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Refinancing a bigger focus; acquisitions on hold; sector shakeup possible

The latest earnings season has been a chilly one for real estate investment trusts (Reits) hit by the credit crunch and a cooling property market.

Many Reits are working to shore up confidence in their credit positions. Property acquisitions are virtually off the table while industry watchers are divided on whether consolidation within the sector is on the cards.

‘Reits are definitely paying more attention to financing,’ said DMG & Partners Securities analyst Brandon Lee. The research house estimates that the sector has at least $4.5 billion up for refinancing in 2009 alone. With credit tightening and spreads widening, the market is watching closely for signs of trouble.

According to a CIMB-GK report, borrowing spreads for Reits have risen from an average of 150 basis points (bps) to 200-300 bps for three-year loans in the last six months.

‘While average all-in cost of debt for most Reits has been contained within 4 per cent thus far . . . we expect the all-in cost for those with significant refinancing due in 2009 to rise,’ said associate vice-president of research Janice Ding.

Reits have tried to soothe market anxiety in the past few weeks by releasing more details on debt. Ascendas Reit (A-Reit), for instance, won confidence votes when it said it had secured firm commitment of $200 million to help refinance a $300 million loan due in August next year.

Suntec Reit also made it a priority to refinance a $700 million loan due in December 2009. ‘Whilst we have no major financing needs in the next 12 months, we are keenly aware of the liquidity crunch,’ said the Reit manager’s CEO Yeo See Kiat last month.

Reits also have to worry about asset devaluation as the slowing economy weighs down on rents and occupancies. Lower property values would raise gearing ratios. Frasers Commercial Trust (FCOT) booked a revaluation loss of $83.5 million in the third quarter ended Sept 30.

Reits have pushed asset acquisition plans to the bottom of the agenda. Even organic growth has slowed. Suntec Reit shelved redevelopment plans for Park Mall. CapitaMall Trust also held back enhancement plans for three malls because of high construction costs.

‘We will review new commitments carefully and will not sacrifice our liquidity,’ said the Reit manager’s chairman Hsuan Owyang last month.

Analysts advise investors to be selective. While low unit prices have boosted yields, it would help to ‘pay extra attention to (Reits’) refinancing profile, especially the quantum of short-term debt due within the next six to nine months,’ said DMG’s Mr Lee in a note. ‘We like S-Reits with strong sponsors (and) excellent track record.’

CIMB-GK’s Ms Ding added: ‘The presence of strong sponsors and government-linked sponsors is advantageous at this juncture.’

FCOT, for instance, managed to take a $70 million loan from parent company Fraser and Neave last week to repay debt. The trust is in talks to refinance the $70 million loan and all debt maturing next year. In response, Standard & Poor’s Ratings Services took FCOT off ‘CreditWatch’ status and said that the outlook is stable.

ARA Asset Management Group CEO John Lim believes that consolidation in the sector seems unlikely because Reits would be more concerned about their own refinancing and asset valuation issues.

CIMB-GK’s Ms Ding said that in today’s market, it would be difficult ‘for any single entity to have enough funds to buy over the entire (Reit) unless it’s a distressed sale’.

But an industry observer believes that consolidation could happen because the sinking tide has left some Reits looking weaker than their peers. To avoid coughing up cash, a potential acquirer can offer units in itself to the target Reit, he added.

Source : Business Times - 28 Nov 2008

THE Urban Redevelopment Authority (URA) is offering a hotel site, Bukit Chermin, to developers, despite the weak property market.

The 3ha site, on URA’s reserve list - meaning it will go to tender if enough interest is shown - has a maximum permissible gross floor area of 10,000sq m.

URA says it should be developed into a ‘distinctive lifestyle hotel’ to enhance the appeal of areas known as the Southern Waterfront and Southern Ridges.

The Southern Waterfront is the Harbourfront precinct, including Sentosa, while the Southern Ridges is a 9km stretch of greenery and open space spanning the hills of Mount Faber, Telok Blangah Hill, Kent Ridge and West Coast Park.

URA had earlier completed two pedestrian bridges, namely the Henderson Waves and Alexandra Arch, to link three popular hill parks on the ridges.

Although the Bukit Chermin site is tucked away amid a hilly setting within an exclusive corner of the Southern Waterfront, it is also just minutes from entertainment and recreational amenities such as VivoCity, Sentosa and Mount Faber.

