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JUST over four years since CapitaMall Trust (CMT) pioneered the creation of Singapore’s real estate investment trust (Reit) sector with its successful listing in mid-July 2002, there appears much to cheer in this sector.

Today, Singapore has Reits owning foreign properties and Reits owning properties outside traditional sectors such as retail, office and industrial, and in areas like hotels and service apartments.

The capital market fund raising activities and property acquisitions carried out by Reits have given investment bankers, real estate agents, real estate valuers, property owners and a host of professionals much to cheer about. Policy makers and regulators can point to Singapore being a hub for Reits.

But even as the sound regulatory environment, the critical mass of Reits and the demand for yield plays from an ageing population all point towards continued growth in Singapore’s Reit sector, danger signs are appearing.

When entities go for initial public offerings (IPOs), pricing should be such that the entity trades, upon listing, at a reasonable premium over the IPO price such that IPO investors will support future equity raisings of the entity in question.

A look at the trading debuts of recently listed Reits shows a cloudy picture.

Disappointing performance

Cambridge Industrial Trust (CIT), which made its trading debut last month, closed at 65.5 cents yesterday, down from its IPO price of 68 cents.

CIT’s unit price performance post-IPO is disappointing despite the trust raising its initial forecast distribution yield, mainly through higher borrowings, when the IPO was relaunched after an earlier aborted attempt.

Both Fraser Centrepoint Trust (FCT) and CDL Hospitality Trusts, which also listed in July, have fared somewhat better. FCT ended at $1.06 yesterday, compared to its IPO price of $1.03 apiece. CDL Hospitality Trusts closed at 92 cents, compared to its IPO price of 83 cents apiece.

However, when CMT and Ascendas Reit listed in 2002, they were offering IPO investors initial forecast yields of 7 per cent and 8 per cent respectively. Their initial yields compare well with those of recent IPOs.

In contrast, yield on the five-year government bond then was less than 3 per cent compared with over 3 per cent today, and gearing of Reits then was lower than what it is today.

Still, there is little to blame property vendors for having certain price expectations when selling assets to a Reit today.

The danger is that when a Reit fails to convince investors of its ability to grow through acquisitions, the price heads south thereby driving up its distribution yield, which, in turn, makes it difficult to find yield-accretive acquisitions.

What stands out, however, is not that Reits are being priced at lower spreads to the risk-free rate as represented by government bond yields but that this has happened as the risk profile of Reits in general has increased.

These trusts continue to be backed by income streams from legally enforceable leases. But their borrowing levels have increased. More trusts are going overseas, which means exposure to foreign currency fluctuations and to risks of owning properties in jurisdictions with typically less robust laws than Singapore’s.

Income streams from assets like hotels have greater volatility given that their business caters to a transient clientele. Also, Reits are competing among themselves to buy assets, thereby putting upward pressure on asset prices.

Let’s focus on the path breaker for CMT. Pua Seck Guan, who was with CMT at its inception, continues to be its manager. Under his leadership, this Reit has done much on the asset enhancement front. CMT’s malls are actively managed for optimal rental returns.

But the risk profile of CMT is increasing. Gone will be the days of CMT providing investors access solely to retail income from well-known Singapore shopping malls, with a focus on those located in densely populated suburban areas.

Greater exposure

CMT’s acquisition of Raffles City complex (which has office, retail, convention and hotel space), together with CapitaCommercial Trust, exposes it to sectors beyond retail.

CMT looks set to own up to 20 per cent in a Reit by CapitaLand, which will own retail assets in China.

Another CMT growth strategy is to invest in Singapore development projects. Farewell then to the concept that investors wanting potentially exciting but risky gains from development projects can park their monies in CapitaLand while those wanting more secure but less exciting returns associated with investment properties can park their monies in CapitaLand’s Reits?

Singapore’s Reits may be a victim of their own success in that investors now have high expectations that Reits can grow their distribution per unit at fairly impressive rates.

This, in turn, puts pressure on Reits to go down riskier paths to fulfil those expectations - be it more borrowings, buying overseas or taking on exposure to development projects.

Recent results posted by Reits have been good but investors should be wary of the heightened risk profile of these vehicles.

Reits must be mindful that they do not take on too much risk such that they lose their unique position in the investment spectrum of being defensive equity plays, which sit between bonds and most other equities.

Source : Business Times - 8 Aug 2006

Rises for Q2 2006 at 13.5% q-o-q and 44.4% y-o-y, says JLL

TIGHT supply of prime office space in Singapore continues to push up rentals, with latest figures from Jones Lang LaSalle (JLL) showing an increase of 13.5 per cent quarter-on-quarter (q-o-q) in Q2 2006, and 44.4 per cent year-on-year (y-o-y).

A report by JLL also shows that capital values have increased by 10 per cent q-o-q and 23.5 per cent y-o-y.

Looking at prime office space in regional cities, JLL head of research (Asia Pacific), Jane Murray, said that the lack of supply ‘hampered’ leasing activity in most cities, with Singapore, Tokyo and to a lesser extent Shanghai seeing a majority of newly completed projects pre-committed.

