560 words
7 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

THE regional and global reopening of international borders and domestic economies looks likely to bode well for business and tourism. But market watchers say there are still more headwinds ahead for Singapore stocks.

"(Singapore's) equity market outlook will depend on how well stocks and sectors deal with supply chain disruptions caused by the Russia-Ukraine war and China's zero Covid-19 policy, uncertainty over the rate of rise in inflation, and the resultant expectations of rapid rises in interest rate hike for the rest of 2022," said RHB analyst Shekhar Jaiswal.

Real estate investment trusts (Reits) is one of the defensive sectors that RHB is banking on -- alongside the consumer, financials, industrials, transport, and manufacturing and technology sectors -- that could potentially benefit from the rising interest rates cycle and provide a foil against rising inflation.

CGS-CIMB analysts Lock Mun Yee and Lim Siew Khee also advocate a "near-term defensive position in Reits" amid expectations that the equity market will remain volatile with "increased external risks".

"In the near term, with inflation accelerating and interest rates rising, we believe investors would look for downside risk protection as well as for real returns," they said.

Lock and Lim note that the Reit sector is trading at a forecast distribution per unit (DPU) yield of around 5.5 per cent for FY2022 -- above the 4.2 per cent yield of the benchmark Straits Times Index.

"With the bond yield curve remaining flat and a strong Singapore dollar, we believe Singapore-listed real estate investment trusts (S-Reits) would likely continue to hold up well," they said. "Furthermore, we project S-Reits to deliver sector growth of close to 6 per cent in FY2022 and a further 3 per cent in FY2023, thanks to organic improvements and contributions from new acquisitions."

While modestly higher inflation could be good for the Reits sector, market watchers warn that persistently higher inflation could mean higher utility costs -- and weigh on distribution.

"But most Reits have a strong dividend yield -- with a 5-year average of around 5 per cent -- which is the most attractive to those seeking an income solution especially when compared to government bond yields of 2.6 per cent and fixed deposit rates of 1 per cent," said Saxo market strategist Charu Chanana.

"Generally speaking, a rising interest rate environment signals strong economic growth and higher inflation -- both of which are key reasons to stay invested in the real estate sector," she added.

Further, DBS analysts Rachel Tan, Derek Tan, Dale Lai and Geraldine Wong note that S-Reits have been stepping up to reduce inflationary pressures from utility costs and interest rates.

"In the Q1 2022 results and updates, we saw S-Reits starting to refinance their near-term debt expiries," the analysts said. "The hedged ratio increased to 77 per cent versus 75 per cent as at end-2021, providing increased defence against rising interest costs."

"While the S-Reits are not spared by the rising interest rate environment, they can still outperform in instances when the yield curve flattens -- (and) the fear of recession sets in -- which we will see in the second half of 2022 to 2023," they added.

SPH Media Limited

849 words
7 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited



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A QUICK glance of headlines surrounding the latest quarterly business updates of Singapore-listed real estate investment trusts (S-Reits) for the period ended March would likely imbue investors with much confidence.

An overwhelming majority of S-Reits posted improvements in key metrics from distributable income (DI), distribution per unit (DPU), net property income (NPI) and occupancy rates to rental reversion or revenue per available room (RevPAR).

On the back of such rosy data, it may be tempting to declare that the sector has left the residual sting of the Covid-19 pandemic behind.

While real estate investment trusts (Reits) in the healthcare, hospitality and retail sectors reported performance metrics that were mostly positive, there were, however, some minor blemishes.

For example, Far East Hospitality Trust (FEHT) saw its gross revenue dip 1.6 per cent for the first quarter ended March as a result of the early termination and non-renewal of leases due to its divestment of Central Square.

Average occupancy across FEHT's hotels portfolio also fell 8.4 percentage points to 67.7 per cent in Q1 due to the cessation of the government contract for isolation purposes at 3 of its hotels.

On a positive note, FEHT's Q1 NPI climbed 4.5 per cent on lower property tax and expenses related to its commercial premises, while its RevPAR rose 15.7 per cent on the back of higher corporate and leisure rates.

The situation, however, was less rosy in the industrial and data centre space, where nearly a third of the Reits reported lower DPUs.

Aims Apac Reit (AA Reit), for example, posted a 4.8 per cent decline in DPU and a 3.8 per cent drop in distributions to unitholders for its second half ended March. This was largely due to the distributions related to the S$250 million perpetual securities issued in September 2021 for the acquisition of Woolworths HQ.

Another industrial Reit, EC World Reit, saw its DPU and distribution to unitholders tumble 9.7 per cent and 9.4 per cent, respectively, for the Q1 ended March. The declines were mainly due to withholding tax expenses and the recognition of 30 per cent of pre-termination compensation.

For some industrial and data centre S-Reits that managed to achieve improved DPU and DI, however, there may be less reason to pop the champagne just yet.

Keppel DC Reit, for example, reported a 0.2 per cent increase in DPU and 5.9 per cent rise in DI for the Q1 ended March, mainly due to recent data centre acquisitions and investment in debt securities. However, the data centre landlord saw its gross revenue dip 0.9 per cent, while NPI was 1.4 per cent lower compared to the year-ago period.

Meanwhile, S-Reits in the office and commercial sectors were mostly bullish -- with a couple of exceptions.

Mapletree Commercial Trust (MCT), for example, reported a 3.4 per cent decline in DPU for the second half ended March, while income available for distribution fell 5.2 per cent and amount available for distribution dropped 3.3 per cent.

MCT's gross revenue was 1.8 per cent lower for H2, partially due to the absence of a net government grant of S$2.7 million recorded in the year-ago period, while NPI fell 3.3 per cent on higher property operating expenses.

OUE Commercial Reit also reported declines across the key metrics, with revenue and NPI down 20.3 per cent and 21.5 per cent respectively for the Q1 ended March, while the amount available for distribution was 15.8 per cent lower.

The declines were mainly due to the deconsolidation of OUE Bayfront's performance post the divestment of a 50 per cent interest in the property in March 2021.

All in all, it is worth noting that the blots in an otherwise stellar quarter for the S-Reits were mostly led by one-off events.

Still, they should serve as reminders that even as the upbeat reopening narrative dominates the headlines in Singapore's -- and the world's -- recovery prospects, it may be wise to adopt a stance of tempered optimism.

While the iEdge S-Reit Index has recovered significantly from the depths of the crash at the start of the Covid-19 pandemic, it is still trading at some 10.6 per cent lower than at the start of 2020.

Indeed, the S-Reits are mostly reporting better operating performance post-pandemic. But investors will do well to keep a close eye on other threats looming on the horizon, including rising interest rates and a prolonged Russia-Ukraine conflict.

SPH Media Limited

1261 words
8 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

"BIGGER is better" has been an underlying factor driving the consolidation of the US real estate investment trust (Reit) market in the 1990s.

Large Reits outpaced the growth of smaller Reits through mergers and acquisitions (M&A). Reits grow assets under management (AUM) by either acquiring new real estate or taking over wholesale real estate portfolios from acquired Reits.

Since the first Reit emerged in Singapore 20 years ago, the Singapore Reit (S-Reit) market has grown exponentially by 155 times from S$734 million in 2002 to S$113.56 billion, equivalent to a compounded annual growth rate (CAGR) of 28.67 per cent. The strong growth momentum of S-Reits, especially in recent years, was driven by a slew of M&As.

