ARA buys Suntec Convention Centre in $235m deal

Acquisition will bring 76% of whole Suntec complex under its ownership

ARA Asset Management finally has a full house in its hand of cards – the real estate fund management firm added the Suntec International Convention & Exhibition Centre to its portfolio of Suntec-brand properties on Saturday.

ARA, an affiliate of Li Ka-shing’s Cheung Kong group, sealed the $235 million deal for the convention centre with Suntec City Development Pte Ltd, of which Mr Li is an indirect shareholder. This deal will add one million square feet of space to ARA’s portfolio.

With this acquisition, ARA will own both the convention centre as well as most of the office and mall space in Suntec City, come the finalisation of the deal in October. The office and mall spaces are owned by Suntec Reit, which is managed by ARA.

The convention centre, however, will be owned separately under the ARA Harmony Fund which was created by ARA for this purpose.

‘We chose the word ‘harmony’ because now all the three components – retail, office and convention space – will be able to operate together in a harmonious manner,’ John Lim, ARA’s group chief executive officer, told BT.

This acquisition will bring 76 per cent of the whole Suntec complex under the ownership of ARA.

‘We have always had a plan to buy back the remaining 24 per cent. We will do it if the price is good,’ said Mr Lim.

While the decision was made not to include the convention centre in Suntec Reit, the trust will have a 20 per cent stake in the Harmony Fund.

The rest of the fund will be held by private investors.

‘At the moment, the convention centre is an operating business, and the Reit cannot buy an operating business because the income fluctuates. The Reit looks for stable income from its properties,’ Mr Lim explained.

Mr Lim was keen to stress that despite the change in ownership, it will be business as usual for the convention centre.

Pieter Idenburg, who has been the convention centre’s chief executive officer since 2005, will continue to run the show. Mr Idenburg regards the acquisition as an opportunity to leverage on the shared resources of the mall and the convention centre.

‘Going forward, we will be looking at the franchising opportunities for the Suntec brand overseas. With the backing of ARA as our management, we can now start those plans to go abroad,’ said Mr Idenburg.

‘Hopefully, we will put one and one together, but get three with this synergy. The retail side will benefit from the people coming into the convention centre, and the convention centre will have the infrastructural support of the mall area,’ Mr Lim added.

In 2004, ARA had listed Suntec Reit in the biggest initial public offering of the year, having bought the Suntec City mall and a stake in the five-tower office development from Suntec City Development Pte Ltd. It did not, however, buy the convention centre which was loss-making at the time.

‘Back then, the convention centre was held back by the owners as the price was not right, given that it was just post-Sars and the convention business was difficult,’ said Mr Lim.

‘We are happy with the $235 million price tag because it is worth the goodwill of the branding and the management expertise that we will get.’

ARA, which also owns Hong Kong-based Fortune Reit and Prosperity Reit, posted a 2 per cent increase in revenue to $17.8 million and a 10 per cent increase in net profit to $10.1 million for Q1 FY2009.

Source: Business Times, 3 Aug 2009

Cambridge Reit drops purchase of property

CAMBRIDGE Industrial Trust is not taking up an option to buy and lease back a $55.2 million industrial property at Tai Seng Street.

The vendor, Natural Cool Holdings, announced the termination of the option agreement yesterday.
Cambridge, which was to have secured equity financing for the purchase by June 30, informed Natural Cool that it was not proceeding with the purchase.

Natural Cool secured shareholder approval for the sale back in November 2007. The plan was to sell Lot 6501T at Tai Seng Street/Tai Seng Avenue to Cambridge and to lease back the property at not more than 8 per cent of the purchase price a year. The lot had leasehold interest for 30 years with an option to renew for a further 30 years.

The agreement was later delayed after certain changes in the terms and conditions were agreed.

