS loves Reits too

In the recent equity market sell off, the FSTREI (S-Reit index) while corrected by some 5 per cent versus the 12 per cent and 25 per cent fall in the STI and FSTREH (property developers index) respectively. S-Reits now offer a prospective FY11-12F distribution yield of 6.5-6.7 per cent, which represent a 500 basis points spread above the long-term government bond. It is now closer to -1 standard deviation of the sector historical yield trading range. We believe that S-Reits continue to offer a compelling investment proposition.

We reiterate our preference for retail Reits. Even in the event of an economic downturn, retail Reits’ exposure in necessity shopping (eg supermarkets, F&B outlets) have kept earnings fairly stable. Industrial S-Reits also offer strong stability and visibility given a larger proportion of their income deriving from master-lease structures. While we continue to see hospitality Reits delivering good numbers going into a seasonally busier 2H11, we believe that growth momentum should be slowing down.

We see value emerging in CapitaMall Trust (Buy, TP $2.05) which is our big cap pick with attractive FY11-12F yields of about 5.3-5.9 per cent. Mapletree Commercial Trust (Buy, TP $1.09) is attractive for its strong organic growth coming off from a first renewal cycle at its VivoCity retail mall. Among the industrial Reits, Mapletree Logistics Trust MLT (Buy, TP $1.07) stands out post an active H1 FY11 and is poised to deliver strong earnings growth into H2 FY11. We continue to see relative value amongst the smaller cap S-Reits – Cache (Buy, TP S$1.07) and Frasers Commercial Trust (Buy, TP $1.05), which offer higher than average yields with limited earnings downside.

S-Reits: What can go wrong?

S-Reits are the flavour of the moment. Witness this gushing report.

“The current yield gap between S-Reits and the 10-year government bond is attractive to us at 5.1 percentage points versus 0.8 percentage point during the 2007 boom, and an average of 3.4 percentage points over the past seven years,” said Royal Bank of Scotland analysts in a report last week.

The report put S-Reits yields for 2011 and 2012 at 6.7 per cent and 7.1 per cent respectively. The high yields now being provided by S-Reits are well supported by a stable rental outlook, low interest costs and acquisitive growth potential, the RBS analysts said.

RBS has an ‘overweight’ call on the S-Reit sector.

As reported earlier http://atans1.wordpress.com/2011/08/21/cimb-on-reits/, CIMB is “neutral” on developers as a whole but “overweight” on S-Reits.

So what can go wrong? Nomura Singapore said that one of the current concerns of investors in the Reits space is the potential risk of recapitalisation if asset values were to fall significantly. In simple English, investors are afraid of rights issues if the gearing of Reits goes sky high if property values supporting the loans collapse. This happened in late 2008.

Even if property values don’t collapse, Reits could face banks refusing to renew their credit facilities, and asking for their money back if the banks face a liquidity crunch. This too happened in late 2008.

Property: What weed are these people smoking?

I am amazed that any broker can call the Singapore real estate sector “Overweight”. But RBS did it on 16 August 2011

The valuation gap between developer stocks and physical properties widened over the past eight months. We expect it to narrow as home sales remain robust. Strong household and developer balance sheets should support prices and cooling measures may prove ineffective in quelling real demand. We upgrade our view on the sector to ‘overweight’ from ‘neutral’.

Developer stocks’ premium to NAV narrowed to just 4 per cent from 33 per cent in January, despite robust primary home sales of 11,197 units (up 13 per cent year on year) in the first seven months of 2011 and a 4.3 per cent half-on-half increase in home prices in H1 2011. The sector also underperformed the STI by 11 percentage points in the last eight months. Policy risks seem as low now in view of heightened global uncertainty. We think any policies to cool the market would prove ineffective as we believe there is virtually no speculation now. We expect mass-market homes to continue to be undersupplied in 2012 to 2013.

Growth in total stock averages 2.3 per cent a year from 2011-12, below the long-term average of 3 per cent, while occupancy rate is at 98 per cent. Hence, we expect the healthy churn of mass properties to persist. We stress-tested the household balance sheet and found that a 30 per cent drop in home prices would bring the debt-to-asset ratio to 18.6 per cent, slightly higher than the long-term average of 18 per cent but below the high of 21 per cent in the 1997 and 2001 booms.

Gearing of larger developers is low at 34 per cent vs 41 per cent during the pre-crisis level of 2008 while that of smaller players halved to 103 per cent. Given their low land bank, developers will not cut prices even if there is a recession, in our view.

RBS expects the economy to grow 6 per cent in 2010 and 5 per cent in 2012. We expect an equilibrium in the office sector, in the light of higher visibility of supply and likely slower demand. Hence, we moderate our office rental growth assumptions to 5 per cent in both 2011 and 2012.

Overall, retail rents may soften in view of an oversupply but quality malls owned by seasoned operators should continue to do well. We like hotels on a structural growth story in Singapore tourism. Capital values of commercial assets should also hold up in view of persistently low rates.

We are most positive on City Developments, which we believe could benefit from a lifting of policy risks and continued strength in the residential market. Hence, we upgrade the stock from a ‘hold’ to ‘buy’, for its large exposure to the residential sector which accounts for 39 per cent of its RNAV.

We maintain our ‘buy’ ratings on Keppel Land, OUE and UOL as these commercial stocks look undervalued, trading at 30 to 50 per cent discount to RNAV. We maintain our ‘hold’ rating on CapitaLand as we believe that the stock may lag in stock price performance in view of its complex shareholding structure.