S-Reits have become bigger over the years. The average size of S-Reits was slightly below S$1 billion before 2010 and then increased to approximately S$1.4 billion before 2018.

There have been 7 consolidations after 2018, significantly driving up the average size of a S-Reit to around S$2 billion.

In 2020, CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) were merged to form the largest S-Reit - CapitaLand Integrated Commercial Trust (CICT). The merged Reit has a market capitalisation of S$14 billion as of 2022.

The merger of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) was approved at the extraordinary general meetings (EGM) on May 23, 2022. It will lead to the creation of Mapletree Pan Asia Commercial Trust (MPACT), which is the third-largest S-Reit by market capitalisation after the CICT and Ascendas Reit.

S-Reit consolidations

Why do S-Reits follow the US trend in the 1990s of scaling up?

Many Reits chase scale to reap efficiency gains in operations and access to diverse sources of capital at competitive rates. They add value to unitholders through 2 channels, first by generating higher cash flows, and second, by lowering discounting factor (or the capitalisation rate as known in the private real estate market).

Higher cash flows can be achieved by increasing rental revenues and lowering operating costs through efficiency gains in physical real estate operations and management. A lower discounting factor is attained by optimising capital structure and cost of funds, reducing the weighted average cost of capital (WACC) for S-Reits.

Reits that meet certain size and trading thresholds enjoy inclusion onto major indices, which leads to increase in institutional following, and corresponding unit price boost. In equity fundraising (EFR), a higher unit price equates to a lower cost of equity, allowing the Reit to acquire higher quality assets. Thus, a virtuous cycle of expansion can be maintained.

Large Reits enjoy ample economies of scale. Reits could command market power in leasing out their real estate space with large real estate portfolios. For example, a retail Reit owning many shopping malls in town can attract international chained stores to take up anchor space in all the malls. It also has more bargaining power to negotiate favourable leasing terms from these anchor tenants.

On the cost side, large Reits can better reap scale advantages in rationalising processes and manpower to attain savings in operation costs. For example, a big retail mall Reit can negotiate and procure utility contracts below market rates with energy companies. They could also reduce costs by pooling resources from different malls when running advertising and promotional campaigns.

Bigger Reits are more competitive in capital management and are better positioned to take advantage of debt and equity funding for further growth. Banks are more willing to establish long-term banking relationships and extend favourable loan terms to large Reits, deemed preferred clients.

Larger Reits are more liquid in terms of free-float units and trading volume in the stock (public) market, which attract liquidity premiums, especially from institutional investors.

Reits with ample capital reserves can better weather economic and policy headwinds than smaller Reits. With the backing from strong sponsors, Reits could access financing and refinancing facilities, especially during a difficult time.

Amid the Global Financial Crisis in 2008, Fraser and Neave Limited (F&N) acquired a substantial stake in Allco Commercial Reit and a 100 per cent stake in the Reit manager, Allco (Singapore) Limited. F&N, the sponsor, renamed the Reit to Fraser Commercial Trust (FCOT) and helped recapitalise FCOT with the much-needed loan facilities of approximately S$650 million in 2009. FCOT has merged with another Frasers Reit to form Frasers Logistics and Commercial Trust in April 2020.

Are there monies on the table?

Reits should be mindful of unitholders' interests while chasing scale. Do M&As truly create value for them? How can the interests of investors be balanced against those of sponsors and Reit managers to achieve a good outcome?

Many factors may trigger an M&A. Financial distress is one possible factor that could "push" a Reit to find a potential buyer to take over their financial debt. Potential buyers could also be attracted to a target Reit that owns significantly undervalued assets.

M&A is an expensive exercise that may incur professional fees and expenses of between S$15 million and S$35 million. Some asset managers charge acquisition fees between S$8 million and S$15 million in M&A exercises.

The CMT manager waived the acquisition fee of S$111.2 million in the CICT M&A because of the unprecedented circumstances caused by Covid.

Who gains and who loses in an M&A? Past studies in the US have shown that unitholders of target (acquired) Reits enjoy significant positive gains from M&A announcements.

Unitholders of acquiring Reits will also expect managers and sponsors to create value before voting for taking over real estate portfolios of a target Reit. Many institutional investors have strong preferences for purity in asset class or geography, and would eschew blunt expansion without due consideration for synergy.

Acquiring Reits could reap scale economics via M&As. Reit managers usually take over not just a new portfolio of real estate, but in most instances, they will also absorb staff from the target Reits. Therefore, acquiring Reit managers need time to integrate and improve the performance of their enlarged portfolios on the premise that "1 plus 1 is more than 2".

Four of the recent M&As in the S-Reit market involved the merger of Reits controlled by the same sponsors. These Reit M&As pay mostly cash and scrip (units) as consideration in exchange for unitholders' interests in target Reits. Unitholders receiving the merged units as consideration could be worst off if the post-merger prices of Reit units decline.

In the recent MCT and MNACT M&A, the sponsor subsequently offered a cash-only option for MNACT unitholders when the MCT units declined below their notional value in the original offer. Effectively, the sponsor ensured that MNACT unitholders received the promised value. Over time, such investor-friendly acts are essential for S-Reits and the Reit sector to grow and thrive.

Dr Chew Tuan Chiong is a Senior Adjunct Research Fellow at the Institute of Real Estate and Urban Studies (IREUS), National University of Singapore. Professor Sing Tien Foo is the Director at the same institute and Head of the Department of Real Estate at the National University of Singapore. The views and opinions expressed here are those of the authors and do not represent the views and opinions of the National University of Singapore, its subsidiaries or affiliates.

SPH Media Limited

Emelia Tan
602 words
13 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

SINGAPORE lists 2 actively traded Healthcare related S-Reits -- ParkwayLife Reit and First Reit.

Healthcare Reits invest in income-producing real estate primarily used for healthcare related purposes including but not limited to hospitals, medical offices, outpatient facilities and nursing facilities.

As such, these Reits may be regarded as an option for investors to gain exposure to the growing and resilient healthcare sector.

ParkwayLife Reit is one of the largest listed healthcare Reits in Asia with a portfolio of 56 properties at S$2.29 billion in size.

The Reit has 64.6 per cent of its portfolio in hospitals and medical centres, and 35.4 per cent in nursing homes, across Singapore (64.3 per cent), Japan (35.4 per cent), and Malaysia (0.3 per cent). ParkwayLife Reit reported 2.3 per cent year-on-year higher gross revenue for Q1 2022, arising from the3 properties it acquired last year and higher rent received from Singapore hospitals.

The Reit noted that its distribution per unit (DPU) has grown steadily at a rate of 122.8 per cent since its listing.

In its Singapore portfolio (hospitals include Mouth Elizabeth Hospital, Parkway East Hospital, and Gleneagles Hospital), its master lessee Parkway Hospitals Singapore, is a wholly owned subsidiary of IHH Health which is one of the world's largest healthcare networks with 80 hospitals in 10 countries.

Its latest renewal term of 20.4 years runs from Aug 23, 2022 to Dec 31, 2042, with an option to renew for a further 10 years.

It has a triple net lease arrangement which means that the Reit does not bear property taxes, property insurance, property operating expenses and is unaffected by inflated-related escalating expenses.

In its Japan portfolio, it owns 52 nursing home properties with a weighted average lease term to expiry of 11.79 years and a diversified tenant base across 28 nursing home operators.

