Tuesday, February 07, 2006

Sungai Wang REIT - SC Was Correct Here

On Feb 6 the Securities Commission (SC) rejected Landmarks' proposal to establish the Sungai Wang Plaza real estate investment trust (REIT). Landmarks said the company believes the rejection of the proposed listing could be because SC was uncertain of the growth prospects for the net rental income and distribution yield of the many secondary shoplots to be owned by Sungei Wang Plaza REIT, which were located at less competitive locations within the shopping centre. Another reason, it said was that the proposed REIT would own only one property comprising 56.9% of the total net lettable area of Sungai Wang Plaza shopping centre while a confirmed growth plan had not been put forward. The rejection of the proposal Sungai Wang Plaza REIT listing is seen as a major setback to Landmarks' restructuring plans given the former's key role in the exercise.

Many finance professionals were of the opinion that SC was not being fair in its ruling, some even passed snide remarks that maybe certain palms were not greased enough. That is quite unfair to the SC. I believe the SC were correct to reject the REIT. Sure, Sungai Wang Plaza commands one of the highest rental psf in KL but it is still only a 56.9% stake. After the listing, the controlling stake would be diluted further. The rules laid out by SC on REITs is paramount as the industry is only just taking off. Allowing SWP REIT to list would set a low threshold for future REITs. A one asset REIT is risky. Tenant mix is volatile. Will the promoter be able to put through "improvements and changes" in the future to SWP to enhance yields or control tenant mix - both being important considerations for a good/safe/reliable yielding asset. You must be able to navigate and control the property/tenant mix/infrastructure/amenities - can Landmarks safely say that they can do that as well as someone with 100% control? All is not lost for Landmarks, they can easily sell their shares of SWP to a bigger REIT in exchange for units in the bigger REIT - but losing control of the only one real attractive asset to Landmarks is not exactly what they have in mind - what ever will the management of Landmarks do after that?? (i.e. rhetoric question... they won't do that deal).

While it is a known fact that there are good REITs listed in Singapore which do not own 100% of the properties listed, but there have more than just one property. The main issue has to be the one asset factor which caused SC to arrive at their decision.

What is the deemed characteristics of a good REIT - not only must it have reliable streams of income for distribution, it must also have solid NTA. If you were to sell 60% of a building to an investor, you can bet that the buyer will be asking for a discount. Everytime the controlling shareholder wants to put through changes or improvements, it will need to go through the same charade. When things are jolly, everyone goes along, but a REIT is in for the very long haul. A REIT is viewed as something like an annuity to buyers, something better yielding than fixed deposit but the risk is balanced with solid tenants and assets. Sure, tenants are now paying high rentals due to traffic flow, but what if the traffic flow plunges. There are too many variables on why traffic may plunge - new competition, unanticipated accidents (fire, too many people blocking exits during emergencies, etc.) - when traffic stops, you can bet that the tenants will balk at paying high rentals. The risk with just one asset is too high, and what price can you get for selling a 60% stake in a property. It could all go very nasty. The SC is here is safeguard the integrity of listed assets, especially when it calls itself a REIT.

2 comments:

Pelabur said...

Hi, Personal Money has a cover story about Reit but I haven't read it yet. What do you think about STAREIT? It's moving so slow.

Salvatore_Dali said...

Pelabur,

STAR Reit is all glitz but tenancy is very low at the moment. They are slowly refurbishing and trying to only take in certain clients. It is a very safe REIT, yields would not be as good as some of the rest. Best to go for something else. Better choices in Singapore at the moment. Investors, esp Singaporeans love Malaysian REITs as the yields are slightly higher, and they do view it as better than fixed deposits plus ringgit exposure - everybody knows the ringgit is at least 20% undervalued - so Singaporeans would come in and bid up the REITs, but it will have the effect of reducing real yields of buyers of REITs. Singaporeans are happy with 6.0%-6.5%, so that's where most REITs will settle. REIT coming to be listed on KLSE are usually priced at around 7.5%-8% yield, so thats why those will move up btw 10%-15% in price upon listing.