Source: Business Times, 18 July 2009

Don’t buy S-Reits on high yield spread

Nomura analysts warn against it as they see mis-pricing in retail & industrial

Investors should not buy S-Reits just because of high yield spreads between Singapore real estate investment trusts and government bonds, Nomura analysts have cautioned.

‘We see the greatest mis-pricing in the retail and industrial sectors,’ said analysts Tony Darwell and Sai Min Chow in a report last week. But they see the negative views in the office sector as having been more than priced in.

Current yield spread between S-Reits covered by Nomura and 10-year Singapore government bonds stands at 543 basis points compared with the five-year historical spread of 324 basis points.

But investing based on higher yield spreads is ‘somewhat simplistic’. ‘The low yield spreads of 2005-2008 reflected leveraged acquisitions amid positive rental reversions delivering 16 per cent sector DPU (distribution per unit) growth per annum,’ the analysts noted in the report.

‘We think a supply and demand imbalance in the office, retail and industrial sectors, amid weak economic activity, will underpin a widespread contraction in DPUs as Reit portfolios are faced with rising vacancy and negative reversions (on lease expiry).’

The net take-up in the central business district was a surprisingly low negative 558,418 square feet in the first quarter of this year, the analysts noted. ‘With the demand outlook weakening, vacancy is likely to rise faster and remain higher for longer than expected, suggesting a drawn-out recovery.’
Sliding retail sales are likely to put stress on Singapore’s retail landlords and the new supply of retail space might allow some tenants to bid down rents.

‘As supply increases and retailing activity remains broadly weak, retailers will begin to rationalise the number of outlets and become increasingly selective of mall locations and sensitive to asking rents,’ they said.

With manufacturing output down, industrial landlords will also face declining rents and downward pressure on asset prices.

Nomura has a ‘buy’ call on CapitaCommercial Trust but cut its ratings on Mapletree Logistics Trust to ‘reduce’ and on Starhill Global Reit and Suntec Reit to ‘neutral’ as prices of the latter three stocks have run up recently.

Source: Business Times, 16 June 2009

Time for mall owners to help with rent cuts

IF ONE accepts that FJ Benjamin’s latest financial numbers are a fair reflection of what is happening in the retail industry, then the time might be right for mall owners to cut rents, if only to ensure their own survival.

FJ Benjamin saw its turnover shrink significantly in the quarter ended March 31. It registered a net loss (attributed to lower sales and foreign exchange losses), even after struggling with cost-cutting measures.

Reporting its quarterly financial results last Monday, it said gross margins slipped to 38 per cent from 40 per cent due mainly to higher promotional activities (such as sales).

Staff costs dipped 9 per cent to $9.5 million, and other operating expenses fell 38 per cent to $4.6 million.

Still it was not enough to displace the 21 per cent fall in turnover to $69.1 million, down from $87 million in the previous corresponding quarter.

Apart from continuing to squeeze margins and cut costs there is very little else FJB can do, which is probably why its CEO Nash Benjamin said earlier this year that it would need to ‘focus our efforts on working with our landlords to reduce rental and other overheads.’

Rental of premises registered $10.32 million in its current reporting quarter, down marginally from $10.6 million a year ago. However, as a proportion of turnover, rentals have increased to about 15 per cent, up from 12 per cent a year ago. This in turn was an increase from 10 per cent in 2007.

FJB is one of the top 10 tenants of Starhill Global Reit which holds stakes in Wisma Atria and Ngee Ann City. The reluctance of landlords to give substantial rental rebates is perhaps best represented by retail rental revenue generated at Wisma Atria of $11.56 million for the quarter ended March 31, down only marginally by 0.8 per cent from a year ago. RSH, which has brands like Zara and Mango, also reported poorer results recently, with net profit contracting by 45.1 per cent to $8.41 million for the quarter ended December 31, 2008. It also reported that its Singapore business saw profit before tax fall by 26 per cent due to higher operating expenses and lower revenue.