Based on its existing lease arrangements, about 95.2 per cent of its Japan portfolio is downside-protected.

First Reit has a portfolio of 31 properties comprising 16 in Indonesia, three in Singapore and 12 in Japan with a combined size exceeding S$1.2 billion.

Its Reit manager is 60 per cent owned by OUE and 40 per cent owned by OUE Lippo Healthcare Limited (OUELH).

As such, the Reit has rights-of-first refusal to a pipeline of properties from PT Lippo Karawaci Tbk and OUELH.

First Reit in its Q1 2022 business update reported 34.9 per cent year-on-year growth in net property and other income and 1.5 per cent growth in DPU paid (0.66 Singapore cents for Q1 2022).

Following its maiden entry into Japan with the acquisition of 12 nursing homes, First Reit noted that it has successfully taken the first step of its First Reit 2.0 Growth Strategy to expand into developed markets and diversify geographical risk.

First Reit's Indonesia hospital operator, PT Siloam International Hospitals Tbk reported stable quarter-on-quarter performance for Q1 2022 despite the impact of the Omicron variant.

First Reit's nursing homes in Japan and Singapore also noted high occupancy rates and the Reit remains confident of the resilient healthcare market in its operating markets. SGX RESEARCH

The writer is a research analyst at SGX. For more research and information on Singapore's Reit sector, visit sgx.com/research-education/ sectors for the monthly S-Reits & Property Trusts Chartbook. Source: SGX Research S-Reits & Property Trusts Chartbook.

SPH Media Limited

Leslie Yee
1062 words
13 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

Inflation is rising globally and in Singapore. Core inflation in Singapore – which excludes accommodation and private transport costs – jumped to 3.3 per cent in April, up from 2.9 per cent in March. This is its highest level since early 2012.

People are looking for assets to hedge against inflation. Physical property could be one such asset. In an inflationary environment, rental rates may rise. With higher construction costs, developers may pass cost increases in building homes to end-buyers.

The nominal value of money gets eroded faster when inflation is high, so putting money into physical assets such as homes, which have historically appreciated over the long term, can make sense.

Demand at recent new private home launches here is strong. Bukit Sembawang Estates' condominium project Liv @ MB in the Mountbatten area sold over 75 per cent of its 298 units, at an average selling price of S$2,387 per square foot (psf), at its launch weekend. Piccadilly Grand, a joint residential project by City Developments Limited and MCL Land, which is linked to Farrer Park MRT station, sold 77 per cent of its 407 units at an average selling price of S$2,150 psf during its launch weekend.

Inflation effects

But, investing in property may not be effective in combating the inflation that we are facing today. While the inflation that the world is confronting started due to the rise in the supply of money and credit to fight the Covid-19 pandemic, it is now driven by cost increases, including that caused by supply chain disruptions due to events such as the war in Ukraine.

Retail landlords can gain from rising inflation. For selling the same quantity of goods, a retailer's turnover rises if prices of goods rise. Should retailers enjoy higher turnover, they can in turn potentially afford to pay higher rent on their shop leases. Also, landlords may enjoy an immediate pickup in rent from retail leases that have a turnover component, due to higher sales of tenants.

But the picture for retail landlords is complicated when inflation is driven by higher costs of utilities and food. Where operating costs increases cannot be fully passed on to tenants, profit margins of mall owners may take a hit.

With inflation and a tight labour market, rising wages can support consumer spending power. But, consumers may be poorer in real terms if wage hikes cannot keep pace with inflation.

Also, those who are not in employment may not benefit from higher wages. Ultimately, many consumers may cut their spending on goods and services, which will affect turnover of retailers.

Furthermore, the propensity to save instead of consume could rise if consumers save more to cope with expectations of higher inflation.

In property segments such as offices, warehouses and factories, inflation may boost turnover of businesses, which can result in better ability to pay rent. Businesses that enjoy bonanzas from higher prices of commodities, may be happy to spend more on prime office spaces and other real estates needs.

But, higher borrowing costs due to central banks raising interest rates to fight inflation can hurt the cash flow and profitability of many businesses. Such businesses may look to cut real estate related costs.

Recession risk

Perhaps, the big risk to various property segments is that of an economic recession.

When speaking to media group Nikkei on May 20, 2022, Prime Minister Lee Hsien Loong said the global economy is currently facing high inflation, and there is a risk that measures taken to combat this problem may lead to a recession - but action must be taken nonetheless, lest inflation become a very serious problem for the world.

PM Lee noted that as inflation is now high, drastic measures are needed to bring it back down and prevent inflationary expectations from taking root.

"It is very difficult to do that and have a soft landing. There is a considerable risk of doing what you need to do, but as a result, provoking a recession," said PM Lee.

Should the global economy tank, many businesses will be hurt, as falling demand crimps revenue and profitability. Demand for space from businesses will in turn be negatively impacted.

As it stands, many existing homeowners and potential home buyers here are facing rising cost of home loans. The 3-month compounded Singapore Overnight Rate Average has risen from around 0.2 per cent at the start of 2021 to around 0.6 per cent as at Jun 10, 2022. Monthly instalment of a S$1 million home loan is around S$190 higher for a 25-year home loan with annual interest rate of 1.6 per cent versus 1.2 per cent.

Floating rate borrowers face the risk that interest rates may continue rising going forward. On the other hand, getting a fixed rate loan can be costly, as fixed rate loans are generally much more expensive than floating rate ones.

And existing stretched affordability of private homes is worsened when inflation eats into household disposable income, thus making servicing of home loans more challenging.

What could really rattle the residential property market is the risk of recession, as this can lead to job losses and wage cuts. Uncertainties around jobs will invariably hurt home buying sentiment and the ability to service home loans.

Certainly, if inflation caused by supply shortages is then followed by a hard landing for the global economy, prices of many assets, including physical property, will be hurt

Overall, real estate is likely to be somewhat effective as an inflation hedge - commercial and industrial landlords may enjoy some up tick in rental revenue as some tenants see turnover rise amid higher inflation. There can also be resistance to home prices falling as the cost of building homes rises.

Yields that are in the low single digits across many property asset classes in Singapore trump what one gets by putting money in Singapore dollar fixed deposits. With real estate investment trusts (Reits), one may get distribution yield of 5 per cent or more.

In sum, it is worth considering putting money in physical property here or proxies such as Reits to hedge against inflation. However, it is a tall order for real estate to hedge effectively against the inflation that faces the global economy today.

SPH Media Limited

Tan Nai
508 words
15 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

STAPLED securityholders of Frasers Hospitality Trust (FHT) should accept the privatisation offer from Frasers Property as it provides an attractive exit valuation, Maybank said.

In a report on Monday (Jun 13), analyst Chua Su Tye noted that the offer consideration of S$0.70 per stapled security already factors in recovery prospects for the real estate investment trust (Reit).

The offer values FHT at 1.07 times its price to net asset value. This is compared to FHT's 0.86 times average multiple since its initial public offering, 0.9 times its peers and 1.04 times for precedent privatisation of Singapore Reits (S-Reits). The consideration is also 27 per cent higher than Maybank's target price on the counter at S$0.55, and should allow stapled securityholders to exit at a premium of between 6 and 52 per cent, the analyst said.

Chua noted an uneven recovery trajectory for the hospitality Reit's distribution per stapled security amid rising macro headwinds.

He expects FHT's growth trajectory for its revenue per available room will remain uneven, with opening borders adding tailwinds to demand recovery.