CIMB on Reits

CIMB loves them based on a research note dated Aug 18 2011 where it called for an “Overweight” on the Reit sector.

CIMB recently hosted nine Singapore and Malaysia real estate investment trusts (Reits) at our inaugural Asean Reit conference. While investors were generally not pricing in a double dip, most appeared increasingly cautious.

Coupled with value emerging from the recent selldown, we sensed increased interest in Reits, with a particular preference for those in more resilient segments like industrial, retail and healthcare.

Our top picks are Ascendas Reit, Frasers Commercial Trust, Starhill Global Reit and Cache Logistics Trust. We also like CapitaMall Trust and CDL Hospitality Trust at current valuations.

During the conference, we sensed increased caution among investors after the recent market selldown, with more turning to S-Reits given increased risk aversion. Most Reits also gave the feedback that they had been receiving more investor interest and enquiries. While turning cautious, investors were not yet pricing in a double dip.

Questions centred on rental growth and expansion via acquisitions or development. Most agreed with us that S-Reits have emerged with stronger balance sheets and portfolios from the last crisis.

Recent market volatilities and developments in advanced economies have not affected Reits yet.

Notwithstanding slowing growth in advanced economies, industry participants remained positive on growth in the region. However, most would be monitoring developments closely.

Industrial Reits continued to expect positive rental reversions on the back of rising spot rentals and rental step-ups. Investors liked the stability from industrial leases but were slightly wary of a seeming slowdown in manufacturing in Singapore.

Industrial S-Reits, however, noted that manufacturing remains a core component of Singapore’s economy and continued to see bright spots as local manufacturing transitions to higher-value-added products and services.

While spot rents for most office S-Reits remained healthy, more investors were starting to question rental growth next year. We noted a moderation in tone among the office S-Reits, on the back of a slowing leasing momentum, significant physical completions in 2012 and potential growth concerns. Most expected rental growth to be more moderate in 1H12, before picking up again in 2H12 as supply tightens in 2013.

Most Reits are still keen to grow through acquisitions. Opportunities are, however, limited with the system still flush with liquidity.

Industrial Reits noted a difficult acquisition environment, given increased competition from new entrants such as private funds, smaller players and other industrial Reits. Most were thus gravitating towards development (mainly build-to-suit) and redevelopment, given their enhanced yields, the small capital outlays, short gestation periods and Reits’ ability to mitigate leasing risks by building to suit.

Similar concerns on compressed yields and a lack of quality assets for acquisition were expressed by the office S-Reits.

Citi continues to prefer Reits

Citi continues to prefer Singapore Reits over developers, because of the current uncertain economic environment. “Despite attractive valuations, continued policy risk implies that it remains difficult to suggest picks within the real estate developer space”.

Citi prefers Reits that are operationally more defensive, including retail Reits such as Mapletree Commercial Trust and Fraser Centrepoint Trust, where passing rental rates are below market ones.

Property developers should petition PM

Given the downgrade of US debt with the fear of higher global interest rates and weaker equity markets, property developers must be more worried today than they were this time last week. Maybe they should petition the PM to bring back Mah Bow Tan as housing minister? It is a well known fact that he can e3nsure that residential property prices rise in a recession.

That they were already very worried last Monday is evidenced by the meeting that day that Redas (the property developers trade union) held for 17 analysts from 14 stockbrokers and five consultants. Developers don’t call for such meetings when they are bullish. They are then too busy counting their potential profits.

They discussed issues such as “possible ways to facilitate sharing of information among industry stakeholders, the need to better understand and analyse new market dynamics and the changing nature of the demand for Singapore residential properties”, Redas said in response to queries from BT.

According to BT, Redas had suggested sharing in-house data to help analysts better study the property market. The supply of private homes in the pipeline was also discussed. The meeting took place days after Redas shared results from the latest Redas-NUS Real Estate Sentiment Index survey, which polled developers, consultants and other Redas members.

The findings reflected a softening in sentiments about the property market in the second quarter.

In recent months, several equity research houses also released reports about a potential glut in private homes. One of the most recent is a July 28 report from Bank of America Merrill Lynch, predicting ‘an inflection point in 2012, driven by excess supply, demand moderation and slowing economic growth’.

Its analysts expect around 12,500 new units to enter the market every year between 2011 and 2015 – 60 per cent higher than the 15-year historic average annual supply delivered to the market. At the same time, they expect demand for private homes to weaken due to factors such as tighter immigration policies and an influx of HDB flats.

Citi’s property analysts are among some who do not see an over-supply of private homes coming, as their June report shows.

Adding to reports from property analysts are views from National Development Minister Khaw Boon Wan, who blogs often. In a June entry, he had advised investors and upgraders to consider various factors, such as volatile global conditions, before buying a property.

According to Redas, its president Wong Heang Fine said that he would like to have such sessions on a regular basis, say, every six months.

CIMB still likes FCOT

On I August 2011 when FCOT was at $0.88 (note I own some shares), CIMB came out with report where it maintains ‘outperform’. Q3 2011 distribution per unit (DPU) of 1.38 cents meets our forecast and Street expectation at 24 per cent of our FY2011 figure. 9M 2011 DPU forms 74 per cent of our estimate. DPU was up 10 per cent y-o-y on stronger net property income (NPI) contributions from almost all its self-managed assets mainly on better occupancy. Occupancy at KeyPoint had improved for the ninth consecutive quarter.

An improving underlying portfolio at China Square Central meanwhile should position Frasers Commercial Trust (FCOT) for upside when it takes over direct management in March 2012. No change to our DPU estimates or dividend discount model-based target price of $0.99 (discount rate: 9.4 per cent).

