https://www.theedgesingapore.com/capital/re...esr-reits-bonds

SINGAPORE (June 18): On June 17, Moody’s Investors Service announced that it has withdrawn ESR-REIT’s Baa3 issuer rating, (P)Baa3 senior unsecured rating on its $750 million Multicurrency Debt Issuance Programme and the Baa3 ratings on the senior unsecured notes drawn down from the Programme and its stable outlook “for its own business reasons”. The outlook at the time of withdrawal was "stable".
The withdrawal was made post the redemptions of the ESR-REIT’s $30.0 million 4.10% Series 002 Notes on April 29, 2020 and the $130.0 million 3.95% Series 004 Notes on May 21, 2020 respectively; both issued under the Programme. As at June 17 this year, ESR-REIT’s remaining outstanding $50.0 million 3.95% Series 005 Notes issued under the Programme will mature in 2023. The $50.0 million Series 005 Notes comprise 4.1% of ESR-REIT’s total debt
“We requested to withdraw Moody’s rating in July 2017. This is due to the aggregate leverage limit being changed from 35% (without credit rating) and 60% (with credit rating), to 45%,” ESR-REIT’s manager explains. “Since then, we have not paid Moody’s for credit rating and have not engaged with them on discussions. Moody’s has continued to rate us, though unsolicited, given that we had a substantial amount of bonds outstanding. Now that there is only $50.0 million bonds remaining outstanding, Moody’s has decided to withdraw the ratings,”, ESR-REIT’s manager says.

There are a few things to consider.. the business model for a bond rating agency is quite different from a stock broker that provides stock research.

Rating agencies generate revenue primarily through these two means:
1. Companies that issue bonds have to pay the rating agency an annual fee to assign and maintain a rating on the bonds that are outstanding.
2. Bond investors who wish to buy the bonds and have access to the rating reports produced by these rating agencies have to pay an annual subscription fee to access their database.

In short, they charge companies who want a rating on their bonds, and they charge investors who want access to the rating reports and access to the analyst who provided that rating (Institutional investors can call up the analyst who rates the bonds to ask them anything).

In the case of ESR, they stopped paying Moody's for a solicited rating (Moody's is the most expensive rating agency of the big 3). By right, Moody's could have opted to withdraw the rating immediately since they are not getting paid by ESR to maintain the rating. However, Moody's could have maintained an unsolicited rating on ESR at the request of bond investors who are their subscribers. If you're a big enough client, these rating agencies will bend over backwards to accommodate you.   

So in this case, ESR said that due to there being only SGD 50 million of outstanding bonds left, it could be that a particularly large investor is no longer holding their bonds and Moody's has zero obligation to maintain a rating on ESR. From Moody's perspective, since ESR is not paying them anymore, there is no problem for them to downgrade the rating further even if ESR is in trouble. So the withdrawal of rating is likely to be due to 'legitimate business reasons', or that the analyst could be re-assigned to rate another company that pays for a rating.

This is purely hypothetical, but it is one of the possible scenarios to explain this situation.

Good to see some forumers's SGX portfolio is in positive gain. How did u guys do it?

Mine is still -6% (most in reits,and DBS, OCBC)

I didn't. I know I missed that. 

Yup. I read this. But this one only target about chinese citizen. Our accounts is under Tiger Brokees Singapore which is of separate legal entity. Again, money in SGD are held in the SGD  trust account so i tink should ok? Quite confident with MAS.

Totally agree. Haha but i only put in sgd2k only so far so should be fine i guess. Already put in so what to do...

Hi all, question here on Capita's REIT merger (mall and commercial), anyone knows when the newly merged entity will begin trading in SGX?

Thanks!

HOCK LOCK SIEW; REITs should go beyond minimum disclosure standards

9 July 2020
Business Times Singapore

© 2020 Singapore Press Holdings Limited

WHEN the manager of Ascendas Real Estate Investment Trust (A-Reit) announced the purchase of a property in Australia last week, it provided just about all the information an investor could want.

It said the prime grade logistics property located in Sydney is currently under development by a company called Larapinta Project. It gave the purchase consideration of A$23.5 million (or S$21.2 million), which comprises the land and development cost as well as 9.5 months of rental guarantee by the vendor.

It also explained that the price tag for the property is 19.8 per cent lower than its "as if complete" market valuation, which Knight Frank NSW Valuation & Advisory had estimated to be A$29.3 million as at June 30, 2020.

