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Never lose money in real estate and REITs?

Sunday, December 16, 2012

I have cautioned people that we are likely to see a decline in prices of residential properties in the next few years. Unless we are sure that we are looking at an undervalued property, we should think again about passing that cheque to the agent. After all, it is a big financial commitment.

The government continues to make more land available for new residential developments. Already, there is a rising vacancy rate in non-landed private residential properties. This would likely worsen as more developments are completed in the next two years. We could have the perfect cocktail for a deep correction in the market if interest rates should head north come 2015.

We retain our negative view on the Singapore residential sector as we continue to see a rising threat of vacancy with an acceleration in physical completions in 2013-15.

Vacancy rates for non-landed private units had increased from 5.9% to 6.1% qoq in 3Q12 as take-up continued to lag physical completions. URA estimates that completions will rise from 16.1k units in 2013 to 23.1k units in 2015, 2-3x more than the historical average occupancy rate of 8k units per year.

We forecast that physical residential prices will fall by 5% by end-FY13, with vacancy rates for private units up from 6.1% currently to 7.2%. (CIMB, 11 Dec 12)

With industrial properties, the government has also made more land available in order to keep the cost of doing business down in Singapore. With investors channelling their funds into commercial and industrial properties due to cooling measures imposed on residential properties, prices of commercial and industrial spaces have sky rocketed.

In all areas, how much of the demand is, therefore, user demand? How much of the demand is from property investors and speculators? The end result is the same. Prices are pushed up which leads to more building. We don't need a degree in Economics to know that oversupply will bring down prices. People who bought at high prices should have deep pockets to avoid foreclosure.

So, how will my investments in industrial S-REITs be affected? They will not escape unscathed, for sure. This is where the quality of the management will be called into question. Quality of management?

For example, Saizen REIT has been able to maintain occupancy of 90% or so for their properties in Japan despite the difficult conditions and much lower occupancy levels of competing properties. I believe in their management's quality.

So, if the management is up to scratch, we could see above average occupancy levels even as more supply comes on stream. However, in a situation where there are many alternative offerings, to retain tenants, rental rates would probably come under pressure.

Although we could continue to see some yield compression in 2013 as money seeks out higher returns in industrial S-REITs, I would be surprised to see unit prices rising by more than 10 or 15% next year. If people ask me if this is still a good time to invest in industrial S-REITs, I would say it is still good if we are investing for income but, perhaps, not so good if we are looking for capital appreciation.

My two largest investments in industrial S-REITs are:
1. AIMS AMP Capital Industrial REIT
2. Sabana REIT

Of the two, I am more impressed with the former's management quality. AIMS AMP Capital Industrial REIT's management have renewed many tenancies ahead of time while Sabana REIT which has almost 48% of its tenancies expiring next year is slow to show results.

So, do we press the panic button? I think not. Sabana REIT would probably be able to renew most, if not all, of its expiring tenancies as the full impact of the new supply coming on stream would not be felt in the very short term. Nonetheless, the impression I get of a management that seem to be dragging their feet nags at me.

I have stayed positive on S-REITs for quite a while now. It is now prudent to turn more cautious on S-REITs although it is too early to turn negative.

Supported by lower than average completion of new industrial space over the past few years, vacancy levels for all industrial segments (Business Parks, Multi-User Factories and Warehouses) have hit record lows. This had led to a strong surge in industrial capital values and rents by 6-26% since the start of 2012. Looking ahead, we see market dynamics turning given that close to 49.7msqft of industrial space currently under construction will be completed over 2013-2015. This, on an annualised basis, represents more than twice the annual supply over the past decade.
(DBS Group Research, 6 Dec 12)

Related posts:
1. AIMS AMP Capital Industrial REIT: 2Q 2013.
2. Sabana REIT: 3Q 2012 DPU 2.34c.
3. Staying positive on S-REITs.
4. AK71's simple strategy.
5. REITs: When to buy?


inquisit0 said...

Hi AK,

Do you refer to all types of REITs in this post?

Be cautious of only industrial REITs?

How about Commercial, Residential, Health and hospitality.

Which one do you think can still invest in?

Would like to hear your opinions. Thanks.

AK71 said...

Hi inquisit0,

I talk about industrial S-REITs because I am most familiar with it. I can't seem to find any undervalued REIT to invest in now although the matter of valuation can be quite subjective.

I have been able to find some stocks which I think are undervalued though. Marco Polo, SoundGlobal and China Minzhong, for examples. I also think that Perennial China Retail Trust is undervalued. I am vested in these. You want to do your own due diligence and decide if these are for you. :)

Kim said...

I am thinking to get into some position for AMP AIMS for income investing of course, in the coming week. Does this mean that I shld hold my hand now?
I also have Sabana too. With this impending oversupply concern, does it means we have to get rid of them or continue to hold for income?
Appreciate your advice

AK71 said...

Hi Kim,

I always believe in hedging. There is after all no certainty that Mr. Market would act in the way we expect him to act.

