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Published November 26, 2011
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The Reit myth busted
Whatever Reits pay out in dividends, they will take back
a few years later in the form of rights issues
By TEH HOOI LING
SENIOR CORRESPONDENT THE high yields of real estate investment trusts (Reits) are tempting. And indeed, they have been touted as a relatively safe and stable instrument to own if one is looking for a steady stream of income. As such, many investors see Reits as a good asset class to have in one's retirement accounts.
Here's what I found. Of the 17 Reits which have a listing history of at least four years on the Singapore Exchange, only three have not had any cash calls or secondary equity raising. The remaining 13 have had cash calls, and many had raised cash multiple times. One had a few rounds of private placement of new units which diluted the stake of existing unitholders somewhat. For many of these Reits, the cash called back far exceeded the cash received. So, the myth of Reits as almost comparable to a fixed income instrument is really busted. Take CapitaMall Trust (CMT) which was listed in July 2002. Assuming that Ms Retiree bought one lot or 1,000 units at the initial public offering (IPO) for a total sum of $960. For the whole of 2003, she received $57 in dividends. However in that year, CMT also had a one-for-10 rights issue. To subscribe for her entitlement, Ms Retiree would have to cough out $107. In 2004, she would received $89 for the total number of CMT units she owned. That year, CMT had another rights issue, also one-for-10. The exercise price was higher at $1.62. To subscribe, Ms Retiree would have to fork out $178. In 2005, CMT again had another fund raising exercise via rights issue. Ms R would pocket $124 in dividends but in that same year, had to return $282 back to the Reit. In the next three years - 2006 to 2008 - Ms Retiree felt rich and happy. She merrily banked in her quarterly distributions which amounted to $404 for her holdings of CMT. Her one lot, after three rights issues, had grown to 1,331 units. In the following year, another $175 was distributed. But CMT wasn't going to let Ms R be happy for long. It launched a big one - a 9-for10 rights issue. To fully subscribe for her entitlement, Ms R had to empty her bank account of a whopping $982. And you know what, the cash call came in March 2009, when the Straits Times Index fell below 1,600 points, and many retirees were dismayed to see their investment portfolios plunge by half or more. Many fret if they would have enough left in the pot to sustain their lifestyle. Having to cough up more money for a Reit was the last thing that they wanted to do! Negative cash flow And here's the final tally. Since its IPO until today, a holder of one lot of CMT would have received $1,264 in cash distributions. However, in all, he or she had to return $1,549 back to the Reit so as to subscribe to their entitlement of new issues. That's a net outflow of $284 per lot. It's the same story with K-Reit Asia, Capitacommercial Trust, Frasers Commercial Trust, Mapletree Logistics, First Reit, Lippo Malls Indo Retail Trust, AIMS AMP CAP and Saizen REIT in that what was taken back from investors was more than what was given out. K-Reit has been one of the most aggressive fund raising Reits. Had you started with just one lot when it was listed in April 2006, you would have to dish out $8,399 to subscribe to your rights issue. Distributions amounted to $1,110, resulting in a net outflow of $7,289. For Reits with at least four years of track record, only Fraser Centrepoint, Parkway Life and CapitaRetail China have not had any cash calls. Instead of a rights issue, Suntec Reit raised funds by issuing new units to some institutional investors at a slight discount. Existing unitholders don't have to cough out additional cash, but they would have their share of earnings diluted somewhat. Misalignment of interests Reits are managed by managers, and managers are paid based on the size of the portfolio that they manage. So the incentive is for the managers to continue to raise money and expand the portfolio size. Sometimes this is not done in the best interest of unitholders. The most recent controversy was over K-Reit's purchase of Ocean Financial Centre (OFC) from its sponsor Keppel Land. K-Reit has launched a 17-for-20 rights issue to pay for the purchase which was deemed by the market to be expensive at a time of uncertain outlook and when office rental is expected to ease. BT reader Bobby Jayaraman argued that rather than be compensated based on factors such as the value of assets, net property income and acquisition fees, Reit managers should be paid based on a combination of growth in distribution per unit and market valuation of the Reit. 'If Reit managers were paid on the basis of distribution per unit and market valuation growth, would K-Reit have bulldozed its way through the OFC acquisition like they have done? 