However, industry experts and analysts say that while the site offers niche developers a unique proposition, the current economic downturn is a key stumbling block.

‘The Bukit Chermin site is a very interesting and unique site, with possibilities for a boutique hotel development,’ said DTZ Research senior director Chua Chor Hoon. ‘But in today’s climate, in which credit conditions are tight and there remains a lot of uncertainty going forward, I don’t think the site will receive any interest from developers.’

‘Given current market conditions, I think it is very unlikely to attract any interest at all from the targeted players,’ said another property consultant who did not want to be named.

‘I think it is safe to say, the URA really is just going through a formality, but nothing is wrong with the URA testing the waters because at the end of the day, who knows? A private developer might just surprise everyone,’ he mused.

Source : Straits Times - 28 Nov 2008

Many of the 2,000 firms in DP Info’s study have high debt, little cash and weak profitability

THE local construction industry could already be in serious trouble heading into the economic downturn, new data from DP Information Group (DP Info) shows.

Ironically, the seeds of the problem were sown during the recent construction boom as firms snapped up projects using short-term credit to get things moving.

As a result, many are heavily reliant on this short-term credit.

And they now face the risk of defaulting on repayments, should banks further tighten credit as times get tougher, the credit and business information firm said.

This finding was based on an analysis of the audited financial results of more than 2,000 construction firms lodged this year.

About three in four have an annual turnover of $10 million or less. The other 24 per cent are over $10 million.

Overall, about 6,000 firms make up the construction industry here.

The analysis of the data found that many companies face not just one but multiple financial problems.

These include: high levels of debt, low levels of liquidity and weak profitability.

All these are all tell-tale signs of pending financial trouble, said DP Info. Managing director Chen Yew Nah said: ‘The research is a warning sign for the construction industry and while it does not mean a large number of firms will fall, it does mean they are vulnerable to collapse if their position deteriorates.’

DP Info’s research showed that 45 per cent of the construction firms surveyed rely on short-term loans.

Of these firms, slightly more than half have debt levels that exceed the cash levels they have in the bank.

This means that 27 per cent of all construction firms surveyed are likely to face financial difficulties if their short-term credit is denied or if the repayment terms are shortened.

Construction firms also face weak levels of liquidity. Of those surveyed, 45 per cent had less than $100,000 in cash.

Of the firms relying on short-term loans, about 59 per cent of them with more than $100,000 in debt have less than $100,000 of cash at the bank.

A third weakness is profitability. About 35 per cent of construction firms reported net losses while 51 per cent have accumulated losses.

Many construction firms do not have strong balance sheets in any event, but during the boom in the past two years, they took on more projects using short-term loans, said Ms Chen.

‘The high level of dependence on short-term debt and the staggered pattern of receipts mean the construction industry will face difficulties if short-term credit dries up,’ she said.

Many financial institutions may be reluctant to renew or extend credit if project sales are slow.

If credit lines of constructions firms dry up, they may not be able to pay their sub-contractors or other firms promptly.

‘What is needed is a coordinated effort by the Government, the industry and financial institutions to respond to the unique problems faced by the construction industry,’ said Ms Chen.

For instance, an industry-specific response is required to ensure that the funds made available by the Government are best used.

The Government recently said it will help make available $2.3 billion worth of loans to help firms ride out the economic slowdown.

‘Bankers need to articulate clearly what are the products available to help the sector, for example,’ said Ms Chen.

Small construction firms are not likely to default as their debt exposure should not be extensive if their debt is related only to committed construction project works, said Singapore Contractors Association executive director Simon Lee.

Ms Chen said cash flow is emerging as a problem at some construction firms since they are not getting paid on time. ‘Once you’re in default, you have negative cash flow and are no longer a viable company,’ warned Ms Chen.

Some firms have folded because of negative cash flow, even if they still have business to do, she said.

The construction industry is just an example of an industry with unique needs. Other industries such as manufacturing and transport may also face problems due to their reliance on debt to finance assets and equipment.

Efforts to assist each industry can be better targeted if research identifies where the problems lie, said DP Info.

TROUBLE LOOMS

‘The high level of dependence on short-term debt and the staggered pattern of receipts mean the construction industry will face difficulties if short-term credit dries up.’