With an improving portfolio, stable capital structure and a strong sponsor in F&N, we see no reason for its 35 per cent discount to book amid forward yields of 7 per cent. We see catalysts from early refinancing, the unlocking of value from AEI at China Square Central and improvements in occupancy and rentals.

NPI was up 10 per cent y-o-y on stronger contributions from Central Park, Caroline Chisholm Centre and Keypoint. Q-o-q, NPI was up 4 per cent as there were improvements at its Australian assets. Occupancy at KeyPoint also continued to improve for the ninth consecutive quarter to 86 per cent since the in-house team took over property leasing in Q2 2009.

Passing rents were stable at about $5 per square foot with limited exposure to higher rollover rents locked in at the 2008 peak.

China Square Central’s underlying occupancy improved 20 basis points, with recent leases renewed at $6.30-8.00 psf versus expiring rents of $6.30 psf and passing rents of below $6 psf. Continued improvements in occupancy and rentals on the back of more proactive management by FCOT and an upcoming Telok Ayer MRT station could position FCOT for upside when it takes over direct management following the expiry of the master lease in March 2012.

Asset leverage had been pared down to about 37 per cent after the divestments of AWPF and Cosmo Plaza. This entire amount ($745 million) will mature in 2012. With a high cost of debt of 4.3 per cent and prolonged low interest rates, FCOT could save in terms of interest following the refinancing of this debt. We estimate that a 50-basis point interest rate reduction could lift its DPU by 11 per cent.

OUTPERFORM

CIMB on property sector

We remain ‘neutral’ on the sector, remaining negative on residential and positive on the commercial/hospitality segments.

Our top picks are Keppel Land (‘overweight’, TP: $4.73); Fraser and Neave (‘overweight’, TP: $7.34); and CapitaLand (‘overweight’, TP: $3.62).

Hard to argue with the bearish stance on residential and bullish on retail and commercial.

More from DBS on S-Reits

Retail Reits are expected to see positive rental reversions going forward, supported by the current positive consumer sentiment.

Frasers Centrepoint Trust (‘buy’, TP: $1.73) is expected to deliver a good set of numbers in the coming quarters, as reconstruction works at Causeway Point have passed the most crucial stage, with committed occupancy at over 99 per cent. In addition, the impending purchase of Bedok mall will act as a re-rating catalyst for the stock.

Mapletree Commercial Trust (‘buy’, TP: $1.05) should also see strong reversions in rental growth of about 10 per cent in the coming quarters, coming off from a first renewal cycle at its VivoCity retail mall.

S-Reits have collectively acquired about $1.9 billion of assets year-to-date, which should start contributing to earnings in the coming quarters.

After two months of relatively flattish distribution per unit, we believe Mapletree Logistics Trust (‘buy’, TP: $1.07) is poised to deliver a strong uptick in earnings momentum, boosted by recently completed acquisitions

FYI, yields for the above trusts are very decent and all three trusts have strong Tai Kors. F&N for Frasers and Temasek for the other two.

Frasers Centrepoint — 6.8%

Mapletree Commercial — 5.7%

Mapletree Log — 6.7%

 

DBS on smaller cap S-Reits

We see relative value among certain smaller-cap S-Reits. Cache Logistics Trust (‘buy’, TP: $1.11), which currently offers a yield of over 8.0 per cent, is attractive, backed by transparent earnings structure and armed with a low leverage of 26 per cent, having the headroom to acquire further.

Frasers Commercial Trust (‘buy’, TP: $1.05), at a P/B of 0.6 times, is unjustified in our view, given that the yield-enhancing steps taken by management and plans to re-finance its expiring loans should result in future interest savings.

I’m glad someone sess value in FCT where I have a holding. Yields 6.77%.

Citi: No property glut

Citigroup thinks that the increase in the supply of new HDB flats and private apartments over the next few years will not lead to a housing glut in 2013 and 2014. A stand contrary to that held by most other brokers e.g. Morgan Stanley and CIMB.

The current “severe shortage”‘ of HDB flats is also likely to provide support for mass-market prices and demand. Most other brokers argue that a step-up in HDB supply will dampen demand for mass-market private homes and hit prices

“We estimate that the deficit in housing units is in excess of 50,000 currently and this undersupply situation will likely take several years to clear, just like the oversupply situation in the early 2000s. With a severe shortage, we are not overly concerned about the rise in supply in both HDB and private residential units.”

The coming HDB supply and the potential increase in the income ceiling for new HDB flats will reduce HDB resale transactions by 7-15% at most. The impact on the private property market would be even smaller. The shortfall in the HDB market will support demand for and prices of mass-market homes.

“rate for mass-market properties are at an all-time high of 97.5 per cent. With yields averaging at around 4.2 per cent versus mortgage rates of just between 1.2-1.6 per cent, investment demand for small units and mass-market units could remain strong.”

However any further price increase or spike in volume in the mass-market segment risks more property measures as the government is monitoring the market closely.

Property: 9 July 2011 is a day to watch

In 2009, S’poreans expected property prices to weaken. There was a recession. They were wrong, prices went up. Lots of reasons were given in hindsight for example  low interest rates, high liquidity, enblocers needed homes. All true but another factor was the flood of FTs coming in from M’sia. Why did they come? In 2008 GE, the ruling BN lost its two-thirds majority in the federal parliament and lost control of five states.

Many Chinese and Indian professionals were fearful of racial riots breaking out. They came here.