Indeed, Singapore’s prime office space, which centres on Raffles Place and Shenton Way, registered the highest q-o-q rental increase in the region, followed by Hong Kong (Central) and Mumbai (CBD).

Dr Murray also said that ’some occupiers are willing to seek alternative accommodation outside the core districts given the surge in rents’.

In Singapore, she noted that rents in the secondary business districts (SBD) are also catching up with Raffles Place rents, with demand coming from banks and financial institutions that are undertaking expansion plans. But she added: ‘As these two markets are distinct in nature, we foresee no impact on one another.’

Vacancy rates have also contracted with latest q-o-q figures registering a further drop of 1.7 per cent. Dr Murray added: ‘Given One Raffles Quay is close to full occupancy, vacancy levels should continue to contract in line with the positive outlook of the economy and the growth of business and financial services.’

Investor interest remained centred on Japan, China, Korea and Singapore. ‘With rental growth still strong and the anticipated conclusion of the Federal Reserve’s tightening policy, we expect more investment activity in the months ahead,’ she added.

In Hong Kong (Central), JLL reported that the latest q-o-q increase of 8.9 per cent marks the 11th consecutive quarter of growth, the longest streak in 20 years. Interestingly, Dr Murray also noted that in the core markets of Delhi, Mumbai, Bangalore and Chennai, rents are reaching the levels of Singapore, ‘despite the lack of professional property management on the premises’.

The current Raffles Place rents command about US$431 psm per annum (on a net effective basis). In Delhi and Mumbai’s CBD, rents are US$491 and US$508 psm per annum, respectively.

Source : Business Times - 8 Aug 2006

As complaints pile up, an online registry will help clients check

THE real estate industry wants to weed out rogue property agents who take unsuspecting clients for a ride and make off with their money.

It wants to have all housing agencies to list their agents online so that anyone will be able to check the agent’s identity.

Singapore’s property agents have been delivering a rising number of complaints to the Consumers Association of Singapore (Case).

And rogue agents keep turning up.

Just last week, Filipino systems engineer Armando Velasco Santillan discovered that he may have fallen victim to a cheat.

He had called a housing agent after seeing an advertisement for a Bishan flat he was keen to rent.

The agent claimed to work for PropNex, Singapore’s biggest housing agency. Mr Santillan, 31, saw the flat and liked it, and paid the agent $1,800 as a deposit and advance rental.

But he never saw the agent again. He called PropNex last week, only to find out that it never had such an employee. In fact, the agency had made a police report because it had received similar complaints about the man.

Mr Santillan, who had previously rented a flat through another agent without a hitch, told The Straits Times: ‘I thought all agents were the same.’

The Institute of Estate Agents (IEA) feels that starting a central registry of housing agents will help.

While the scheme is voluntary, 13 of the biggest agencies with 11,500 agents have already signed up. The IEA estimates this represents more than two-thirds of all agents.

When the scheme is launched by the middle of next month, , home buyers and sellers will be able to check on the institute’s website if a particular agent is employed by the agency he claims to represent.

If an agent is sacked for unethical conduct or a crime, the system will be updated within 72 hours. Normal staff movements will be updated at least once every three months.

Housing agencies on the scheme will also be able to check if a prospective employee had got into trouble for dubious practices, something that they are now unable to do.

The real estate industry is now largely unregulated as the Government licenses housing agencies, rather than individual agents. There were 1,340 licensed agencies in March. In recent years, the industry has been an increasing source of complaints to Case. There were 672 complaints last year, up from 469 in 2004 and 447 the year before.

To raise service standards, the institute teamed up with the Singapore Institute of Surveyors and Valuers to launch an accreditation scheme last year.

The programme, designed to nudge housing agents towards getting professional qualifications, has accredited 348 individual agents so far. A total of 270 agencies - with about 6,500 agents - have also got the quality tag.

But problems persist.

Big housing agencies like PropNex, ERA Singapore and Dennis Wee Group say some agents use their companies’ reputations to attract clients, but close the housing deals under a smaller company’s name.

As a result, home buyers who hire an agent assuming they have the services of the bigger firms actually get less protection should the deal go awry.

PropNex chief executive Mohamed Ismail, estimates that 10 per cent of housing deals are done this way.

Institute president Jeff Foo said: ‘There’s no immediate remedy.’ But with the registration scheme, it will be harder for rogue agents to operate.

‘Anybody will be able to check whether someone is a bona fide agent,’ he said.

Source : Straits Times - 7 Aug 2006

Good demand from expats, but rents still have some way to go before reaching highs of 2000

Residential rents in Singapore have rebounded by double-digit figures since the market bottomed out two years ago, but they still have some way to go before reaching the high levels achieved in 2000.

The present market recovery in residential leasing is led by the luxury segment, data shows. Rents for high-end properties have rebounded faster than rents for the rest of the market - and market players attribute this to good demand from the expatriate crowd.

