Strong developer sponsorship allows Reits to trade at lower yield levels while boosting the former's risk management portfolio, says LESLIE YEE
SINGAPORE commercial Reits have been enjoying rising office rents in 2007 but are facing fierce competition to acquire prime office assets amid competition from private equity funds and yield compression.
Three events stand out (See Table 1):
(i) CapitaLand sold its 90 per cent-owned Temasek Towers to a private fund and not to CapitaCommercial Trust (CCT);
(ii) CapitaLand sold its mixed development project Wilkie Edge to CCT; and
(iii) Keppel Land and Cheung Kong announced plans to sell their respective stakes in One Raffles Quay to K-Reit and Suntec Reit.
Questions from investors we spoke to include:
Why is CapitaLand exiting a development project instead of waiting to reap maximum benefit from completing the project and selling out post income stabilisation?
Why are Keppel Land and Cheung Kong entering interested person transactions involving payment of income support when perhaps better deals could be struck by selling to third parties?
Does CapitaLand's sale of Temasek Towers to a bidder who could pay more than CCT set the standard for good governance and maximise value for CapitaLand's shareholders?
Singapore's five-year-old Reit market has been driven by developers divesting assets into Reits where they continue to hold a substantial stake and also own the fund management entity.
We believe investors prefer such sponsored Reits for their strong acquisition pipelines and trade them at lower yields. Still, conflict issues can arise when Reits buy assets from developer sponsors. Although regulations adequately protect Reits from over-paying for acquisitions, in the current Singapore market where asset prices are rising, the converse of developers under-pricing when selling to Reits may become more of a concern.
Over time, we spot a silver lining for Reits amid the global credit crunch in that private equity funds may become relatively less competitive than Reits in asset acquisitions due to possible increase in debt cost and pricing of risk.
In the medium to longer term, we look for reversal in yield compression for physical property in Singapore and a narrowing in distribution yield spread for Reits, which will help Reits grow via accretive acquisitions.
In selling an asset to its sponsored Reit, a developer can realise proceeds, yet ride any upside should it have a stake in the Reit. We see this model as providing a middle ground between being asset light and asset heavy as per the traditional Asian developer who holds investment properties for capital gains. Also, a developer who owns the Reit's manager can earn management fees. The fund management business itself is potentially valuable given the recurrent stream of fee income.
Our analysis on the sale of a completed asset shows the net benefit to a developer is roughly the same from selling to a Reit or from selling to a third party at a price that is nearly 20 per cent more. Here, we ignore the potential for recycling the additional proceeds realised from a third-party sale into new development projects and the relative difficulty of selling a minority stake in a building compared with selling an entire building.
Looking at the Singapore Reit universe, we note that Reits which we think have strong sponsorship from developers, trade at current yields of around 100 basis points lower than other Reits in a similar asset class (See Table 2). We attribute this premium to the inside track the developer sponsor provides to the Reit in asset acquisitions.Best practice
Essentially, a Reit's chances of acquiring an asset from its sponsor are higher than that of a third party. Should a developer sponsor fail to help its Reit acquire assets, we expect the market will stop ascribing the developer premium to the said Reit, which in turn results in a loss in market capitalisation and higher cost of capital for future acquisitions.
We believe that the best practice for a developer sponsoring a Reit involves using its resources and expertise to help grow the Reit and not leave it static. We see value from a risk management perspective for a developer to build up a Reit platform, as having a Reit that is able to buy a development project on completion which allows a developer to be more confident and aggressive in taking on large-scale developments.
We think this matters as periodic bouts of financial market turbulence could lead to times when there may be a dearth of buyers for chunky real estate assets.
The writer is executive director, Asia-Pacific investment research, Goldman Sachs
No comments:
Post a Comment