On July 9 2011, Perkasa (a Malay supremacist organisation) is threatening to counter demonstrate if Bersih 2.o goes ahead a with demonstration.

The July 9 “Walk for Democracy” Kuala Lumpur protest will be attended by several civil societies, including a few opposition parties. Bersih and its coalition partners have six demands in mind, including an end to the misuse of government machinery and funds during elections. With an expected attendance of more than 100,000, the march is expected to the biggest of its kind since the group’s 2007 demonstrations.

If blood flows on KL streets, Malsysians will be rushing here.  And they need places to live in.

Mapletree Logistics is interesting

This Temasek-related Reit invests in logistics facilities in the region. Its latest investment is in S Korea.

Its yield is 6.8%. While its last traded price is $0.92 and its last reported NAV is $0.85, OCBC recently came out to say that OCBC calculated that its revised NAV is $1.01 (also OCBC’s target price for the stock). Not a rich discount to the share price but pretty decent, given its Temasek credentials.

I might add it to my portfolio.

Moody’s on S-Reits

Ratings agency Moody’s Investors Service 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”.

Property: Greedy developer?

Given all the recent bad news about property (e.g. this, and this), I was surprised to read that a developer (listco Sim Lian) had priced some HDB flats in Tampines at S$750 per sq foot (5-room flats at S$880,000 and more (4 and 3-room flats).

Prices are higher than the resale HDB flats in the Tampines private housing in surrounding areas. Article

The developer paid only S$261 per sq ft, so it can’t claim that its cost of land was high.

But it will, in my view, end up like greedy en-blocers, cutting prices to get sales.

My sources tell me that million-dollar units in a development in a gd district that is within walking distance of an MRT station are going a-begging. It seems only about half the units on offer have been bought.

Market has moved from “Buy before prices go higher” to “Wait and see”. But Sim Lian seems to think that there are daft buyers out there.

Bullish on Orchard Rd rentals?

Starhill Global Reit should interest you.

DBS is retaining our ‘buy’ call for Starhill Global Reit following updates from management and the Hong Kong non-deal roadshow.

Starhill Global Reit’s unique value proposition lies in its prime retail offering and niche office exposure along the Orchard Road belt. FY11-12 yields of 6.9-7.3 per cent imply attractive 280 basis points spread over the risk-free rate, backed by the top class commercial assets in town and a reputable sponsor.

There is good earnings visibility going forward, led by organic growth potential and proactive asset enhancements. At current valuations of 0.7 times P/B NAV versus its commercial peers’ 0.8-1.3 times, valuations are attractive. At $0.73 target price, the stock offers 23 per cent total return.

BUY

Note I don’t own shares in this Reit yet. Nothing wrong with the numbers (the 6.9% is attractive and sustainable) but in times like this I would prefer its “big brother” to be an international name, not a M’sian cotporate, albeit a respectable name.

Only one way for property stocks to go

Well the analysts got it right at the beginning of the yr telling us to sell or avoid property stocks because of possible govmin actions.

But I bet no-one tot a minister would use a blog posting as part of his plan.

Interesting read

http://www.todayonline.com/Business/Property/EDC110610-0000050/2013–Market-crash-or-ghost-towns

Even greedier en-blocers

Pine Grove, I’ve been reminded by irate Laguna Park residents is the most expensive en bloc propery up for sale, costing about S$1.7 bn. They were upset by my comments that they were greedy. http://atans1.wordpress.com/2011/05/28/too-greedy-again/

Despite the absence of a sea view, and its odd shape, Pine Grove will cost developers S$2.17bn or S$1,152 per sq ft per plot ratio in total, inclusive of the S$460mn development charge.

Funnily, Laguna Park’s larger plot ratio allows the winning developer to build up to 36 storeys. Although it is a smaller plot compared to Pine Grove, the intensity to build is there. The buildable areas for both sites are about the same.

For instance, with a land area of 677,493 sq ft and plot ratio of 2.8, the redeveloped Laguna Park is able to yield about 1,600 units at 1,200 sq ft each.

With a plot ratio of 2.8 Pine Grove is able to yield about 1,500 units at the same size per unit.

Analysts have said  that a reserve price with a discount of 20 to 25% is more “realistic” for Pine Grove.

This translates to about S$1.3 bn to S$1.4 billion, or about S$924 to S$970 per sq ft per plot ratio.

Laguna Park residents say their reserve price of S$1.33bn is reasonable.

I say that the residents of both estates are greedy, Pine Grove being worse. Pine Grove should be worth about S$1bn.

Perennial Retail Trust: the case against

In today’s ST, Perennial China Retail Trust took out a full-page ad in colour in ST to extol the IPO’s merits.

Two pages away, ST carried a story headlined ” CapitaLand’s share dip linked to China”. In juz slightly smaller type face, the headline went on, “Poor showing due to concerns over firm’s greater exposure, vulnerability to policy changes”.

If I were Perennial, I’d ask ST for a refund. This headline sums up the thesis why this is an IPO to avoid.

Consequences of Khaw’s HDB policies

I hope S’poreans realise that the HDB building spree means that in all probability their properties will lose value in the coming few yrs as HDB flats are available for occupancy. Remember also that there is a lot of private housing coming on-stream.  How much values fall depends on the complex interplay of housing demand and supply and the growth of the economy. Immigration policies play a part in this interplay.

Those who will be worst affected by a fall in values will be those who bot HDB flats, and lower end private condos in the last few yrs (say from 2006).

These property owners should demand that more FTs be let in to keep property prices buoyant. They should also demand that the PAP focus on GDP growth.