A-Reit's manager said transaction costs were expected to amount to AS$1.43 million (or S$1.29 million). Based on that, and the rental guarantee from the vendor, it said that the property's net property income yield for the first year will be approximately 6.2 per cent before transaction costs or 5.8 per cent after transaction costs.

It also said the acquisition would be accretive to A-Reit's distribution per unit.

For good measure, the manager let on that the freehold land occupied by the new warehouse spans some 26,632 sq m. The warehouse itself will have approximately 13,100 sq m of net lettable space, and is expected to be completed in Q2 2021.

There was just one little thing that A-Reit's manager did not disclose: the background of Larapinta Project, and an assessment of its ability to make good on the rental guarantee.

Did A-Reit's manager not do the necessary due diligence on Larapinta Project to provide that information? Or does it have the information, but thought it unnecessary to disclose it?

Reits' competitive advantages

Truth be told, unitholders of A-Reit probably have no reason to care either way.

A-Reit has an extensive property portfolio and market capitalisation of more than S$11.8 billion. So, the A$23.5 million deal it announced last week is really a drop in the ocean.

Moreover, A-Reit's deep expertise and business relationships within the industrial real estate field probably make it irrelevant if Larapinta Project is capable of delivering on the rental guarantee. A-Reit would probably be perfectly capable of extracting value from the new logistics property on its own.

So, why does it matter whether A-Reit's manager discloses information it has about the ability of Larapinta Project to support the rental guarantee committment? Because it would set a good example for the rest of the local Reit ecosystem.

The success of the local Reit market is often attributed to Singapore's favourable taxes and trusted legal system.

Yet, Singapore's competitive advantage in this field was also buttressed by its strong commercial property sector, dominated by a handful of big players - including CapitaLand, Keppel Land and Mapletree - that saw their Reit platforms as an integral part of their businesses.

It was the combination of careful stewardship and having portfolios anchored by high-quality and highly visible local commercial property assets that led to Singapore's leading Reits gaining an enthusiastic investor following and the local market becoming a magnet for Reit listings.

Foreign Reits eroding trust

Over the years, a string of foreign Reits have come to Singapore to exploit the local investor base. Few of them have really distinguished themselves, and some have failed spectacularly.

The most recent debacle is Eagle Hospitality Trust (EHT), which is now suspended and the subject of an investigation by the authorities.

One of the many issues that has emerged with EHT is that its sponsor, Urban Commons, which was the master lessee of all the Reit's properties, ended up reneging on the fixed monthly payments it was supposed to make to the Reit.

The master leases on the properties formed the basis of their valuations when they were placed in the Reit.

After witnessing EHT implode over the last few months, investors might well question whether the processes that are in place to list a Reit in Singapore are sufficiently robust, and whether all the bankers, lawyers, auditors and valuers in the local Reit ecosystem are sufficiently competent and properly incentivised.

The whole episode may also have eroded investor confidence in future Reit listings, and might hamper capital raising efforts by existing Reits, especially if they own faraway assets.

Price of leadership

This would be a problem even for leading incumbents like A-Reit, which will have to keep tapping local investors and are increasingly turning to foreign assets to drive their growth.

To maintain the high degree of investor confidence they enjoy, they should make it clear to the market that they are observing more than just the minimum required standards.

So, what further information should A-Reit's manager have provided last week?

It could have given the market a sense of what it knows of Larapinta Project's ability to deliver on the rental guarantee. It could also have offered some information about the valuation done by Knight Frank, given that the valuation was the basis of determining that it was getting a good deal.

It might seem unfair, of course, for the likes of A-Reit to have to do more than the mediocre players in the sector. But the burden of setting standards is the price and privilege of leadership.

For decades, real estate in the financial hubs of Hong Kong and Singapore seemed infallible. Critics of such "conventional wisdom" gave the example of the recent financial crisis, but this was brushed aside as a "once-in-a-lifetime" event that could not happen again.

But it has.

At its bottom in the recent Covid-19 crash, both Hong Kong's and Singapore's value-weighted portfolio of real estate investment trusts lost 25 per cent.

As of the beginning of the month, the Hong Kong real estate portfolio appeared to have recovered while the Singapore portfolio was still down 16 per cent.

Investors who thought real estate provided stable returns with not much risk would have been in for a double-whammy as real estate returns cratered at the same time as equity markets worldwide.

Focusing on real estate investment trusts in Singapore with residential and hotel properties shows an even starker image, with cumulative returns from the beginning of the year down over 20 per cent and 40 per cent respectively over the same time period.