Data from property consultancy CB Richard Ellis (CBRE), which monitors a sample of properties in each segment to calculate average residential rents, shows that while average rents for luxury properties have climbed 17.1 per cent since the second quarter of 2004 - when the residential leasing market hit rock-bottom - rents across the whole island have increased by a smaller 13.9 per cent. And rents in what CBRE terms the ‘prime’ category, which is slightly more low-end than the luxury category, have also increased by a comparatively lower 13 per cent.

Average rents for the luxury segment grew from $3.50 per sq ft per month (psm) in the second quarter of 2004 to $4.10 psm in the second quarter of 2006. Rents for the prime segment grew from $2.30 psm to $2.60 psm, while islandwide rents climbed from $1.58 psm to $1.80 psm.

Observers say that the rental uptrend is in line with the general recovery and strengthening of the economy. But they also agree that upward price movements - especially in the high-end segment - are aided by expatriate demand. ‘The continued rental uptrend . . . is an indication that there is strong expatriate demand for quality rental housing, as well as some signs of improvement in the budget for housing,’ CBRE’s associate director for residential services Teresa Tso said.

Wallace Chu, senior manager of Savills Singapore, agrees with the assessment. ‘One reason for this is that a lot of expats are coming in,’ he said.

According to Savills, more senior executives are relocating to Singapore with higher housing allowances of $15,000 per month and above, and these executives usually look for larger units and detached houses in prime districts.

But recent figures released by the Urban Redevelopment Authority (URA) show that rents are still below their recent highs in the third quarter of 2000 for all types of private properties - non-landed apartments, terrace and semi-detached houses, and bungalows.

Present market sentiment believes that there is still a bit of time to go before prices draw on par with their highs in 2000, and one reason for this is that multinational companies have not been too quick to increase their housing allowances for the people they have brought into Singapore since the property downturn began. ‘While companies have adjusted expatriate housing budgets upwards since late 2005 in response to the upward market movement, many are keen to look into localised packages for their expatriates with a view to managing fixed costs whenever possible,’ said CBRE’s Ms Tso.

In a departure from URA’s statistics, CBRE’s data shows that islandwide rents have recovered to even exceed their 2000 high, while rents in the prime and luxury segments have almost reached the 2000 levels. CBRE said, however, that its sample size is much smaller than that used by the URA, and that calculation methods also differ.

Another effect of the expatriate demand is that properties in the two parts of Singapore more popular with the expat crowd - the Central and East regions - are seeing good rent growth. Looking at apartment and condominium rents across Singapore, Ms Tso said: ‘While these rents have on the whole improved islandwide, some regions have nevertheless moved ahead of the pack.’

As for rents outside the high-end segment, market watchers think that it will not be too long before a supply crunch means that increasing rents in top-tier properties filter down to the rest of the market. For example, demand for landed properties is expected to go up at a time when the number of such properties remain in short supply. This means that house-hunters may start to look at smaller properties, pushing up prices.

Source : Business Times - 7 Aug 2006

Property prices relatively low but rents are good due to proximity to downtown area

GEYLANG may not be the first place that comes to mind for home buyers looking to settle down in a quiet area.

But its infamous reputation has ironically helped to make some properties there a good investment: Rental yields there can be almost double those in surrounding areas.

These yields, an indication of the value owners get out of renting out their properties, are calculated as a ratio of the annual rents earned over what the buyers paid for the properties.

The relatively low prices for properties in Geylang, coupled with the attractive rents they get, mean good yields.

The fact that Geylang is just a stone’s throw away from the downtown area is a big selling point to many looking to rent, said property experts.

‘The demand comes from foreigners and working singles who like the proximity to their offices in Suntec City,’ said Mr Mark Teo, group division director of property agency ERA Singapore.

He added that ‘properties in Geylang still command a good rental price’.

Rents in Geylang are comparable to nearby Katong and East Coast - about $1,800 to $2,000 for a two-bedroom flat and $2,000 to $2,200 for a three-bedder.

Because home prices in Geylang are lower, annual rental yields, which are between 3 and 4 per cent for Katong and East Coast properties on average, can go up to 7 per cent in Geylang, property agents said.

For example, Mr Tan, an investor who declined to give his full name, enjoys a 7 per cent rental yield on his unit at Wing Fong Mansions in Geylang Lorong 14, which he bought for $350,000.

‘The apartments here are cheap and the rental price is good,’ he said, adding: ‘Apartments in other areas cost more than $400,000.’

A check of seven properties situated between Lorong 28 and Lorong 40 in Geylang found that the average price per sq ft (psf) is $441, compared with an average of $520 psf in nearby The Legenda in Joo Chiat, Dunman View and Haig Court.

That translates into rental yields of 5.2 per cent for Geylang properties, at least 1 percentage point higher than Katong and East Coast homes, which can cost up to $700,000, according to Mr Eric Cheng, senior division director of PropNex.

However, investors hoping to get financing for their home purchases should bear in mind that some banks may be reluctant to give loans for certain areas in Geylang for fear that they may face difficulty selling these properties in the event of a default and repossession.

But that does not bother some investors like Mr Tan.

‘I’m not worried about not being able to sell the apartment because the rental return is good,’ he said.

‘For properties, as long as the price is good, location doesn’t matter.’

Source : Sunday Times - 6 Aug 2006