They will also be fans of Mah Bow Tan who even in a recession kept property prices going up. Every dog has its day and Mah will be popular soon. Khaw will be reviled.

Too greedy again?

Laguna Park, a residential redevelopment site in District 15, is up for en bloc sale at an expected price of S$1.33bn.

This is the second time the 33-year-old development has been put up for sale, with a previous attempt in October 2009 that failed. No-one was interested at bidding at the S$1.2bn minimum price. A local developer offered between S$950m and 1bn, but nothing happened.

Well the present tender is likely to fail given that the

– price is extremely rich given that the developer will have to pay to top the lease to 99 yrs,

– coming torrent of private flats coming onstream, and

– annc that the HDB is returning to the policy of building in anticipation of demand, with the twist of putting up flats quicker, and building more of them this year.

Why so greedy leh? Should have tried S$1.2bn again. My guess-estimate is S$1.1bn would be the highest any developer will bid.

Gd for S’poreans, bad for stock market?

Seems CIMB thinks that the “old” policies on HDB flats, FTs and tpt (that cost the PAP votes because the policies made voters suffer) are better for listcos than any changes.

In our post-elections note, we highlighted that a raised HDB income eligibility cap and slower immigration and slower population growth will be detrimental for property stocks. We reiterate our negative view on property. The upcoming hike in the HDB eligibility ceiling will move the sandwich class from over-priced mass-market private properties back to HDB flats. We think that that will be bad for developers with large mass-market exposure (Allgreen Properties, City Developments).

A marked slowdown in foreign immigration will reduce rental demand, more telling when new completed supply comes onstream in 2013. Capped foreign immigration would have negative implications for some industries that depend on foreign workers, namely, construction and shipyards. Lastly, the need to keep public-transport fares low suggests that ComfortDelGro Corp and SMRT Corp may not be able to get the fare hikes that they have applied for this year. Overall, a changed government trying to portray receptivity to the people is unfortunately, bad for corporate profitability.

We downgraded the Singapore market from ‘overweight’ to ‘neutral’ on May 18 on three points: 1) a worsening outlook for corporate profitability; 2) signs of some stalling in US GDP growth and a revival of old EU debt concerns; and 3) new policies after the Singapore General Election which could be further drags on corporate profitability. We retain this view and our bottom-up target of 3,560 for the Straits Times Index.

Our top picks are still DBS Group, Fraser and Neave, Noble Group, Singapore Airlines, Overseas Union Enterprise, Sembcorp Industries and Wilmar International. Our ‘ideas’ are still CWT Limited, Ezion Holdings, Frasers Commercial Trust, Midas Holdings, STX OSV Holdings, OKP Holdings, UMS Holdings and Foreland Fabrictech Holdings.

Singapore Market – NEUTRAL

Property: ignoring the Hard Truth of 2009

“And I guess to the extent that in the last couple of years, housing prices went up very sharply, coinciding with the very dramatic turnaround in the economy, I guess that resulted in quite a lot of unhappiness on the ground. And I accept responsibility for that,” Mah Bow Tan said,

He missed out something in the above analysis. In 2009, S’pore had a recession, but property prices rose  . Specifically in a recession year, prices of HDB resale flats rose by 8.2%.

This showed that there was a massive inbalance between supply and demand, so much so that despite a recession there was a demand for housing.

Property prices

In 2009, prices moved up despite a recession. One reason we now know is that the M;sians were migrating here after the 2008 election results.

In that election the ruling BN lost its two-thirds majority and the MCA (the main Chinese party in the BN) lost badly in the seats it contested. There was concern abt the political situation (in particular about racial riots breaking out). So the Chinese left for S’pore.

Well the M’sian PM has just told the Chinese that they had better support the MCA. Otherwise that party would not be able to represent Chinese interests within the BN.

Expect more Chinese to migrate here. And expect property prices to remain strong.

Property prices: Going against natural laws

MM was quoted in late 2009 as saying, ”If the country is going to go down, then economy will go down, people’s incomes will be down, unemployment will be up, then property values will go down.”

He was wrong because we had a recession, but property prices rose  . Specifically in a recession year, prices of HDB resale flats rose by 8.2%.

Mah Bow Tan should boast of what must be first for public housing in any country, “We ensure public housing prices go up even in a recession.”

And adding, “So when economy does 15%, of course, HDB rices will fly. Only the daft will expect HDB prices to stabilise or go down.”

“Vote PAP. Public housing values will always go up,” he should say.

Starhill Reit: DBS likes it

Healthy financials: Gearing remains healthy at 30.2 per cent, well below the optimum level of 45 per cent. With no major refinancing needs till 2013, the group is in good financial position to make further acquisitions.

We maintain our ‘buy’ call, TP of $0.73. The improving office outlook and stabilised retail market should lead to further improvement in its Singapore portfolio that represents 60 per cent of its total revenue. We see relative value in SGReit with the stock trading at 0.7x P/BV and offering forward FY2011-2012 yields of about 6.9-7.3 per cent.

Property values juz outside Hougang and Potong Pasir

If you are living in a PAP constituency and you are just a street or two away from Hougang and Potong Pasir, I hope you realise that the value of yr property is adversely affected by the non-redevelopment of Hougang and Potong Pasir.

Property is all about location and that includes the neighbourhood. So even though you dutifully vote PAP, made sure yr family and neighbours did the same, and your area gets redeveloped, the fact that Hougang and Potong Pasir are juz accross the street, or round the corner, affects adversely the value of yr property.

Don’t believe me, go ask any property agent from a reputable firm.