He also expects the lack of scale for FHT -- which is among the smallest S-Reits by market capitalisation -- will likely limit acquisition growth opportunities, while the counter's low trading liquidity likely needs to climb over 4 times to be considered for index inclusion.

Chua suggested stapled securityholders accept the offer and look for investment opportunities in other hospitality Reits instead.

He recommended CDL Hospitality Trust as the best proxy for the hospitality sector recovery, and Far East Hospitality Trust for its pure-play Singaporean assets.

Frasers Property Hospitality Trust Holdings, a wholly-owned subsidiary of Frasers Property, on Monday proposed to privatise FHT through a trust scheme of arrangement, in a deal that will shave over S$1.3 billion worth of value from the local bourse.

The offeror plans to acquire all of FHT's stapled securities -- other than those held by TCC Group Investments and Frasers Property and its subsidiaries -- at a scheme consideration of S$0.70 each in cash.

In another report on Monday, CGS-CIMB analyst Lock Mun Yee noted that the transaction is in line with Frasers Property's long-term strategy, and will allow the company to increase its investment in hospitality assets.

Frasers Property should also be able to leverage on its deep understanding of FHT's assets and adopt a disciplined approach to drive performance, Lock said.

Stapled securities of FHT closed at S$0.70 on Tuesday (Jun 14), up S$0.01 or 1.5 per cent.

SPH Media Limited

1108 words
15 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

SOME investors will almost certainly gripe about not being offered a high enough price. And, there could be some hand-wringing about the local market losing good listings because of pitifully low valuations.

Yet, the proposed privatisation of Frasers Hospitality Trust (FHT) by its sponsor group is a positive development for holders of its stapled securities as well as Singapore's real estate investment trust (Reit) sector.

On Jun 13, Frasers Property (FPL) said it plans to take FHT private at S$0.70 per stapled security.

The announcement of the deal included a frank acknowledgement that FHT -- which owns 14 assets across 9 cities in Asia, Australia and Europe -- has failed to perform well.

Despite a series of acquisitions and asset enhancement initiatives, FHT's net asset value (NAV) and distributions per stapled security (DPS) have been in a steady decline -- even before the pandemic began.

This translated to a weak market valuation. Since its initial public offering (IPO) in 2014, FHT had traded at an average discount to its NAV of 19 per cent. Over the 3-year period to Apr 7, FHT traded at an even bigger discount to NAV of 25 per cent.

From its IPO until 2019 -- before Covid-19 began -- FHT traded at a relatively high average DPS yield of 7.2 per cent. Its hospitality peers traded at a yield of 6.4 per cent.

To their credit, FHT's managers and sponsor group have chosen to do something about this languishing Reit. And, they are taking a course of action that involves the sponsor group coming up with a significant amount of cash.

Stumping up cash

On Apr 8, the managers of FHT said they were reviewing strategic options to enhance and unlock value.

The market price of FHT's stapled securities had begun a steep ascent in March, in tandem with peers Ascott Residence Trust (ART) and CDL Hospitality Trusts (CDLHT).

Informing the market of the value unlocking intentions arguably helped FHT's price stay aloft and ensure that market expectations were factored into decisions that followed.

FHT's managers explored continuing with their existing strategy; expanding the FHT platform via acquisitions or mergers; pursuing a strategic sale of its assets; and the sale of the FHT platform to a third-party or its own sponsor.

Under the proposal to take FHT private, FPL will acquire all its stapled securities other than those it and TCC Group Investments currently hold.

TCC holds more than 707.3 million (or 36.7 per cent) of FHT's total outstanding 1.9 billion stapled securities. FHT holds almost 497 million (or 25.8 per cent) of FHT's stapled securities.

At S$0.70 each, the nearly 721.8 million FHT stapled securities that FPL plans to acquire will cost it S$505.3 million.

The money FPL is stumping up will enable long-suffering holders of FHT's stapled securities to cash out at 1.07 times book value. Investors who bought FHT's stapled securities at its IPO in 2014 and subscribed to its rights issue in 2016 would walk away with a total return of 22.7 per cent.

Over the same period, ART returned 48.9 per cent. CDLHT and Far East Hospitality Trust (FEHT) returned 20.7 per cent and 7.9 per cent, respectively.

Giving investors choices

This does not necessarily mean holders of FHT's stapled securities should vote in favour of the deal, though.

FPL would not be taking FHT private if it did not see significant value in the Reit -- even at S$0.70 per stapled security.

With the pandemic receding, some investors may be betting that FHT's market value will continue to improve. During most of 2018 and 2019, FHT's stapled securities traded north of S$0.70.

Some long-term investors might also be upset that FPL is paying less than FHT's IPO price of S$0.88.

Nevertheless, the proposal currently on the table gives investors choices they did not previously have. They can vote in favour of the deal and eventually collect S$0.70 per stapled security, or vote against the proposal and hold on.

Alternatively, they can take advantage of FHT's currently elevated market price -- it closed at S$0.70 on Tuesday (Jun 14) -- to immediately get out and hunt for alternative opportunities amid the current sell-off.

Raising the bar

The larger point is the proposal to take FHT private might come to be viewed as a playbook of sorts for how sponsor groups should reposition a failing Reit.

Over the past few years, sponsor groups have merged Reits within their stables to enlarge them and widen their investor following. But these transactions came under fire for being unfair to unitholders of one Reit or the other.

More than 2 years ago, some unitholders of Frasers Commercial Trust felt they were getting the short end of the stick in its merger with Frasers Logistics & Industrial Trust.

FPL seemed content to stay out of the fray, though. And, it wasn't the only one.

When ESR Cayman and Ara Asset Management merged, they left it to ESR-Reit and Ara Logos Logistics Trust to organise their own merger to solve the problem of their overlapping mandates.

At one point, investors were told the combined sponsor group might sell the manager of one of the Reits if they failed to merge -- a move that would have created a lot of uncertainty for unitholders.

Mapletree Investments set a precedent with its hands-on approach in quelling investor discontent with the merger of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT).

It underwrote a S$2.2 billion preferential offering by MCT to make it possible for minority unitholders of MNACT to receive their consideration in cash instead of new MCT units.

FPL's decision to offer investors an opportunity to cash out of FHT at a premium to book value may now further raise the bar, and investors may soon look askance at sponsor groups of Reits that do not garner decent market valuations.

Prominent Singapore-listed Reits currently trading at discounts of more than 20 per cent to book value include CapitaLand China Trust, Starhill Global Reit, FEHT, IReit Global and United Hampshire US Reit.

The capacity and willingness to offer investors generous cash exits from their failing Reits ought to be a hallmark of a "good" sponsor.

SPH Media Limited

1199 words
18 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

A real estate investment trust (Reit) is an investment vehicle that pools capital together to invest in income-generating real estate assets, which are illiquid, immobile, and lumpy. A Reit is structured to facilitate efficient flow-through of income generated from physical real estate directly to investors. The distributable earnings are tax-free at source in Singapore and other Reit markets like the US, Australia, and Japan.

Singapore Reits (S-Reits) invest in real estate, which must make up at least 75 per cent of the portfolio. At the outset, S-Reits focus on real estate investments by type, leveraging experience and expertise in a particular sector and local market.

