Reit consolidation not likely: analysts

They say requisite factors for consolidation such as valuation disparity, market disruption and little room for growth are not present

By

Lee Meixian

JUN 15, 20155:50 AM

Singapore

THE erratic outlook for the Reit sector has rekindled market talk of possible consolidation - be it smaller players grouping together, or larger players taking smaller ones out - should market conditions worsen.

This is given the "saturated" Reit market in Singapore, particularly in the industrial space which is fragmented with several small players which do not appear to be very different from one another to the layman.

But analysts The Business Times spoke to thought it unlikely, citing a list of factors that need to be in place before consolidation can occur.

First, Reits need to be trading at deep discounts, which is not the case now. Most are trading at or above book value, said Vikrant Pandey from UOB Kay Hian. Another condition is that Reits need to have exhausted growth opportunities, and competition has to be so intense and affect profit margins so badly that they turn to consolidation as a way out.

While the pool of assets in land-scarce Singapore is limited, Reits have overcome that by acquiring overseas assets, thus making consolidation unnecessary, he said.

DBS Group Research analyst Derek Tan cited other preconditions before consolidation can occur, namely: financial market dislocations, given how reliant Reits are on capital markets, and - related to Mr Pandey's point - a valuation disparity, where a Reit is trading above book value and another below, so that it is cheaper for the former to buy the latter through a share swap.

"At this point, we see neither," he said.

Consolidation also tends to happen during times of crisis, not when the market is flush with liquidity like now, said Ong Kian Lin, who recently became the head of research at RHB Research in Singapore.

The last time Reit consolidation happened here was during the 2008 global financial crisis when Frasers Centrepoint acquired 17.7 per cent of the Singapore-listed Allco Commercial Reit and 100 per cent of its manager, and rebranded the Reit as Frasers Commercial Trust.

The stakes were acquired from the then financially troubled Allco Finance Group, which needed the proceeds to repay debt.

Later that year, Malaysian developer YTL Corp also bought 26 per cent of the Singapore-listed Macquarie Prime Reit and 50 per cent of the manager from Macquarie. Macquarie had spent months seeking a buyout offer for the Reit, but could not find takers in the difficult capital market environment. It thus relented to sell just its own stake to another sponsor.

Fast forward to present day, the financial health of Reits still looks good, Mr Ong said. "The balance sheets are strong. No one looks in distress."

Meanwhile, the jitters have not shaken several offshore, cross-border Reits looking to list here. At least three Reit listings are expected to revive the quiet IPO market this year.

One of them is Canadian insurer Manulife Financial Corp's asset management arm, which is planning an up to US$450 million Singapore listing of its US office properties in Q3. DBS Bank and JPMorgan are advising on the deal.

Another Reit in the pipeline comes from Shanghai property investor Kailong Real Estate Investment, which might spin off its Shanghai business parks in a S$200 million listing in July, said Reuters. The Reit will be denominated in both renminbi and Singapore dollars and will be the first dual currency Reit in Singapore. It will also be the first mainland Chinese company to issue a Reit IPO here.

The third comes from fund manager CIMB-TrustCapital Advisors, which is planning to list a Reit with possibly up to A$1 billion (S$1.04 billion) worth of Australian office assets on the Singapore bourse, according to The Australian.

The Reits are likely drawn by Singapore's pro-business tax incentives and large investor base well-versed with the Reit instrument.

Analysts say these listings will add diversity to the offerings here and boost the options for investors. The chances of them cannibalising interest in the existing Reits are low because their exposures are quite different.

In fact, some analysts expect offshore, cross-border listings to form the trend going forward, given the vast numbers of property portfolios available outside Singapore, and the already well-represented domestic sectors for office, retail, hospitality and even industrial real estate here.

Unclear timing of rate hike causing Reit jitters

Interest rate increase may or may not be priced in already; selldown still expected when rates rise

By

Lee Meixian

JUN 15, 20155:50 AM

Singapore

THE unclear timing of the interest rate increase is causing some volatility in the share prices of Singapore real estate investment trusts (Reits), which have rallied and corrected with each reading of the Federal Open Market Committee's (FOMC) meeting minutes.

The FOMC next meets on June 16-17. With June now looking unlikely for a rate hike given still-mixed US economic data, the consensus now seems to be for a 25 basis point bump-up in interest rates in September.

And although Reits have braced themselves for it - some 80 per cent of all their borrowings have already been hedged - analysts still expect a selldown on fears.

There are divided views on whether Reits have already priced in the rate increase or not. One analyst noted jitters still when US Treasury bond yields or Singapore government bond yields spike.

For instance, when the US 10-year bond yields went from 1.89 per cent to 2.29 per cent on April 20, the FTSE ST Reit Index fell 2.1 per cent.

More recently, when the 10-year Singapore bond yields rose 24 basis points from 2.42 per cent on May 29 to hit an 18-month high of about 2.66 per cent on June 5, Reits sold down 1.1 per cent over the same period.