Bang balls, property bears

Based on the sale price of S$161.6 million of Amber Towers “and at the equivalent plot ratio of 3.55, the sale reflects a land rate of $1,118 psf ppr,” said Ms Suzie Mok, director of investment sales at Savills Singapore.

Note Amber Glades and Marine Point were recently sold to Far East Organisation and CapitaLand for $1,066 psf ppr and $1,056 psf ppr respectively, So despite all the govmin measures, and the supply coming onstream in the next few years,  developers remain bullish.

And they don’t think Goh Meng Seng and friends will get a chance to implement their plans to destroy the property markry by selling HDB flats at cost of construction prices.

CapitaLand: The peril of being a China play?

CapitaLand is trading below its FY2010 NAV per share of S$3.32. This has not been seen since September 2009 to May 2010. CapitaLand is currently in a position of balance sheet strength (FY2010: S$7.2 billion cash, 0.18 net gearing), and has balanced exposure to diversified property segments across different geographical regions. DBS Sec

Moreover, the market has assigned no value to any accretion from an expected S$6 billion in capital deployment this year. We update assumptions and maintain a ‘buy’ rating with a fair value of S$4.05 at parity to RNAV.

Me: Nothing to do with balance sheet strength or profitability. Investors are concerned with its large China exposure. And I hear hedgies are shorting it as a proxy bet against Chinese property.

Oil at US$120: Property prices

Well if oil goes to and remains at US$120, we could have a recession in the West and a recession here will follow.

We are told that there is plenty of private property coming on stream in the next few years, and that Mah Bow Tan is building HDB flats like crazy to compensate for his goof-up in not ramping up supply when the government was allowing FTs in.

We could be in for some sharp falls if there isn’t unrest in Malaysia and we see another influx of M’sian Chinese into S’pore as we saw in 2008.

How many houses David Marshall could buy on his salary?

Someone in TR wrote that David Marshall in an interview said he was paid $8000 a month in the 1950s as Chief Minister and went on like Marshall to rant against the PAP.

Based on $8000 a month, Marshall was paid $96,000 a year. From what I understand that could buy 3 bungalow properties in a then non-fashionable area in the East, say Frankel or Opera estate. He could have some change leftover.

Today, a minister earning $3m a yr, may juz be able to buy a bungalow in these areas with his annual salary.

Want to beat up PAP, join in the bashing, But don’t talk rubbish. Only helps PAP.

Roxy-Pacific: Decent discount to RNAV even after 25% discount

But company is leveraged over its eyeballs — 128%. I’ll give it a miss but OCBC’s analysis is worth a read in giving one the facts on which it bases its call.

OCBC Investment Research, March 9

ROXY-PACIFIC Holdings is a specialty property and hospitality group in Singapore. It primarily develops domestic residential projects, and also owns two investment properties and a hotel, Grand Mercure Roxy Hotel (GMRH). In FY10, 77 per cent of revenues and 59 per cent of earnings were derived from the property development segment. The investment properties segment and GMRH constituted 1.5 per cent and 20.5 per cent of revenues respectively. We expect future earnings in FY11 and FY12 to be underpinned by recognition of revenue at 12 projects that are mostly sold out.

We believe Roxy enjoys a strong reputation for quality small to mid-sized projects in the East; and in recent years, it has expanded successfully to other regions and larger projects, ie, Spottiswoode 18 at Tanjong Pagar. Management has indicated a soft target of $300 million in acquisitions this year and would also look closely at commercial and retail deals. The current balance sheet shows a high net gearing of 128 per cent. If we revalue GMRH to $188 million (currently held at $71 million book value), net gearing falls to 61 per cent..

We have valued Roxy at $0.55 per share – a 25 per cent discount to its RNAV sum-of-the-parts value of $0.73.

When buying distressed reits or shipping trusts

Don’t focus on rising NAVs.

Focus on their ability to service their debts and the options they have to refinance. The improvement in NAVs is a subset of these issues.

Office reits: OCBC is bullish

OCBC Investment Research, late last week wrote, We found a few common themes in the guidance given by office Reit managers. Firstly, most office Reits with Grade-A office assets expect negative rental reversions to bottom out by end-2011.

In FY2010, negative rental reversions were still prevalent in some Grade-A properties such as Six Battery Road and One George Street. One Raffles Quay and Suntec City also saw y-o-y declines in gross revenue contributions, but this is expected to turn around in 2011-12.

According to CB Richard Ellis (CBRE), Grade-A rents averaged $9.90 psf a month in Q4 2010, reflecting an increase of 10 per cent q-o-q and 22.2 per cent y-o-y.

Property prices will hop-a-long

The govmin is stepping hard on the brakes to prevent property prices from being a one way bet, and to appease those S’poreans who missed the boat.

Some of those who missed the boat are daft enough to expect a property collapse. Why shld it?

FTs are still flooding in; interest rates are low; credit is easily available (bit harder than the recent past, but still easy); people are more optimistic despite the efforts of ToC, TR, WP, SDP, Tan Kin Lian and Goh Meng Seng*; and the economy is expected to do 5% this yr.

The US is printing money, some of which will find its way here,

Then there is the Budget which shld more money in our pockets, so that we can afford to take out bigger mortgages.

And best of all. It is difficult for any government to stop the momentum of rising property prices. Despite the attempts of the Chinese authorities  over the past year or so, property prices continue to rise. Juz more slowly.