So, I believe in remaining invested while keeping a war chest ready. See my blog post "AK71's simple strategy". :)

No one can see the future but based on what we know, a picture of oversupply is forming from 2013 to 2015. How would Mr. Market react? Ah, that is the wild card.

I would be more cautious about adding to my long positions in S-REITs now but I have not turned negative on them. As of now, they are still good investments for income. Any pull backs would probably still see strong buying interest as buying on pull backs is definitely more prudent than chasing ever rising prices.

Mr Chua said...

Hi ak71

Could you kindly comment on the recent disposal of its Japanese properties by FCOT?

Also the election has somehow boosted the stocks in Japan.

As a newbie, how useful are these information to our analysis of taking/accumulating position in saizen reits?
Thank you very much

AK71 said...

Hi Dc,

It is impossible to do a like for like comparison for FCOT and Saizen REIT. Apart from the fact that they are both REITs, they are not alike.

The divestment of its Japanese commercial properties was seen as a positive for FCOT because they were performing so badly. Since they were a drag on the overall performance of the REIT, divestment makes sense. Post divestment, the REIT's gearing level reduced, total occupancy ratio and WALE improved.

For Saizen REIT, it only owns residential properties in Japan. It does not own commercial properties. The demand for the sort of residential properties Saizen REIT owns is relatively inelastic. Through good and bad times, occupancy remains relatively high.

Unlike Singapore, the property market in Japan has been deflating for 20 years. The value of the residential properties owned by Saizen REIT is now below their replacement cost. This means that it does not make sense to build more of such buildings. The supply is not growing.

I also wonder how the return of the LDP under Shinzo Abe would affect the Japanese economy. Abe seems determined to drive down the value of the JPY. This is likely to help Japanese exporters. It would, however, mean lesser income in S$ terms for the unit holders of Saizen REIT.

You might want to read the second half of this recent blog post:
REITs: When to buy?

I think Saizen REIT at 17c a unit is relatively undervalued. However, there is no way to tell what Mr. Market thinks. :)

Anonymous said...

No wonder Mapletree Industrial is falling these few days. I have been entering one lot at a time using SCB but I think with this report, I will not over commit into this counter.

Sabana has been a very rewarding investment and certainly the knowledge of 47% of their space up for renewal next year would be another dampener.

But then, Retail reits are so expensive now, esp Fraiser Centerpoint.

Ahh, not much choice too with QE4 coming next year to further depress bank savings rate. Your basic 50%/50% strategy will continue to be the optimal one

Zaanan said...

Hi AK,
Any thoughts on the recent run-up in price for perennial china retail trust?


AK71 said...

Hi Kelvin,

I don't know why MIT's unit price is declining. Who can tell what's on Mr. Market's mind? ;)

However, it would be prudent for us to exercise caution at this stage when unit prices have appreciated so much.

I would like to have higher yields to compensate for possibly higher risk from 2013 to 2015. I can only wonder if Mr. Market agrees or if he would continue to pay higher prices for lower yields (which could still appear attractive in a low interest rate environment).

Personally, I would only add to my long positions if there is a meaningful pull back since I already have significant exposure. Undervalued propositions are always irresistable. ;)

AK71 said...

Hi moonlight,

Welcome. Your first comment in my blog? ;)

PCRT? I think it is still undervalued, fundamentally. You might want to read the comments in the following blog post from 30 August 2012:
Comments on PCRT.

Technically, any retracement would see relatively strong support at 50c. Whether it would happen or not is anyone's guess. :)

AK71 said...

According to Knight Frank, rentals of factory space have increased by five per cent in Q1 2013 from Q4 2012 to S$2.13 per square foot islandwide.

Knight Frank noted that the newer strata-titled factory spaces have commanded higher rentals, but with 24 million square feet of new supply coming up in the remaining 2013, rental increase is likely to be capped.

According to the URA Price Index, industrial property rentals rose 3.9 per cent in the fourth quarter of 2012 from the preceding quarter, outstripping the 1.2 per cent quarter-on-quarter rise in July through September.

CNA, 8 April

AK71 said...

AN ALL-IN bidding battle among 11 developers for a plum plot in Tiong Bahru ended up smashing price records for a residential site.

The land in Kim Tian Road drew a top bid of $550.28 million, or $1,163 per sq ft (psf) per plot ratio (ppr), from Keppel Land's Harvestland Development.

That is the highest price per square foot ever tendered for a purely residential site in the Government Land Sales (GLS) programme. It beat the old record set last August when Far East Organization offered $1,108 psf ppr, or $45.8 million, for a small Farrer Road site.

It also trumped analysts' predictions that the top bid would not exceed $920 psf ppr with no more than 10 bidders in the fray.

19 April 2013, The Straits Times.

Very bubbly. Could the insanity get any worse?

I think a selling price of $2,000+ psf is a foregone conclusion. Good luck to Keppel Land and even more good luck to anyone who buys. ;)

AK71 said...