"So I don't think the rate increase is really reflected in their current prices, because there is always this emotional sentiment. When rates do increase, although it may be gradual, things will still get pretty volatile and we can expect a bit of a selldown," one analyst said.

He added that investors will need to be very selective about picking stocks.

"Going forward, it's not easy to pick a conviction within the sector . . . A few houses are advocating bottom-up stock picking, meaning as opposed to going for a sector, you look at company fundamentals specifically. You comb across the different Reits and look for factors like strong balance sheet, good capital management, high percentage of borrowings hedged, and DPU (distribution per unit) growth."

DBS analyst Derek Tan noted that average interest costs have been increasing moderately over the past year or so, largely due to some floating rates on loans going up, as well as on longer tenure loans which typically come with higher costs.

"But generally the DPU trend is still positive, albeit its growth has been slowing," he said.

When the interest rate increase finally kicks in - and it would have been about two years since the possibility of it first surfaced in May 2013 - there is almost guaranteed to still be a selloff in the S-Reit sector.

But Mr Tan believes "it will be a relief rather than downside, and the downside won't be a lot because the market has been waiting for it for so long that the majority has been priced in".

Asked to describe his outlook for Reits for the rest of this year, UOB Kay Hian analyst Vikrant Pandey called it "hazy".

"For the next quarter, I think Reit prices will move sideways, without any strong upward or downward movement. This year has been a see-saw in terms of the outlook for interest rate direction, be it an earlier or later than expected rise, and that has caused swings in the performance of interest rate sensitive sectors like Reits."

In the US, big utility stocks also rank among the most rate-sensitive equities because of their highly geared nature. A lot of capex is pumped into their infrastructure projects which then yield recurring income, much like how properties work in Reits. But there are no such pure plays on Singapore's bourse.

Among Singapore's Reits, the respective sub-sectors also have their own headwinds to contend with.

The office sub-sector faces a massive four million square feet of supply until end-2016, and while there appears to still be some time, this has put the bargaining power back into tenants' hands.

According to Knight Frank, office spot rents grew at a slower pace of just 0.2 per cent in Grade A+ buildings in Raffles Place and Marina Bay quarter on quarter in Q1. Office Reits have traded down about 7 per cent year to date, making them the biggest laggards compared to other sub-sectors.

The industrial property sector faces a similar oversupply situation, as well as a slew of restrictions - on strata sub-division and space occupied by anchor tenants, seller stamp duties, shorter land tenure, longer minimum occupation periods before asset sales - all of which are measures by the government to cool industrial property prices and rents.

Retail is on a structural downtrend, plagued by labour costs and online competition, while hospitality is faced with falling tourist arrivals - a 5.4 per cent drop in the first four months of this year - and weak regional currencies which make Singapore an expensive destination.

Maybank has an "underweight" recommendation on Reits, with "sell" calls on CapitaLand Mall Trust (CMT) and Ascendas Reit. UOB Kay Hian has a "sell" on CMT too, citing retail weakness, while RHB recommends "buy" for its economies of scale and low gearing. OCBC Investment Research and RHB are neutral on Reits, citing rate fears. Different houses are more pessimistic on different sub-sectors with no clear consensus.

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【本報訊】羊年臨近，年廿八，洗邋遢；有拍賣行負責人提醒巿民，若大掃除時在家中枱底暗角，發現一些五仙「神沙」要留意年份，隨時升值變「大牛」。本周末拍賣的「一九六四年香港五仙」拍賣底價五百元，「一九八○年香港一毫」底價四百元，「呢個只係大約巿價，經叫價分分鐘唔止呢個數。」
記者：蔡朗清

普藝拍賣行錢幣部主管梁達榮昨表示，錢幣收藏家競相追逐的香港輔幣主要是兩種，其中是一九八○年的一毫，如果是全新硬幣，現巿價高達逾千元，升值一萬倍；即使用過，只要硬幣整體表面沒有刮花，色澤光鮮，亦可賣得四至五百元。
一九八○年一毫是香港最後一款大面積的一毫硬幣，之後全部硬幣都變得輕巧細緻，所以變得值錢，「政府當年全面回收一九八○年一毫，巿面流通量唔多。即使係一九八○年前的一毫都唔值錢」。

無人知市面有幾多枚

梁達榮續稱，一九六四年香港五仙硬幣更值錢，拿去拍賣行保守估計可賣得八百元，升值逾萬倍；保存良好隨時拍得二千元，「點解一九六四年香港五仙咁值錢？其他年份唔值錢，因為其他硬幣都有發行量，惟獨一九六四年五仙無公佈發行量，到今天都係一個謎，巿面仲有幾多枚，冇人知。咁樣先值錢」。
他說，普藝本周末錢幣拍賣行各有一枚一九六四年香港五仙及一九八○年香港一毫拍賣，底價分別是五百元及四百元，「最後成交價幾多？好難估計」。
除硬幣外，當日亦有鈔票拍賣，其中一組二百張連編號的全新滙豐銀行拾圓，底價三千二百元，「係一九九二年鈔票，賣家當年喺銀行『唱』返嚟諗住封利是，點知擺係保險箱到𠵱家。值錢在於連號碼加上靚冧巴，頭三個號碼是888，有一張仲係888777。𠵱家已經無連號碼鈔票換」。
另一張拍品是一九八一年全新滙豐銀行一百元，編號555555 ZF，估值四千二百元。
梁達榮打趣說，巿民在大掃除找得有關輔幣等，不妨拿來拍賣行估價，「我哋會盡快幫賣家安排拍賣」。 

Integrated Shield Plans: To keep or not?