The "pure-play" S-Reits appeal to institutional investors who add new real estate market types not yet included in their portfolios. S-Reits also give retail investors opportunities to invest in commercial real estate, such as Vivo City, Suntec City, Raffles City, etc, which will otherwise not be possible with their limited capital.

As local sponsors gained confidence from the early S-Reit listings, they set up new Reit vehicles that hold overseas real estate. These Reits listed before the global financial crisis in 2007 are broadly divided into 2 groups.

The first group holding geographically diversified real estate in the logistics, warehouse, and hospitality sectors includes Frasers Logistics & Commercial Trust (previously known as Frasers Logistics & Industrial Trust) and Ascott Residence Trust.

The second group holding sector-focused real estate outside Singapore includes CapitaLand China Trust (previously known as CapitaLand Retail China Trust), Lippo Malls Indonesia Retail Trust, Ascendas India Trust, and First Reit.

As the S-Reit market grows and gains reputation, more foreign Reits package overseas real estate portfolios and list them on Singapore's bourse. IReit Global was the first pan-European real estate portfolio Reit listed on Singapore's bourse in August 2014. City Developments acquired half of the stake in IReit's asset manager from Tikehau Capital, a French alternative asset management group, in 2019.

China sponsors followed the bandwagon with the listings of 4 China-focused Reits on Singapore's bourse, including BHG Retail Reit in 2015, followed by EC World Reit in 2016, Dasin Retail Trust in 2017, and Sasseur Reit in 2018. In recent years, Reits with real estate assets located farther away in the European and US markets emerged to tap capital via listings on Singapore's bourse. The small size of the local real estate market pushed more local Reits to pursue growth through acquisitions of properties outside Singapore. More S-Reits looked abroad for promising investments. Foreign real estate acquisitions hit a record high of S$11.8 billion, accounting for about 91 per cent of the total assets acquired in 2021.

Today, only 3 of 43 Singapore-listed Reits (that is, Far East Hospitality Trust, Frasers Centrepoint Trust, and Sabana Industrial Trust) hold 100 per cent of Singapore real estate in their portfolios.

The market seems to have significantly under-valued overseas real estate relative to those in Singapore. The charts show that Reits holding overseas real estate were priced at significant discounts to book values, despite offering high dividend yields. The market price to book value ratio and the dividend yield of the overseas-centric Reits average at 0.766 times and 7.08 per cent as of May 20, 2022, compared to 1.054 times and 4.59 per cent, respectively, for Reits with some exposure to local real estate markets.

The undervaluation of overseas-centric Reits could be explained from the perspectives of diversification strategies, local bias in stock valuation, and control spans of Reit managers.

Geographical diversification

Geographically diversified real estate is not always effective in reducing systematic risks, especially in markets where real estate prices are highly correlated. Some Reits choose strategies to avoid value dilution by adding real estate of the same type from other countries. Commercial and retail Reits with a high concentration of real estate in Singapore include Mapletree Commercial Trust, Frasers Centrepoint Trust, OUE Commercial Trust, and CapitaLand Integrated Commercial Trust. These Singapore-focused Reits appeal to institutional investors who already hold diversified real estate portfolios outside Singapore. But Reits with geographically diversified real estate may not fit into the diversification strategies of these investors. Diversification outside Singapore may not add value to some Reits.

However, other Reits in the hospitality sector, such as Ascott Residence Trust and Frasers Hospitality Trust, and those in the logistics and warehouse business, such as Frasers Logistics & Commercial Trust, and Mapletree Logistics Trust, hold real estate in different markets for strategic reasons, not for diversification motives. Firms need to take up warehouse and logistics space across countries to support the supply chain operations of businesses. Diversifying real estate outside Singapore creates a competitive edge and adds value to these Reits' portfolios.

Local bias

Demand for physical real estate space is mainly derived from local economic activities. Shopping mall managers need to know not just purchasing power, but also the culture and taste of residents in local markets. "Local bias" of investors and analysts adversely distorts the valuation of foreign Reits. Investors, especially retail investors unfamiliar with overseas real estate, are more hesitant to invest in foreign Reits. Stock analysts are also more reluctant to cover foreign Reits, especially those owning real estate in far-away markets.

Control spans

Reit managers could overstretch their resources and control spans when remotely managing real estate portfolios distributed across different regions. A local management team played an instrumental role in supporting local operations of foreign Reits, especially during the periods when the Covid-19 border controls were in place. For example, Cromwell European Reit establishes property management offices in 17 cities across 11 countries to build long-term relationships with tenants and identify new investment opportunities in foreign markets.

Foreign Reits could trail local rivals in generating value for overseas real estate portfolios, which in turn causes the undervaluation of their foreign assets.

Reits that outsource management and property services of foreign properties to third-party managers may not be able to compete effectively with their local rivals. It is also harder for Reits to scale up their operations and develop a competitive edge without the support of a local team.

The high dividend yield and the underpricing of overseas real estate put a lid on the growth of foreign Reits. While foreign Reits find it a disincentive to inject new assets into their portfolios, local Reits could still leverage the yield gap between local and foreign real estate to expand overseas.

However, they should not pursue overseas growth strategies at the expense of diluting the values of existing Reit unitholders.

They must balance the growth against possible risks in holding foreign real estate in their portfolios.

Professor Sing Tien Foo is director of the Institute of Real Estate and Urban Studies (IREUS), and head of the Department of Real Estate at the National University of Singapore. The views and opinions expressed here are those of the author and does not represent the views and opinions of the National University of Singapore, its subsidiaries, or affiliates.

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CANDACE LI
486 words
19 June 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

THE ongoing merger of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) is on track to create one of the top 10 largest Reits in Asia.

The merged entity, Mapletree Pan Asia Commercial Trust (MPACT) will have an estimated market capitalisation of over S$10 billion and will hold a diversified portfolio of 18 commercial assets across Singapore, China, Hong Kong, Japan and South Korea, with assets under management (AUM) of approximately S$17.1 billion.

The Reit managers believe that the merger will provide a pathway for growth by merging MCT, a Singapore-focused Reit, with MNACT, a ready and established platform that has scale and reach in North Asia.

MCT said that this will in turn bring about immediate financial benefits and access to attractive footholds into North Asia supported by established local operating teams with extensive experience and a strong track record.

Other key benefits cited by the Reits include enhanced financial flexibility to pursue more growth opportunities such as larger acquisitions and capital recycling opportunities, increased liquidity and index representation, enhanced geographic diversification, reduced single asset concentration and improved tenant diversification as well as immediate financial benefits in terms of distribution per unit (DPU) and net asset value (NAV) accretion on a historical pro forma basis.

Post-merger, MPACT will hold best-in-class assets such as Festival Walk in Hong Kong, Mapletree Business City and VivoCity in Singapore.

The Reit managers believe that together, these will improve overall cash flow stability and resilience through market cycles.

MPACT will host major tenants with global businesses such as Google, BMW, Seiko, HP Japan and NTT UD.

Together, the top 10 tenants by gross rental income (GRI) will contribute 23 per cent of its GRI post-merger. This is down from MCT's 27.7 per cent and MNACT's 37.7 per cent, reducing income concentration.

Unitholders of MCT and MNACT have voted in favour of the merger last month.

The merger will be effected through the acquisition by MCT of all the issued and paid-up units of MNACT by way of a trust scheme of arrangement.

During the election period, each MNACT unitholder is entitled to choose only one form of scheme consideration: scrip-only, cash-and-scrip or cash-only options. The cash-only consideration will be the default form of the scheme consideration.

