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Friday, December 25, 2009

All about REIT - REIT as a Property Developer

The main business of a REIT is in acquiring and renting out of income producing properties. There is a related paragraph in the MAS Code on Collective Investment Schemes about this in section 7.1:
"... at least 75% of the property fund’s deposited property should be invested in income-producing real estate"

Deposited property is defined in section 2.2 as follows:
"Deposited property means the total value of the underlying assets of the
scheme.
". In another words, it is the total asset value of the REIT.

This guideline helps to ensure that a REIT is primarily a property landlord, such that it is able to distribute a stable and regular dividend from its rental income. However, other than being a property landlord, a REIT can also be a property developer. Following are 3 related paragraphs about this in section 7.1 of the MAS code:

"A property fund should not undertake property development activities whether on its own, in a joint venture with others, or by investing in unlisted property development companies, unless the property fund intends to hold the developed property upon completion. For this purpose, property development activities do not include refurbishment, retrofitting and renovations;"

"A property fund should not invest in vacant land and mortgages (except for mortgage-backed securities). This prohibition does not prevent a property fund from investing in real estate to be built on vacant land that has been approved for development or other uncompleted property developments;"

"The total contract value of property development activities undertaken and investments in uncompleted property developments should not exceed 10% of the property fund’s deposited property;"


Simply put, the REIT can engage in property development activities of up to 10% of its total asset value, but it has to hold the developed property upon completion. As 10% is a rather low level, a REIT can only engage in significant property development activities when its total asset value is large enough in size.

Ascendas Reit and its Built-To-Suit projects
As of this writing, the only REIT I am aware that has actually engaged in property development activities is Ascendas Reit. Its total asset value is around $4.6 billion, a large enough size for significant property development activities. It has completed some development works in Changi Business Park. It is also involved in some Built-To-Suit (BTS) projects.

A simple definition of Built-To-Suit:
"It is an arrangement whereby a landowner offers to pay to construct on his or her land a building specified by a potential tenant, and then to lease land and building to the tenant."

This a actually a win-win situation for the landlord and the tenant. The tenant gets exactly what he wants for the design of the property, while the landlord already has a committed tenant before the building is built. Recently, A-Reit has completed a BTS project for Built-to-Suit for Expeditors Singapore. The property is a part 2-storey and part 4-storey logistics facility at Plot 6 of Airport Logistics Park, 100% of which will be leased to Expeditors Singapore. The development cost of this property is S$24.4 million.

Currently it is engaged in a more significant BTS project for Singtel, the development of a 9-storey Hi-Tech Industrial building at Kim Chuan. There will be a 20 + 10 years lease with annual rental escalation. The estimated development cost is S$175.4 million.

To study the impact of property development on the Reit, we can take note of the development cost of the property, and monitor the subsequent asset valuation of the property. We can also compare this to the acquisition cost and subsequent asset valuation of a property that is purchased through acquisition, to compare which one brings in a greater advantage in increasing its total asset value.  

CapitaMall Trust's Bid for the Clementi Mall Tender
As of this writing, CapitaMall Trust is the largest Reit in terms of total asset value, with latest figure at about $7.4 billion. It has definitely achieved the size to engage in significant property development activities.

So far I have never come across CMT having actually involved in any property development projects. But it has shown its interest for suburban mall developments with its bid for Clementi Mall in early November. The tender for Clementi Mall drew a response of six bids, and CMT's bid of S$338.8 million was the third highest. The tender was eventually awarded to a joint venture between Singapore Press Holdings, NTUC Income and NTUC FairPrice which placed the highest bid of $541.9 million. (Many has viewed this bid as being excessive as the next 4 bids were all in the S$300 million range). Although CMT was not awarded the tender, some analysts still view the decision to bid positively as it shows that it is ready to engage in property development actitvities.

Personally I find that tenders for development of new retail malls of significant size will probably be hard to come by. There are already quite a number of new malls being completed recently or in progress of development in both the central and suburban areas. Nowadays, you will hardly see a more populous town without a flagship mall in its town centre. New shopping areas will also come up in the integrated resorts and the Marina Bay area. My feeling is that if CMT wants to look for significant property development projects, it will probably need to look overseas. But this seems unlikely for now as property development overseas is already being undertaken by its new parent, CapitaMall Asia. Furthermore, CMT is still mainly a Singapore player, other than some indirect exposure to China through its 20% stake in CapitaRetail China Trust. It may likely remain a pure property landlord in the near term, unless of course there are tenders for smaller retail mall development projects.

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