If you believe property prices will ease-off significantly, keep on whistling in the night, or pray that there will be a global recession. The data shows that 2008 excepted (when M’sians flooded in and bot because of fears of instability in M’sia), property prices fall 20% when there is a recession.   

—

*If they are believed, most S’poreans are poor and unhappy. S’poreans are unhappy but they are not poor. They can afford the interest payments on mortgages on S$500,00 HDB flats. They are unhappy because they are envious of richer S’poreans.

Starhill Reit: Worth a look at?

Yield of 6.2%  is decent, even though one can find reits with higher yields, even within its sub-sector,.

But it trades at 64.5cents, a large discount to its lasyed reported RNAV of 89 cents. There is room to gear up further given its gearing is 31%. In other words it doesn’t need to calls a rights issue to fund run-of-the mill acquisitions.

Better still rents along Orchard Rd are likely to go up further by another 3-5% yearly (no new supply) likely, analysts say. Remember Starhill generates two-thirds of its revenue from Ngee Ann City and Wisma Atria.

Kim Eng is bullish on Starhill noting that about 20% of its retail leases in Singapore are expiring this year and that so far, the rates of those leases are about 30 per cent below rentals in the fourth quarter of last year. Kim Eng sees a positive rental revision in the next two years.

Might buy some for myself. Better than keeping money with CPF.

20-sumethings don’t do gratitude

As you will be aware, UMNO in Malaysia has, since the mid 1990s, been losing the support of younger Malay voters. In an attempt to correct this, UMNO in the early and mid noughties conducted dialogues between the senior politicians and Malay voters in their 20s. An intellectual who attended a few of these sessions told me how they went: comically tragic.

The politicians reminded the young Malays of what UMNO had done for the Malays and told them that they shld be grateful for the affirmative policies and vote UMNO.

The young responded by saying, “Why should we be grateful? We were born after the implementation of these policies. If you remove these policies, you are the bigger losers, not us. What concerns us is the future and not history.” They then went on to list their grievances: lack of job opportunities, inflation, corruption and so on.

My friend says the politicians couldn’t accept this answer and called the young, ungrateful and rude. Something he said that did the UMNO no good. UMNO did not get their votes. But he says post-2008, UMNO is learning to accept that young Malays don’t do gratitude, and has begun addressing their concerns, rather than lecturing them, telling them that they should be grateful.

Translating this into our context, reading the ST articles on their collaboration with MM on his latest book, I get the sense that MM is not happy with younger S’poreans because he thinks that they do not appreciate (and are not grateful) for what he and the PAP have done for them.

Time to convert yr housing loan from floating to fixed rate interest?

Warren Buffett is doing this for his loans.

Nearer to home, I knew someone in SPH who opted for a fixed rate loan, 20 yrs ago. Others there said he was “daft”. He reminded them of their comments when in 1994 the Fed tightened rates and they found their interest payments doubling or tripling.

There are times when paying a premium in return for certainty is a better option. Taz how S’pore prospered. You know what you get from the PAP. Can’t say the same for UMNO or an Indonesian government. There you pay and take yr chances. E.G. it is a lot cheaper to build storage tankers in Johor or Batam, than here. Yet S’pore is the preferred site oil farms. Oil traders even rent tamkers and park them off S’pore when the oil farms are full.

Investing in Reits

BT published a long piece that could serve as a primer on how to invest in Reits. Reit Primer.

Two complaints abt piece.

One is that it doesn’t talk abt buying Reits that trade at big discounts to latest reported RNAV. True there may be gd reasons why some Reits trade way below RNAV. But savvy investors can make $ buying Reits that they think shld not trade way below RNAV and holding them until they trade above or juz below RNAV, while getting good payouts while waiting. Useful Reit table for yields and RNAVs.

Those who bot Ascendas India Trust (trumpets pls) when it was trading way below its RNAV have made gd capital gains. I should have sold  out but the yield is pretty decent.  And India is now hot and RNAV could rise.

The other complaint abt the piece is that Reits can use the low interest environment to refinance their debts at lower rates and for longer tenures. Analysts from DBS and OCBC are saying this is happening.

BTW, high-yielding Reits  courtesy of ST scan0004. Declaration of interest: I own units in three of them. (Update on ^ January 2010: Now own four of them.)

Update on 4 January 2010

Must read — a summary of Soro’s piece (many yrs ago) on the danger of buying a Reit trading above RNAV (and attraction).

Another gd Reit table.

Property: What a minister’s salary can buy in 1957 and 2010?

Or why PAP ministers deserve our compassion in this season of gdwill. Another Christmas macabre tale. Who would think they deserve our compassion? But they do.

David Marshall said he was paid $8000 a month in the 1950s as CM. Taz $96,000. From what I hear* that could buy 3 bungalow properties in a then non-fashionable area in the East, say Frankel or Opera estates. He could have some change leftover.

Today, a minister earning $2m a yr, can’t buy even one bungalow in these areas with his annual salary. He could possibly get a two-storey terrace house for $1.5m. He has to borrow money from the bank to buy a bungalow.

Other macabre Christmas tales

http://atans1.wordpress.com/2010/12/25/freak-election-result-no-worries-mm/
http://atans1.wordpress.com/2010/12/28/a-ghost-city-state-or-why-fts-are-needed/

——–

*too young and can’t find written records. Have to depend on old people’s memories.  You know what can go wrong, I mean if MM can forget that the Malays are the second biggest group ….

Residential property: Unconvincing contrarian call

Brokers’ analysts are like lemmings, they move in herds. So it is nice to see Credit Suisse is bullish on Singapore’s residential property market when other brokers e.g. Nomura and CIMB are telling investors to give the sector a miss; and DBS and OCBC barely mention the sector. Sadly it is unconvincing though the call to buy CityDev makes sense in itself.