REAL ESTATE RETURNS ARE RISKIER THAN YOU THINK

From January 2000 through April 2020, the worst drawdown for Singapore real estate was over 67 per cent between July 2007 and August 2012, and the worst drawdown for Hong Kong real estate was almost 70 per cent from November 2007 through November 2010. And it is not just Singapore or Hong Kong.

Similar drawdowns occurred for Japan, with over 75 per cent from April 2006 through April 2013. In fact, real estate drawdowns of the United States, Australia, Singapore, Hong Kong, South Korea, Israel, Japan and Germany were all worse than the maximum drawdown from the MSCI All-World Country stock index returns.

In addition, academic research has shown that real estate returns exhibit no outperformance relative to local and global equity market indices. In fact, the research has shown that common factors driving equity markets also drive real estate returns.

WHAT ABOUT PRIVATE REAL ESTATE?

Some may argue that this is not a fair comparison as the real estate assets considered here are real estate investment trusts (Reits), which are packages of real estate that are traded publicly on the stock exchange.

In fact, overall real estate indices, such as the SRX Property Index, have sub-components using prices from private market real estate, which show a rising trend over the long term.

The private non-landed index using data from all regions in Singapore rose from 124.9 in January 2010 to 191.1 in March 2020, a gain of over 53 per cent.

The price returns S&P Singapore Reit index over the same time period rose by 24 per cent. Taking into account Reit dividends, a return of over 103 per cent was generated over the same period.

What makes the comparison between private and publicly traded real estate difficult is that some investors also live in the home, getting a consumption flow in addition to the capital gains. This is certainly not possible with Reit investments.

In this case, the closest Reit comparison is for investors to use dividend income from Reits to rent an apartment.

Which number is the right comparison depends on whether an investor is receiving dividends on their private property investments, whether an investor is actually staying in the private property, and what the maintenance costs of holding the property are.

For example, condos have monthly servicing and homeowner's association fees that must be considered. In addition, selling and buying private real estate involve agents who charge a commission. For example, for non-landed private property, sellers pay an average of 2 per cent commission. This will decrease the 10-year return from 53 per cent down to 50 per cent, a reduction more than the sticker amount of 2 per cent due to compounding.

Another argument from proponents of real estate investing typically argue to just hold on to the asset for a while so that no losses are realised. Therein lies a fallacy.

Just because gains or losses are not realised does not mean they do not exist. In the absence of large trading frictions, investors should react the same way to realised and unrealised gains and losses.

But in practice, this isn't true. A study in behavioural economics and finance spearheaded by Nobel prize winner Richard Thaler at the University of Chicago looks at these types of fallacies that generate predictable price patterns.

One specific example of this fallacy is the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon. Disciplined and quantitative traders can exploit such predictable behaviour to generate consistent returns.

So why the obsession with private real estate? One answer is leverage.

Real estate is one of the few securities that you can purchase for investment with only a 25 per cent down payment and borrowing the remaining 75 per cent in order to finance the portfolio, equivalent to a 4x leverage on the equity put into the purchase.

This means even a 1 per cent increase in the value of the real estate translates to a 4 per cent increase for the initial investment.

Seasoned investors who purchase and flip properties do not pay down the mortgage much and can maintain a high leverage ratio by rotating into new purchases and out of existing positions.

SO WHAT MAKES PRIVATE REAL ESTATE SPECIAL?

In a rational world, illiquid assets - those that cannot be quickly converted into cash - would trade at a lower price as investors consider the situation where they quickly need cash but cannot liquidate.

However, there is one situation where the illiquidity of private real estate may be beneficial.

In this world with imperfect investors who have self-discipline problems, holding on to the asset during temporary bad times and ignoring the public market signals may be beneficial. Just increasing the holding power for investors to stay invested longer is the key.

In this case, the common wisdom to hold on and avoid unrealised losses is not a fallacy as it would be in a rational world, but is indeed wisdom in a behavioural world.

However, this applies to investing in any asset. Long-term investors should also not react much to short-term market movements. But we don't seem to have such "common wisdoms" for equity markets. When equity markets lose 20 per cent, articles get written all around the world calling for people to liquidate their positions and "avoid the big one".

So, if people ask me now what makes real estate special, it seems quite obvious to me. Beyond the leverage, it is the investors.

• The writer is an assistant professor of finance at the National University of Singapore Business School and also a co-founder and head of research at Chicago Global, a quantitative global investment fund.

• The opinions expressed are those of the author and do not represent the views and opinions of the National University of Singapore or Chicago Global.

Congrats!
KDC is my 6th largest position!