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They buy, refurbish and resell industrial property to Reits

Savvy businessmen and industrialists are fast becoming a new class of investors as they are finding that there is more money to be made in selling property than in toiling over a lathe.

DTZ Debenham Tie Leung director and auctioneer Shaun Poh says some people are snapping up good industrial properties at auctions, refurbishing them, finding tenants, securing leases, then selling them to industrial Reits for a neat profit.

Up to 10 individuals or companies are involved, he says. It is not a large number but ‘before Ascendas Reit, there was no such thing as an industrial property investor’.

Some of the bigger players include Crescendas Group, Trivec and Steel Industries.

In July, Trivec sold a building in Joo Seng Road to Mapletree Logistics Trust (MLT) for $13 million. It paid about $3.8 million for it in August 2005. In May, Crescendas sold a building in Tai Seng Drive to MLT for about $38 million. It paid $7.18 million for it in January 2005.

Although the profits look very attractive, Mr Poh points out that the buildings are usually in very ’shabby’ condition so investors could spend between $3 million and $5 million retrofitting them.

More important is that these investors are also industrialists, who can guarantee leases of up to five years - an important factor in a sale and leaseback deal with a Reit. The tenants come from the investors’ subsidiary businesses or through their industry network.

The value of industrial property has been rising. According to a report by DTZ Research, $141.55 million of properties were auctioned by the four major auction houses in Q3 2006 - a 137 per cent year-on-year increase. The transaction value of industrial properties more than doubled to $20.06 million compared with Q3 2005, although there was no marked increased in the number of industrial properties sold.

DTZ Research analyst Serina Wong believes this is due to increased sales of larger properties. ‘In Q3 2006, almost all the industrial properties sold in the auction market had floor areas between 35,000 and 95,000 sq ft,’ she says. Almost all were mortgagee sales.

Reits specifically look for large properties. Among the industrial properties sold at auctions recently, Mr Poh estimates that at least three could be ‘Reit plays’. The highest price paid - $5.01 million or $63 psf - was for a choice property in Genting Lane that is likely to be resold to a Reit.

What do industrial Reits look for in a property? It must have about 100,000 sq ft of floor area and a minimum 40-year lease, and the seller must also have market credibility as securing leases is crucial for Reits.

Many business folded during the last economic slowdown, resulting in banks foreclosing on properties, says Mr Poh. ‘A lot of banks are now willing to cut losses through mortgagee sales.’

There still is, of course, demand from traditional industrialists. Mr Poh says a property in Sungei Kadut was hotly contested during a recent auction - bidding started at $2.5 million and the property was sold for $3.5 million, a 40 per cent premium.

DTZ Research says the average price of industrial properties sold at auctions increased in Q3 2006 to an average of $3.34 million, up 367 per cent quarter-on-quarter and 259 per cent year-on-year.

Source : Business Times - 25 Oct 2006