DP Info managing director Chen Yew Nah

Source : Straits Times - 28 Nov 2008

A host of factors to overcome first before parcel can be used

IT MAY boast a waterfront view overlooking the upcoming Sentosa integrated resort, but don’t expect much interest from developers for the latest hotel site at Bukit Chermin released by the Urban Redevelopment Authority (URA).

That’s the view shared by property analysts Today spoke to yesterday.

“Investor sentiment is very weak now, so it is unlikely that any developer would want to (pull the) trigger at this point in time,” said Colliers International director of research and advisory Tay Huey Ying.

Transaction volumes in the real estate market have been dismal in recent months, noted Cushman and Wakefield’s managing director, Mr Donald Han, who expects the trend to continue in the next few months.”

Situated along the Keppel Harbour coastline, the hilly, 3-hectare site sits between Keppel Club and the upcoming luxury residential development Reflections at Keppel Bay. The site is currently on the Government’s Reserve List, meaning it will be open for tender only if developers indicate a minimum bid price that is “acceptable to the Government”.

The URA released more details about the sale conditions for the site yesterday. “In addition to accommodation facilities, the proposed hotel development is planned to include offerings of lifestyle programmes and services that will cater to discerning international visitors,” the authority said.

Mr Han said another factor that might discourage developers would be the extra costs needed to develop the site, which is situated on a hill. Developers have to fork out more cash to “get traffic up the hill” and also to prepare retaining walls, which are needed to prevent the erosion of slopes, he said.

Analysts also point to declining tourist arrivals amid a deepening global economic downturn as another reason why property developers are not likely to bite. According to the latest Singapore Tourism Board statistics, visitor numbers fell for the fifth consecutive month in October. The decline of8.1 per cent was the single biggest monthly drop since Feb 2005. Hotel revenue dropped for the first time in three years, while the average occupancy rate dropped about 7 percentage points to 82 per cent.

ERA Asia-Pacific’s assistant vice-president Eugene Lim thinks developers will show interest, although he feels the bids may be too “conservative” to trigger a tender.

“Developers definitely need to look long-term. If they succeed in getting the site and get it going, the integrated resorts would be up by the time, so they’ll be catching the upswing,” he said.

If triggered for tender, developers will then have to - unlike most other hotel sites - submit two separate proposals based on development concept and on price, with the concept aspect being evaluated first, the URA said.

Source : Today - 28 Nov 2008

But survey finds Republic is world’s 9th most expensive office market

The republic is still one of the most expensive places in the world to do business in, even though office occupancy costs here have dropped, the latest survey by CB Richard Ellis (CBRE) shows.

As in the firm’s previous survey in May, Singapore was the world’s ninth most expensive office market, though occupancy cost dropped to US$135.13 per square foot per year from US$139.31 in May.

In CBRE’s November 2007 survey, Singapore posted the world’s biggest 12-month increase in office occupancy costs. But in the May 2008 survey, it dropped to third place. And in the latest ranking, it is 13th.

Occupancy costs here rose 27.8 per cent in the 12 months to November 2008, down from 86 per cent in the 12 months to May 2008. CBRE’s chief global economist Raymond Torto said that globally the rate of change is generally slowing, and in some markets the pricing direction is down. ‘Our current perceptions are greatly affected by the current economic malaise.’ he said. ‘We tend to forget how fast rents and occupancy costs were rising over the past 12 months. The turn in rent trajectory will provide some relief to occupiers and angst to owners.’

Abu Dhabi in the United Arab Emirates (UAE) registered the fastest-growing office occupancy costs in CBRE’s November 2008 Survey. Costs there jumped 94.6 per cent in the past 12 months.

‘The rise in occupancy costs in the UAE has reflected market fundamentals - limited supply of quality office space and high demand from international firms, primarily law firms, financial institutions and real estate and construction companies planting a footprint in the UAE,’ CBRE said. Ho Chi Minh City in Vietnam, which registered the fastest-growing occupancy costs CBRE’s May 2008 ranking, fell to second spot in the latest survey. Costs there rose 51.4 per cent in the past 12 months.

London’s West End and Moscow remain the world’s two most expensive office markets. Hong Kong’s CBD, Tokyo’s Inner Central District and Mumbai’s Nariman Point round out the top five.

Source : Business Times - 27 Nov 2008