Based on indicative dates announced by the Reit managers, the election period is expected to run from Jun 15 to 29 while the merged entity is expected to begin trading on Jul 29.

MNACT's estimated date of delisting will be on Aug 3.

The writer is a research analyst at SGX. For more research and information on Singapore's Reit sector, visit sgx.com/research-education/sectors for the monthly S-Reits & Property Trusts Chartbook. Source: SGX Research S-Reits & Property Trusts Chartbook.

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Short seller Jim Chanos is betting against “legacy” data centres that now face growing competition from the trio of tech giants that have been their biggest customers.

Chanos, who remains best-known for predicting the collapse of energy group Enron two decades ago, is raising several hundred million dollars for a fund that will take short positions in US-listed real estate investment trusts.

“This is our big short right now,” Chanos said in an interview. “The story is that although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centres.”

Data centres owned by groups such as Digital Realty Trust and Equinix are vast warehouses of servers that power large swaths of the internet.

The growth in demand for data centres has been a big theme for institutional investors, who are seeking to tap into the global expansion of cloud computing. Last year $915bn alternatives manager Blackstone bought QTS Realty Trust for around $10bn, at the time the largest deal in data centre history.



Mike Forman, managing director of Blackstone Real Estate, said in February that the deal was designed to capitalise on “exponential” growth in data creation and storage requirements. “‘The cloud’ is not literally in the clouds; it is in physical datacentre assets. This all translates into unprecedented demand for data centres that is expected to grow at double-digit rates over the next decade in the US and internationally.”

The three biggest cloud providers, Amazon Web Services, Google Cloud and Microsoft Azure, are by far the largest tenants of data centres. Chanos’ thesis is that these three “hyperscalers” prefer to build data centres to their own design rather than moving into existing ones; and when they do outsource, they typically offer low returns to their development partners. Chanos also said he believes that the real estate investment trusts are overvalued and are in for a period of declining revenue and earnings growth.

“The real problem for data centre Reits is technical obsolescence,” said Chanos. “Their three biggest customers are becoming their biggest competitors. And when your biggest competitors are three of the most vicious competitors in the world then you have a problem.”

Chanos has built a career out of trying to identify corporate disasters-in-the making. In 2020 he made $100mn from shorting the Germany payments company Wirecard, which filed for bankruptcy that year after admitting that €1.9bn of its cash probably did “not exist”. But he has also been burnt by a high-profile short position in Elon Musk’s electric carmaker Tesla, whose share price has soared.

The past decade has been a challenging one for short sellers, as trillions of dollars of central bank stimulus turbocharged a bull market for US equities and lifted asset prices indiscriminately across the board. Chanos has struggled to raise money in this environment: the firm’s assets peaked at around $7bn after 2008 when its short-only Ursus fund — named after the Latin for “bear” — gained 44 per cent net of fees, and have been slowly declining since then. The firm now runs around $500mn.

In 2020 Chanos sold a minority stake in the management company to boutique investment firm Conlon & Co. Since then he has hired a team of options traders to help structure its short positions and rebranded Kynikos Associates, the investment firm he launched in 1985, as Chanos & Company.

Chanos said that years of soaring equity valuations have made investors complacent. “One of the things that amazes me is how sanguine inventors are,” he said. “People just shrug their shoulders and don’t seem to notice where equity valuations are today versus historically and that there are so many flawed business models. It’s a little bit baffling that no one seems to think they need financial insurance because it’s pretty cheap. It’s another reason to be more cautious — no one is beating down the door of short sellers these days.” 

Tech stocks have been pummeled this year as investors grapple with higher inflation and interest rates. This has been a boost to Chanos, who has described the current environment as “the dotcom era on steroids,” luring investor capital into lossmaking unicorns, special purpose acquisition companies, cryptocurrencies and non-fungible tokens.

This year Ursus is up about 30 per cent, compared with a fall of more than 25 per cent for the technology-heavy Nasdaq Composite share index. Two of the biggest contributors to the fund’s performance have been its short positions in cryptocurrency exchange platform Coinbase, and online used car retailer Carvana, both of which have suffered steep losses. Meanwhile a “tail risk” strategy, designed to protect investors against extreme events, is up more than 200 per cent in the same period.

Chanos believes that as the market cycle turns and a sell-off in stock markets continues, it will be a fertile environment for short sellers: “We’ll be feasting on the returns of these stock ideas for years — very similar to the post-dotcom era.” 

Additional reporting by Tabby Kinder and Kaye Wiggins

766 words
5 July 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

REAL estate investment trusts (Reits) have been pummelled by fears of rising interest rates, even as effects of the Covid-19 pandemic continue to linger.

The FTSE EPRA Nareit Developed Index, a global Reits benchmark, saw total returns slide to negative 18 per cent for the first half of 2022.

This comes as the US Federal Reserve wages war on inflation with a series of interest rate hikes.

Most recently, in June, the Fed raised the federal funds rate by 75 basis points to 1.5-1.75 per cent -- its biggest hike since 1994 -- which sent investors running for the hills.

The way DBS analyst Derek Tan describes it, the second quarter had been a period of "maximum fear".

However, he believes investors should be looking to add at current prices and valuations as we move into the second half of the year.

"In general, we believe that the Reits sector is bottoming out given that we are now close to the end of the most aggressive rate hike momentum by the Fed," Tan told The Business Times.

The second half of 2022, Tan opines, will see a more modest rate hike momentum that is more data-driven.

Amid the global market uncertainties, market watchers note that Singapore Reits (S-Reits) are in a better position than their global counterparts.

S-Reits have, in fact, been significantly more resilient and outperformed the global markets so far this year. Compared to the steep decline for the global Reits benchmark, the iEdge S-Reit Index in H1 generated flat total returns.

"We believe the Singapore market is slightly better positioned in terms of economic growth backed by strong government support policies, full reopening of the economy and capturing the shift in demand arising from strict Covid zero policies in North Asia," RHB analyst Vijay Natarajan told BT.

For the second half, Reits in the office, suburban retail and industrial sectors could be potential beneficiaries from "structural growth trends," the analysts say.

Both Tan and Natarajan point out that Reits with a Singapore office focus are likely to benefit from a lack of supply even as more firms are seen setting up their headquarters here.

In part, this is likely to be driven by "increased demand from tech and co-working firms and a shift in office demand in Hong Kong", Natarajan said.

Meanwhile, market watchers also favour the retail Reits -- particularly those with suburban properties.

While suburban malls had been resilient amid pandemic-related lockdowns and changing shopper behaviour, there are no signs yet that these malls outside of the city centre will see their strong performance taper off due to the reopening of borders and the return to office.

Tan noted that suburban retail sales appear to be "sticky" at close to 10 per cent above pre-Covid levels.

Veteran Reits investor Gabriel Yap, chairman of investment firm GCP Global, said the Singapore retail Reits are displaying "strong pricing power" after showing resilience through Covid-19.

"The pricing of the Mercatus portfolio sale could set a new higher benchmark for retail assets, especially those in locations next to MRT stations and serve a commanding suburban population," Yap added.

BT in June reported that Mercatus Co-operative, a unit of NTUC Enterprise, is putting up a bundle of 4 of its suburban retail properties in Singapore for sale with an expected price tag "in excess of S$4 billion".