In a report last week Credit Suisse said that it expects home prices here to increase by 15% this year, and by another 5% in 2011 and 2012 each. Not much to peg bullish hopes on, I must say.

“The low interest rate environment, historical high rate of GDP growth as well as continued population growth should propel growth in the Singapore residential property market”. Err what abt less FTs being allowed in?

There were  risks such as capital inflow controls (Huh? What are they smoking or drinking at the X’mas party?) or more anti-speculation measures from the government.

But the average valuation of Singapore property stocks is still below the historical average, and the residential sector is “reaching the peak with decelerating growth momentum”. Now isn’t the latter a gd reason to avoid the sector?

Credit Suisse has an “outperform” on CityDev, target price of t $17.16.

“While … 37 per cent of its RNAV … is in residential, the landbank had been mostly acquired at low costs, and we estimate 56 per cent is in the luxury sector, which has lagged the mass market segments,” Credit Suisse said. Sounds a gd reason.

It also has “outperform” on OUE, target price of $4.20.

BTW CIMB has “underperform” on CityDev, but likes OUE and KepLand.

Time to see waz OUE all abt?

OCBC picks for 2011

Like other brokers, OCBC is bullish for next yr. But there are some picks that are unique to OCBC.

Our picks for 2011 are Ascott Residence Trust, Biosensors International Group, CapitaLand, DBS Group Holdings, Ezra Holdings, Genting Singapore, Hyflux, Pacific Andes Resources Development, Keppel Corporation, Mapletree Logistics Trust, Noble Group, Olam International, Sembcorp Marine, StarHub, United Overseas Bank, United Overseas Land and Venture Corp.

OCBC likes S-Reits

In  a research report dated 10 December 2010, OCBC Research writes most of the Singapore real estate investment trusts (S-Reits) emerging stronger from the financial crisis, with healthier balance sheets, forthcoming acquisition proposals and more asset enhancement works.

Three Reits listed on (SGX) this year, Cache Logistics Trust, Mapletree Industrial Trust (MIT) and Sabana Reit. This was in stark contrast to a year ago when most of the S-Reits were burdened with deleveraging plans, decompressing cap rates and asset sales.

The FTSE Reit sub-index is up 15.9 per cent year-to-date. It has since recovered 145.1 per cent from its trough during the financial crisis in March 2009 and is 38.2 per cent shy of its peak in June 2007.

If we use 2006 levels as a benchmark, the FTSE Reit sub-index still has 25 per cent of headroom before reaching the 2006 summit, and it is only 9.2 per cent above of its 2006 nadir.

Stepping into 2011, we think there is still upside potential for the index to reach 2006 levels, and this recovery momentum is already playing out nicely among some of the S-Reits.

Despite being touted largely as defensive yield plays, we have witnessed some S-Reits (such as CapitaCommercial Trust, K-Reit Asia, Fortune Reit and ParkwayLife Reit) appreciating more than 25 per cent year-to-date.

Going into 2011, we upgrade our rating for the S-Reits from ‘neutral’ to ‘overweight’.

The persistently low interest rate environment is expected to stimulate the property market and continue to drive prices higher.

Together with ‘hot capital inflows’ pouring into Asia, it is likely that spot rental rates and asset prices will continue to be inflated.

At the same time, many Reit managers are capitalising on the recovery cycle for further asset enhancements initiatives and acquisitions.

Being an inflation hedge, we think investors’ interest in S-Reits is likely to remain piqued in 2011.

However, we noted that different sectors may experience different rates of recovery.

In our opinion, the recovery is likely to be more pronounced for the office sector, followed by the industrial sector as the catch-up potential is greatest for these two sectors.

The retail sector is likely to remain subdued with moderate rental escalation, new retail supply with additional 612,000 square feet of leaseable retail space in 2011, and lessened spending power from foreign visitors affected by the appreciating Singapore dollar.

Within our coverage universe, our preferred picks for large-caps are Mapletree Logistics Trust (‘buy’, fair value: $1.00), Ascott Residence Trust (‘buy’, fair value: $1.38) and for small-caps, Frasers Commercial Trust (‘buy’, fair value: $0.18), Starhill Global ( ‘buy’, fair value: $0.66).

Sabana: Inshahallah

This piece of news (Sabana) in Monday’s ST did nothing to support the stock, because although it reported insiders buying at higher prices to support the IPO (issue price; 1.05), it also reported that a substantial shareholder had dumped shares. If this shareholder came in via the placement, if I were Sabana, or FreightLinks or other keystone investors, I’d be upset with the placing broker.

It went on falling. On Wednesday it closed at0.95, having fallen to 0.94 on Tuesday.

But SIAS research was quoted by ST as saying that at  last friday’s closing price of 0.975? Sabana was a buying opportunity.

Well SIAS Research is part of self-styled shareholders’ champ SIAS. But wouldn’t it have done better to point out that AIMSAMP industrial reit gives a yield of  9.5% and trades at discount to last reported NAV of 18%?

Me, I think Sabana is attractive at 0.81, when over 10% yield and a 18% discount to NAV of 0.99cents. As to whether it gets there

Know for a surety each must play his game,
As from heaven’s dice-box fate’s dice chance to fall.

BTW, I have no economic interest in AIMSAMP. It is on my “Feel like buying, but no hurry” list.

Related post

http://atans1.wordpress.com/2010/12/01/calling-all-muslims/