'The day K-Reit announced the OFC acquisition, its stock price fell close to 10 per cent and has continued sliding. Yet, its Reit manager will take home significantly increased management fees while shareholders would have lost a good chunk of their capital even as they bear significantly more risk in the form of higher leverage and potential property devaluations given the uncertain environment,' he wrote to BT. Misalignment of interests aside, there are also unitholders who clamour for growth. But while Reits may not be the perfect income yielding instrument that they are made out to be, they have proven their capacity for capital appreciation. Relative to the capital ploughed in, CapitaMall Trust has rewarded its unitholders with a return of 127 per cent. Most Reits have yielded positive total returns. Instead of buying Reits for yields, some savvy investors only buy them when they see those with good quality assets trade at sharp discounts to their book value. For example in the first half of 2009, CMT was trading at 50 per cent its book value. Today, it is not as cheap. At $1.755, CMT is now trading at 13 per cent premium to its net asset value of $1.55. Hence, valuation metrics which apply to a typical asset heavy stock would apply to Reits as well. | |||
Saturday 26 November 2011
What I Have Been Saying About REIT for Many Years
New Building Guidelines in Singapore
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This ruling will make it even more difficult to en bloc terraces and semi-detached homes. It will make it compulsory for almost 100% of terrace owners to agree to a collective sale. Imagine there are 10 units of terraces of 1500 sf each that a developer wants to buy. 9 of them agree and one brokeaway. The combined size of 9 units may be 13,500 sf, enough to make a smallish apartment or condo, but since the single unit is less than 10,000 sf, the deal cannot go ahead.
The second ruling warns us against buying any property below 1.4x plot ratio. Developers generally buy properties at "future" prices and then rebuild into much smaller units, selling them at as much as double the price. This ruling will set a minimum size for redeveloped land with a ratio of 1.4. The scam in the last 5 to 6 years has been this: Developers instead of selling a 1000 sf unit for 1000 psf and get 1m in revenue, break the unit into 2 and sell them for 1800 sf, making them cheaper in quantum at 900k per unit. But the developer earns 1.8m. Only silly Singaporeans and foreigners who are keeping their cash here will do that. Perversely, the Singaporeans may not be that dumb because they know that foreigners will buy anything just to keep their cash here. But think of it this way, if there is another Asian crisis, the foreigners may decide to sell these units at 20% below their cost price. If the rental yield is not high, the price could fall very quickly. This is likened to a house of cards.
I am very curious how the Singapore residential sector will pan out over the next 2 to 3 years. I have some hunches but will keep the cards close to my heart.
Published November 25, 2011
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New building guidelines take effect
Guidelines will only affect new applications
By MINDY TAN
A MINIMUM plot size requirement of 1,000 square metres and a guide on the maximum number of dwelling units (DUs) for non-landed residential estates were put into effect by the Urban Redevelopment Authority (URA) yesterday.
In addition, for all breakaway proposals from existing landed housing for either flat or landed housing developments within non-safeguarded landed housing areas, the aggregate land area for the left-behind plots must also satisfy the minimum plot size. The impact of this guideline will be felt particularly in the area of en bloc sales for landed housing, noted Tang Woon Ee, partner at Rodyk & Davidson. Citing the example of a breakaway development for a row of terrace houses, she noted that there have been cases of a plot being redeveloped into a block of apartments, with a small, adjoining landed property. 'This will put a stop to this practice, unless the adjoining piece that doesn't want to take part in the collective sale is of that minimum size of 1,000 sq m,' she said. Separately, a guide on the maximum number of DUs for flat and condominium developments within GPR (gross plot ratio) 1.4 residential estates was introduced. The DU guide is also applicable to residential components of mixed-use developments, within GPR 1.4 residential estates, and other low-rise, low-density residential areas. A more stringent formula was developed for areas such as Telok Kurau Estate, which has seen a rapid injection of a large number of units, resulting in significantly higher traffic volumes along the existing narrow local access roads, noted URA. 'If the number of units are being restricted, on average unit sizes will be larger. For developers looking to achieve the same per square foot pricing, you are looking at a higher total quantum that may or may not be supported by the market,' pointed out Ms Tang. The guidelines will only take effect with respect to new applications, added Ms Tang, noting that any formal applications (excluding outline applications) submitted prior to Nov 24 which had been granted provisional permission or will result in provisional permission being granted will be evaluated under the old guidelines. Kovan and Joo Chiat/Jalan Eunos estates were also identified as potentially problematic clusters. URA and the Land Transport Authority are conducting a joint study to determine if more stringent DU guides are required based on the infrastructural capacity of the area. The study is expected to be completed by the third quarter of 2012.  | |||
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