The 4 retail malls are Jurong Point, AMK Hub, Mercatus' half-stake in Nex, and some 110,000 sq ft of strata space in Thomson Plaza, which is branded as "Swing By @ Thomson Plaza".

At the same time, the analysts believe the industrial Reits could offer the best defensive plays under the uncertain current market conditions.

"Data-points such as manufacturing growth and the Purchasing Managers' Index (PMI) still point to expansionary demand in the Singapore industrial sector," Natarajan said.

For now, however, all eyes are on whether the central banks are able to dodge a potential recessionary scenario.

"The key challenge that investors must watch out for is the persistent inflationary pressures and whether central banks are able to tackle inflation by raising interest rates without inflicting too much damage to economic growth," Natarajan added. "If central banks are able to achieve a soft landing by controlling inflation without severely damaging growth, we see more upside potential for Reits."

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Jude Chan
816 words
5 July 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

HEADING into the second half of 2022, investors should focus on real estate investment trusts (Reits) that can deliver sustainable growth in the near to mid term.

"Risk of interest rates impacting distributions is well flagged out, but given the way we see base rates increasing, we believe that the actual impact could be a tad more than expected," said DBS analyst Derek Tan.

Against this tough backdrop, it is important that investors focus on Singapore Reits (S-Reits) with the potential of delivering growth in their distribution per unit and net asset value. On top of that, Tan said investors should keep an eye out for S-Reits with low refinancing risks.

Analysts who spoke to The Business Times pointed to Reits in the Singapore office, suburban retail and industrial sectors as among those that could potentially benefit from "structural growth trends" going into H2.

"We like the office sector, so our favourite (S-Reit pick) would be Keppel Reit," Tan said.

For one, the analyst sees Keppel Reit as a purer play to the Singapore office sector. "(It has a) robust outlook, coupled with minimal risk to refinancing and operational cost challenges," he added.

According to SGX Research, Keppel Reit was one of the top 5 S-Reits that booked the highest net institutional inflows in the first half of 2022, proportionate to their current market capitalisation.

More than three-quarters of Keppel Reit's S$9 billion portfolio as at December 2021 was located in Singapore. It also held assets in Australia and South Korea.

For FY2021 ended December, Keppel Reit reported a 31.4 per cent jump in net property income (NPI) attributable to unitholders to S$155.8 million.

Distributable income rose 9 per cent to S$212.1 million, while distribution per unit (DPU) was up 1.6 per cent to S$0.0582.

Units of Keppel Reit closed at S$1.09 on Monday (Jul 4), reflecting a yield of 5.3 per cent based on its FY2021 DPU.

Meanwhile, RHB analyst Vijay Natarajan favours Ascendas Reit as his top Reit pick.

"Ascendas Reit is the largest industrial S-Reit and a good proxy to the Singapore industrial segment – which accounts for 60 per cent of its assets," Natarajan said. "This, in our view, offers the best mix of defensive cum growth potential."

In addition, Natarajan said Ascendas Reit's trading at around 5.5 per cent yield is "attractive", with most downside risks already buffered in.

Ascendas Reit - the first and largest locally listed industrial Reit - had S$16.3 billion in assets under management as at Dec 31, 2021. Its portfolio comprises some 220 properties across the developed markets of Singapore, Australia, the US, UK and Europe.

Ascendas Reit reported a 16.9 per cent rise in gross revenue to S$1.2 billion for FY2021, while its NPI climbed 18.6 per cent to S$920.8 million.

The Reit posted a 3.9 per cent increase in DPU to S$0.15258. Based on its closing price of S$2.87 on Jul 4, this translates to a yield of 5.3 per cent.

On the retail front, Natarajan said the potential accretive acquisition of the Mercatus suburban mall portfolio could be a key catalyst for Frasers Centrepoint Trust (FCT).

"We see a good possibility of FCT teaming up with its sponsor to acquire the 4 suburban retail assets from Mercatus Co-operative," he said in a recent report. "(This) in our view presents a good strategic fit to FCT's portfolio and could further boost the Reit's standing as a dominant suburban mall player in Singapore."

As at end-September 2021, FCT's portfolio comprised 9 retail malls and an office building located in the suburban regions of Singapore, with assets under management of around S$6.1 billion.

For FY2021 ended September, FCT's gross revenue more than doubled to S$341.2 million, while NPI soared 122.4 per cent to S$246.6 million.

DPU for FY2021 came in 33.7 per cent higher at S$0.12085. Units of FCT closed at S$2.26 on Jul 4, representing a yield of 5.3 per cent based on its FY2021 DPU.

Aside from FCT, DBS's Tan believes that the Mercatus sale is likely to also attract other local property players. These include fellow S-Reits CapitaLand Integrated Commercial Trust (CICT) and Lendlease Global Commercial Reit (LREIT), as well as property developers City Developments and Far East Organization.

"This transaction is expected to support capital values for retail malls in the suburban space, with selected malls in CICT, FCT, and LREIT to benefit," Tan said in a recent report. "As such, we anticipate it to support valuations, implying that net asset valuations (NAVs) should remain resilient."

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Vivien Ang
1131 words
5 July 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

The real estate investment trust is staying on the green path – and taking as many as it can with it

Before they call it a night, FairPrice staff working at the Jem outlet will place non-organic waste items, which include plastic packaging and carton boxes, at a designated collection point for recycling.

This is an act of commitment by both the Jem mall tenant and landlord Lendlease Global Commercial Reit (LReit) in their joint effort on a green journey.

Joelle Chen, sustainability director of Lendlease Singapore – the parent of LReit – said: "It is important for buildings to be green as compliance is now more stringent. For asset managers who are already on the journey, this ensures that the buildings they manage are always top performing. The cost of non-compliance involves carbon taxes levied on large emitters such as energy-generation companies. Eventually, for poor performing assets that are not green rated, it would mean higher energy cost."

Jem is the crown jewel of LReit's green buildings, with features such as sky terraces that wrap every alternate office floor, creating walls of green. Its vertical green walls also provide shade, cool interiors, and help buffer the mall from traffic noise.

All this is on top of the mall's energy conservation practices – such as a highly efficient air-conditioning system, regenerative lifts and extensive use of LED lighting. They make it possible for Jem to cut down on energy consumption by about 13 gigawatts per hour (GWh) annually – equivalent to the power used by about 2,400 public housing flats each year.

And of course, with natural daylight pouring into offices on the perimeter of the floor-plate, the need for artificial lighting is reduced.

The mall was acquired by LReit in April 2022 from 2 private funds.Collection of recyclables during the exhibition titled You Won't Believe It's Trash, featuring replicas of iconic memorabilia from Star Wars made from recyclables. LReit

LReit has continued to do its part in waste management through simple gestures, such as collecting non-organic waste from retail tenants twice a day and encouraging shoppers to toss waste into conveniently placed recycling bins.

Used kitchen oil from food-and-beverage tenants are also recycled into biofuel. The green corner at the waste management room are where tenants can recycle paper, aluminium cans, glass bottles, and plastic.

Jonas Kor, director of corporate communications at FairPrice Group, said: "Being located in a mall that integrates high-tech eco-friendly processes in its business operations makes it convenient for landlord-tenant collaboration in managing waste and recycling efforts efficiently and effectively. The importance of recycling is in line with FairPrice's commitment to environmental sustainability in our operations, and promotes a circular and low carbon economy."

Another tenant, IKEA, is also part of the effort to go green.