When MediShield Life starts later this year, it will provide everyone, both sick and healthy, with cradle-to-grave health insurance cover. There will no longer be any lifetime limits, and benefits and premiums will be higher than under the current MediShield. This has caused many people who are currently on the Integrated Shield Plans (IPs), which cover them for more than subsidised hospital care, to ask if they can drop these additional plans which have higher premiums, and simply rely on MediShield Life. Today, six in 10 people on MediShield have IPs. Some certainly should continue with their IPs while others would do better to downgrade to the basic MediShield Life. Senior Health Correspondent Salma Khalik gives some pointers to help you decide which route to take if you are currently on an IP.

There are five insurers - AIA, Aviva, Great Eastern, NTUC Income and Prudential - that offer three categories of Integrated Shield Plans or IPs: for treatment at private hospitals; public hospital A class; and public hospital B1 class.

Public hospital B2 and C class wards are heavily subsidised and can be covered by the basic MediShield Life.

UP TO the age of about 40 years, the premiums for IPs are relatively low, as younger people are less likely to require expensive hospital stays. This reason alone makes IPs worth considering, especially if you do not have company health cover.

Current premiums range from $78 to $383 a year, but will rise when MediShield Life starts as all IPs have to incorporate it. MediShield premiums are $50-$105 today but will rise to $130-$310 a year when it becomes MediShield Life. Those who do have good hospital coverage provided by their employer should look at considerations for older workers.

PREMIUMS start going up rather sharply from the age of 41 years as that's the age when people start getting chronic problems like blood pressure and high cholesterol levels which put them at higher risk of serious illness. That is also when the incidence of cancer and diabetes starts to climb.

IP premiums range from $631 to $1,667 a year. While these premiums might still appear pretty affordable as up to $800 can be paid with Medisave money and they are still drawing a salary, it is time for those who have hospital cover from their employer to ask themselves the following question: What class of ward am I likely to use after I retire?

This is because, for them, it is only after they retire and no longer have company health coverage that MediShield Life of IP becomes their main health insurance.

Remember that insurance, unless you also buy a rider, does not pay the whole hospital bill.

The deductible, or the initial amount the patient needs to pay, ranges from $1,500 to $3,500 depending on the ward class. There is also a 10 per cent co-insurance for the rest of the bill that the patient needs to pay for.

Many patients take stock only at the point of admission.

Today, 60-70 per cent of people with IPs pegged at private hospitals or public hospital A class ward choose a lower hospital class than their insurance entitles them to - which essentially means that they have chosen the wrong IP and have been paying higher premiums than they needed to for years.

Another thing to look at is not the premiums you are currently paying, but the amount you will need to pay a decade or two after retirement. One in three people aged 65 is expected to live beyond 90 years. Would you be able to afford those premiums then?

If the answer is no, then do you want to pay high premiums up till the point when you cannot afford them, or downgrade early and save on a lot of money in the coming years.

IF YOU have retired and need to be more careful with what you spend, you too should look 10-20 years down the road and see if the premiums are likely to remain affordable.

Remember that the premiums are also likely to rise as cost of health care goes up, so the premiums you will need to pay in future will be higher than what you see charged for older people today.

Now, the highest premiums for private hospital plans is more than $8,000 a year. It is about $5,000 a year for B1 plans. MediShield Life premiums for people 65 years and older will hold steady for at least five years at $815-$1,530 a year before subsidies.

IF YOU are already suffering from a serious long- term ailment and are already collecting from the insurance, you probably should carry on to ensure that your coverage is not reduced. This applies to people of all ages.

Another group that might want to hang on to their IPs are diabetics with a high potential for kidney failure. If you qualify for subsidised dialysis, MediShield Life is enough. If you don't, you will need dialysis at a private centre.

B1 and A class plans that say they cover dialysis "as charged" refer to public hospitals and institutions only, but there are currently no public institutions offering private dialysis.

DOWNGRADING from an IP to the basic MediShield is never a problem and can be done any time. But moving to a higher plan will depend on whether you have any pre-existing medical problems that will result in exclusions in your coverage. The older you get, the more difficult it will be to change to a higher plan.

IN THAT case, the best thing to do is to hang on to your current plan for one more year. When MediShield Life is launched, the IPs will revise their premiums. By early next year, the picture will be clearer and you can then decide on the best scheme for you and your family.

salma@sph.com.sg

www.facebook.com/ST.Salma

@STHealth