"Policy effect coupled with slower population and economic growth are likely to continue to add downside pressure to capital values, albeit moderately," said Dr Chua Yang Liang, head of Research, Singapore and South East Asia at Jones Lang LaSalle.

"Both prices and rents will come under pressure in the months ahead, especially for newly completed projects which have been selling slowly," CBRE.


AK71 said...

Even though the sell-off has left S-REITs fairly valued and their yield spreads over Singapore government bonds within average ranges, it's not the time to buy, analysts say.

"It's not where rates are at, but rather, when will they stabilize and at what levels," Donald Chua, an analyst at CIMB, said in a note. He said shares could fall 12 percent from current levels if the 10-year Singapore government bond's yield rises to its 10-year high of 3.60 percent, still about 90 basis points away.

Still, not everyone agrees the boom days are over for the sector.

"Singapore's market will continue to be quite a good place to raise money for the REITs," said Gregory Yap, head of research at Maybank-Kim Eng. "Where else can they go," he said, noting Singapore's investors are familiar with REITs.

"At this point, people are looking for places to hide. The REIT sector is actually one good place to do so," he added, noting the Singapore dollar is likely to remain much more stable than the currencies of its emerging market neighbors.

AK71 said...

In the third quarter, Savills Singapore says the average price of a home in the city is S$1,962 psf, compared to S$1,308 psf in the suburbs.

Eric Tan, chief executive officer of GSK Global, said: "The gap will continue to close for another six to nine months before the suburb homes -- we will start to see the suburb home prices fall. The prices of suburb condo is getting higher and higher, and to me I'm very confident that those who bought suburban homes, they are not going to make money."

AK71 said...

DEVELOPERS have collectively paid up to $55.1 million in extension fees for unsold units in their private condo projects since 2012. They could potentially fork out another $80.7 million to extend the sales period for another year if they do not sell their inventory by year-end, according to a study by OrangeTee Research.

"As the penalty amounts to millions of dollars per project, we believe that it will incentivise some developers to reprice some of these projects to move sales in the near term," said OrangeTee research head Christine Li.

Under the government's Qualifying Certificate (QC) rules, developers have to pay extension charges to extend the sales period after two years of the project's TOP.

Privately owned Far East Organization and Hoi Hup are among the few developers exempted from the rules.

Given that the QCs allow developers up to five years to finish building a project and two more years to sell all the units, the heat is on developers to clear their stock by the deadline.

To extend the sales period, developers pay 8 per cent of the land purchase price for the first year of extension, 16 per cent for the second year and 24 per cent from the third year onwards. The charges are pro-rated based on unsold units over the total units in the project.

The charges paid up so far are just the tip of the iceberg as projects built from land acquired during the 2006-2007 en bloc fever have just crossed a seven-year mark, they say.

Based on URA caveats, there are 71 unsold units in Wheelock Properties' Scotts Square that TOP-ed in 2011 and 16 unsold units in Wing Tai's Helios Residences, which also TOP-ed in the same year.

Even if a developer decides to set up an investment company to buy the units and rent them out, the company could be hit by a 15 per cent ABSD and is restricted by a loan-to-value limit of 20 per cent.


AK71 said...

With recent weakness in manufacturing, experts said this could impact demand for factory space.

Coming at a time when the supply of industrial property is on the rise, they added that this could put pressure on some real estate investment trusts (REITs).

Within the next four years, more than 5 million square metres of factory space, and 1.6 million square metres of warehouse space, are expected to come onstream.

This is expected to exert pressure on rentals for certain types of industrial space.

AK71 said...

Home prices in Singapore will decline at a steeper pace, falling by 20 per cent between this year and 2016, as economic restructuring as well as property and loan curbs continue to weigh on the housing market, Bank of America Merrill Lynch (BAML) said in its research report released Tuesday (Sep 9).

“Overly tight population policies will imply the dominance of ageing-resident demographics over the influx of younger non-resident workforce. Delays in relaxing property measures would imply a greater negative impact from rising mortgage rates,” said BAML economist Chua Hak Bin.

Under the ongoing economic restructuring that the Government has said is a long-term undertaking, it will slow the flow of foreign workers into Singapore while rolling out incentives for companies to raise productivity.

“Restructuring and stricter foreign worker and immigration policies are lowering potential growth and impacting the property market,” Dr Chua said.

“Foreign labour growth is fast slowing, while permanent resident growth has turned negative … We believe total job creation is likely to slow to about 100,000 this year versus 136,000 in 2013,” he added.

Private home prices fell for a third straight quarter in the three months ended June as cooling measures such as the Additional Buyer’s Stamp Duty and loan restrictions such as the Total Debt Servicing Ratio (TDSR) framework curbed demand. From the beginning of the year, prices had fallen by 2.3 per cent by the end of the second quarter, the Urban Redevelopment Authority’s index showed in July.


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