IKEA Jurong store manager, Nur Diana Abdullah, said: "At IKEA Jurong, our first store to be located in a mall, we do not manage our cardboard and plastic waste directly – which is why we are glad to be in a mall with a landlord who shares our approach to caring for the planet.

"We do everything we can to support the global IKEA ambition to become circular and climate positive. That's why we continually work to reduce the waste we generate in our operations and recycle more than 77 per cent of it."

Asked about the biggest misconceptions about a building being green, Kelvin Chow, chief executive officer (CEO) of the manager of LReit, said: "In our opinion, green premiums could be one of them."

He said that while companies may have to pay a higher price to rent or acquire buildings with certified sustainability credentials, green strategies can drive higher occupancy, rents, tenant retention and offer overall higher value.

"Today, creating sustainable spaces is no longer about simply increasing their value. It has become a corporate priority. Investors are putting on the ESG (environmental, social and governance) lens and placing more emphasis to invest in companies that have ESG strategy."

Hence, since LReit was listed in 2019, all the assets under its portfolio are green assets.

It has also bagged various ESG-related awards since its listing, including the BCA Green Mark Platinum Award for 313@somerset. The mall's atrium daylighting design maximises the use of sunlight, minimising the requirement for artificial lighting during the day.

Its 3 buildings at Sky Complex in Milan also possess Grade A office specifications boasting an excellent energy efficiency profile, and it received the highest-tier 5-star rating and was the Regional Sector Leader in GRESB for two consecutive years since listing.

Chow said: "Our ESG investment criteria is that the asset must have good sustainability rating under rating schemes such as BCA Green Mark, US Building Council's LEED scheme or equivalent. In the absence of such ratings, it must demonstrate sustainable features and the potential to incorporate them in future.

"In addition, there must be no environmental risk or legal restrictions associated with the asset, which is in compliance with local regulations and Lendlease's Global Minimum Requirements. With increasing importance placed on the sustainability performance and green certification of the assets, we expect sustainability financing to be a common financial instrument to fund acquisitions that have strong sustainability credentials."

He added that LReit is a signatory to the United Nations' Principles for Responsible Investment, and approximately 60 per cent of LReit's borrowings are sustainable financing.

"We hope to see a future in which sustainability standards become a hygiene factor for all financing. It is heartening to see real estate owners as well as the financing community take responsibility to contribute to this change."

On Lendlease Singapore's future plans, Chen said that it will continue to implement energy efficiency initiatives to maintain top performance in green building ratings and increase the use of renewable energy to 100 per cent by 2030.

The real estate investment trust (Reit) will also develop and pilot the next generation of green leases for tenants, and educate them to reduce emissions.

Chen added: "For us as a group, we have started taking steps towards decarbonising our assets and operations, and have committed to our Mission Zero – net zero carbon by 2025 and absolute zero by 2040. These are one of the most ambitious targets to date for the real estate sector, and we believe that it is essential for us to meet our climate goals, given that buildings are responsible for almost 1/3 of global energy consumption. Together, with like-minded leaders, let us all do our part in taking responsibility for the planet seriously."

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Nisha Ramchandani
896 words
6 July 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

THE rise of the digital economy and the acceleration of digitalisation thanks to the Covid-19 pandemic have resulted in increased demand for data centres. But the investment premise for data centre assets is under attack.

Late last month, US-based hedge fund manager and short seller Jim Chanos revealed he is raising money for a fund that will short real estate investment trusts (Reits) listed in the United States. In particular, Chanos expects to make money as the prices of data centre Reits falls.

In an interview with Financial Times, Chanos said data centre Reits face "technical obsolescence" because their 3 biggest customers - the Big 3 cloud providers Amazon Web Services, Google Cloud and Microsoft Azure - are also their 3 biggest competitors.

He believes that although demand for cloud services will grow, the cloud providers will take most of the profits in the space.

Chanos's comments had an immediate impact. Prices of US-listed data centre asset owners Digital Realty Trust, Equinix and Iron Mountain fell by 3 to 5 per cent the day Chanos made his comments.

In Singapore, pure-play data centre Reit Digital Core Reit also fell. The counter has been on a downtrend this year, but it hit a low of US$0.73 on Jul 1.

Its peer, Keppel DC Reit, is faring slightly better but is also in negative territory.

In fact, unit prices of both Digital Core Reit and Keppel DC Reit have underperformed the Straits Times Index (STI) and the iEdge S-Reit index. The STI is up 3.5 per cent this year, and the iEdge S-Reit index is down 4.9 per cent. Digital Core Reit and Keppel DC Reit, however, are down about 17 per cent.

Local market analysts, however, are far more positive than Chanos about the market's prospects.

In a report on Keppel DC Reit, Citi analyst Brandon Lee noted that data centres are still very much in demand even as tech firms have come under pressure this year. Keppel DC Reit is seeing "demand driven by (the) acceleration of cloud migration and increased prominence of cloud computing". With capitalisation rates remaining stable, Keppel DC Reit could go on to make acquisitions in markets "where yield spreads remain positive, likely Japan, Europe and China in our view", wrote Citi's Lee.

DBS analysts Dale Lai and Derek Tan, meanwhile, see Digital Core Reit supported by its long weighted average lease to expire of 5.5 years. This will ensure long-term occupancy and income, the analysts said.

In any case, the Asia-Pacific market appears to have a shortage of data centre space. DBS said in its report that the likes of Amazon, Google and Microsoft "continue to seek new capacity to keep up with their customer growth".

Land-scarce Singapore is a leading hub for data centres in the Asia-Pacific, as it is seen as a springboard to South-east Asia. Real estate consultancy Colliers calculates there are over 70 operational data centres here with a total capacity of about 1,000 megawatts (MW), run by some 40 operators, though the top 5 data centre operators account for nearly two-thirds (63 per cent) of the total power load. Of the total stock, 4 million square feet (sq ft) is estimated to be lettable white space, delivering some 600 MW of power.

According to Colliers, data centres are able to deliver higher rates of return vis-a-vis most other real estate classes here - as they come with higher operational risks. Against the backdrop of robust demand and limited supply, the real estate consultancy sees rents for data centres climbing north, and expects them to rise about 3 per cent annually on average.

Supply in the Singapore market is tight amid a government-imposed moratorium and after the pandemic derailed construction timelines for new data centres, contributing to high utilisation rates. Analysts say that supply in Singapore will grow by some 20 per cent by the end of next year as fresh supply comes on stream and as the moratorium is lifted.

Earlier this year, the government announced it would remove a moratorium on the construction of new data centres, albeit with the imposition of certain criteria linked to sustainability. With fighting climate change high on the Republic's agenda, the moratorium was introduced in 2019 as the authorities sought to manage the growth of the market and curb emissions. A Bain & Co report forecasts data centres will account for 12 per cent of Singapore's power consumption by 2030.

Under the pilot phase, which will commence this year, up to 3 data centres of 10 to 30 MW capacity will be approved as 60 MW of capacity is split among a maximum of 3 operators. Other criteria include a 10-year-lease tenure and a power usage effectiveness (PUE) of 1.3 or under: criteria which some industry players admittedly have been less than enthusiastic about, citing cost inefficiencies and a short lease tenure. (The PUE is a ratio that measures the energy efficiency of a data centre - the lower the better.)

Amid more stringent regulations, data centre operators equipped with the financial muscle and operational experience will ultimately be the ones that will succeed in the new landscape.

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