RSH spoke out against high rents here recently after several retail associations led by the Singapore Retailers Association publicly asked landlords to cut rents by between 20-30 per cent in February.

BT had reported then that major mall earners were not convinced that occupancy costs were too high. However, RSH responded by saying that every tenant has a level of profitability they have to achieve to sustain their business, and that level varies from retailer to retailer.

There are not many retailers in Singapore that are publicly listed so FJB and RSH’s reported financial numbers are a useful barometer of how the entire retail industry is doing as a whole.

Mall owners, on the other hand, still appear to be doing well. Many of Singapore’s malls are owned by Reits like CapitaMall Trust, Starhill Global Reit and Frasers Centrepoint Trust. All three Reits reported increases in net property income. One Reit saw this rise by as much as 17 per cent for the current quarter.

Perhaps more interesting is that some are still increasing rents when leases come up for renewal.
According to filings by CapitaMall Trust, rents were increased by 6.8 per cent at both Plaza Singapura and Junction 8 compared to preceding rents.

Being publicly listed entities, Reit managers are probably more constrained when it comes to offering rental rebates. However, if the retail industry is doing as badly as numbers show, the Reit managers may have no choice.

As FJB’s Mr Benjamin said: ‘It’s better to lower rents than not have a tenant.’

Source: Business Times, 18 May 2009

Real estate fund-raising falls to 5-year low

A total of 22 funds closed last quarter, says research firm

(SEATTLE) Private equity real estate funds raised US$13 billion in the first quarter, the smallest amount in five years, as declining asset values deterred investors from committing new capital, Preqin Real Estate said.

A total of 22 funds closed last quarter, the lowest since Q4 of 2004, when 45 funds raised US$10 billion, according to the London-based research company.

The largest were Goldman Sachs Group Inc’s Real Estate Mezzanine Partners at US$2.63 billion and London- based Orion Capital Managers LP’s European Real Estate Fund III at US$1.34 billion, Preqin said.

Fund-raising stalled after the global credit crisis combined with a growing number of fund managers competing for capital caused managers to postpone closings.

There are an estimated 390 funds on the road trying to raise a combined US$227 billion, Preqin estimates.

‘The number of funds abandoned has also risen,’ said Ignatius Fogarty, a spokesman for Preqin, in a statement. ‘We already have 14 confirmed cases of fundraisings being abandoned. This compares with 17 in 2008 and 12 in 2007.’

About US$7.6 billion of the funds raised last quarter may target debt and distressed real estate as managers try to take advantage of the market turbulence by buying assets at discounts, Preqin said.

The Q1 total excludes two large funds that have yet to be counted as having had a final close.

These are Morgan Stanley’s new global real estate fund, which has raised about US$6 billion, and more than US$10 billion of new funds being raised by Dallas-based Lone Star Funds, according to Preqin.

The Morgan Stanley fund had a target of US$10 billion.

Preqin Real Estate compiles data on funds raised, returns and terms. — Bloomberg

Source: Business Times, 16 April 2009

Commercial property sector faces $20b issue

Sector seen having to deal with pressing issue of refinancing

SINGAPORE’S commercial real estate sector, including the Reit sector, will have to deal with the pressing issue of refinancing $19-20 billion of debt this year.

Peter Mitchell, CEO of the Asian Public Real Estate Association, said about $11 billion can be attributed to commercial real estate companies and Reits, and the remaining $8 billion to non-listed vehicles such as private property funds.

Reits account for a small portion and he estimates only about four Reits here still need to arrange refinancing, he said.

Speaking at the Cityscape Connect Business Breakfast event yesterday, Mr Mitchell added: ‘Reits have been affected like many other investment classes, but longer term, the model offers a number of attractions, including greater liquidity.’

One private property fund that faces refinancing this year is the Mapletree Industrial Trust (MIT), in which Arcapita has a 56.5 per cent stake.

Also speaking at the Cityscape event was Blake Olafson, director and head of real estate Asia at Arcapita.

Earlier this month, MIT said it would have to go back to its investors for a $140 million capital injection, largely because the valuation of its properties had fallen and a loan being extended was smaller.

Giving some insight, Mr Olafson said refinancing of a bridging loan to finance MIT’s $1.71 billion acquisition of assets last year will be due soon, but whether MIT’s investors will have to inject capital is not a certainty. ‘This will depend on the banks,’ he said, referring to the refinancing terms.

Mr Olafson thinks the industry here will take the credit crunch in its stride as there is more acceptance of low loan-to-value ratios.

He said that generally, higher equity ratios will help stabilise the market, unlike in the US where 95 or 100 per cent debt financing is the norm. ‘In the US a 50-60 per cent loan is considered as no liquidity,’ he added.

Alan Dalgleish, executive director of CB Richard Ellis, said: ‘The overall quality of lending has been higher in Asia than some of the things that have happened in Europe and the US.’

While Mr Dalgleish believes in the long-term strengths of the property market here, he does feel
there could be a residential supply overhang.

‘We haven’t seen the impact of the (collective sale) sites washed through the system yet,’ he said, adding that this could take another two quarters.

He also believes there is a ‘reality check’ coming as more sellers accept that prices have to come down to levels acceptable by the market.

Source: Business Times, 1 Apr 2009

Property sector needs govt help in refinancing $12b of debt

THE Government has been asked to help listed property firms here, especially real estate investment trusts (Reits), to refinance an estimated $12 billion in debt, given the frozen state of credit markets.

The appeal comes from the Singapore-based Asian Public Real Estate Association (Aprea), a body set up to represent the listed real estate sector in Asia.

‘Government assistance is needed to get liquidity moving and reduce the risk of plummeting real estate values and pressure on the capital positions of lenders,’ said a background paper by Aprea. ‘Its help is needed to restart the credit markets for commercial real estate debt.’

‘This is an issue for the general commercial real estate market and, by extension, the broader real estate market and the broader economy,’ said its chief executive Peter Mitchell yesterday.

Aprea has been submitting a series of proposals since last November to regulators in Singapore and Japan, seeking assistance in these unusual times, he said.

One assistance option would be a lending facility being implemented in Australia, said Aprea. The country announced a A$4 billion (S$3.86 billion) fund with four Australian banks to support lending in the commercial property sector.

The Singapore Government has unveiled measures to free credit to businesses here but nothing specifically aimed at listed real estate entities.

Inability to raise credit and refinance could lead to foreclosures, bankruptcies and forced sales, leading to market instability and a potential downward spiral, the paper said. ‘The more that real estate loans can’t get refinanced, the more risk there will be of losses for the banks, some of which can ill afford more losses.

‘Banks’ jobs are to make loans, not own real estate. There is a risk that banks will not be able to absorb, manage and turn around properties at this scale if they come back to the lenders,’ it said.

‘The collapse of an otherwise healthy real estate market caused by general credit paralysis has the potential to significantly aggravate recessionary pressures.’

There is a risk of default being forced upon property owners that hold property with good cashflows, a risk that would not exist in a normally functioning credit market, it said.

The current negligible activity in commercial real estate market is a particular issue for Reits, which the paper described as a ‘handle with care’ product.

Ratings agencies are talking about downgrading Singapore Reits because of refinancing concerns. But it is because of the dysfunctional credit environment and should not happen, said Mr Mitchell.

‘It is not the Reits themselves having problems. They are just being impacted by the freezing of credit.’

Of the estimated $12 billion of refinancing needs this year, one-third is attributed to Reits. It is important to help Reits through the turmoil as they are what will attract investors as Singapore moves out of this downturn, he said.

‘Investors are going to be risk-averse and will look for things that are liquid, transparent and lowly geared, equity-orientedinvestment. That’s what Reits are.’

Source: Straits Times – 5 Feb 2009