First REIT: Reply from the management.

A reader, Gregg, first shared his concerns regarding Sarang Hospital in First REIT's portfolio here in the comments section: Gregg's comment.

Sarang Hospital

Another reader wrote in with a list of questions for the REIT's management and shared these with me in an email. Here is the email with the replies from the management in red.

1. Noted that there is impairment provided in subsidiary of S$8,136,000 in the statement of total return. Could you advise me the reason of this impairment being provided and which subsidiary? Understand usually DCF was prepared to determine whether impairment is necessary. Since the impairment is being provided, does that means that the present value of the future cash flow is lower than the carrying amount of the investment?

 

We have made some provisions for impairment to our investment in South Korea, Sarang Hospital.

This S$8.1m is the impairment provided at Trust level for Kalmore Investments Pte Ltd, the holding company of Kalmore (Korea) Limited which owned Sarang Hospital. 

 

2. Under note 9 of the financial statements, there is deferred tax income recognised relating to changes in fair value of investment properties of S$11,667,000 despite the fact that there is increase in fair value of investment properties of S$61,334,000 (net) under note 12. Could you advise which property does the S$11m relating to? 

 

The write back of the deferred tax relates to the Indonesia properties mainly due to lower building reinstatement values as provided by the independent valuers, as compared to the net book value of the properties.

 

3. In note 14 of the financial statements, an impairment allowance is provided of S$2.165 million. Please advise which property it is related to and what are the Trust's action to recover this debt. Noted that there was also provision made in prior year of S$547k, is it relating to the same debtor? 

 

The impairment allowance of S$2.165 million was made for Sarang Hospital.  We have taken legal actions in the past two years to recover the debt from the vendor.

 

There is no provision of S$547K make in the prior year however the provision of S$567K was made for amount due (intercompany balance) from Kalmore Investment Pte Ltd (Subsidiary of First REIT) at Trust Level in FY2013.

 

4. Noted that the fair value of Sarang Hospital decreased to S$6.3m compared to purchase price of S$13m. Please advise the reason of 50% decrease in fair value. 

 

·         As the Vendor and Guarantor for the Master Lease Agreement encountered unforeseen financial difficulties, he was unable to fulfill his contracted rental obligation.

 

·         Hence, through the Valuer’s (CBRE) independent assessment and judgement, it was more appropriate to value Sarang Hospital on a “market rental basis”, ignoring the contracted rental in the Master Lease Agreement which was guaranteed by the Vendor.

 

·         Due to the lack of similar comparables in the market, the Valuer has adopted a “proxy approach” to determine the market rent. Apart from the Valuer’s investigations into rentals achieved with comparable properties and within the broader market, the Valuer has relied on anecdotal evidence which include their discussions with active brokers, investment and fund managers as well as fund investors.

 

·         They have also considered the relativity of asset class pricing. This includes the relativity of the healthcare real estate sector against other comparable markets, and the relativity of the healthcare real estate sector against other asset classes within the relevant market.

I suppose that the curious decision of buying a lone property in South Korea has turned out to be a bad one. Fortunately, it should not have a big negative impact on the REIT as a whole.

Related post:
First REIT: Purchase in South Korea.
(Dated 9 July 2011.)

Buying an apartment: Considerations for first timers (UPDATED).

A reader recently asked me if I would blog about buying an apartment for first timers in Singapore. 

I thought of this before but decided that I am not a good candidate for this topic because for most people in Singapore, their first apartment would be from HDB and I don't have any experience in this area.

However, I have blogged about buying real estate in Singapore before and quite a few times too. 





So, in case you are thinking of buying an apartment either for self stay or for investment, you might want to consider the following points:

1. To rent or to buy?

In some countries, there is a strong culture of renting. 

This is usually when buying a home is considered too expensive. 

This is the case in places like Japan, Taipei and Hong Kong, for examples. In a report, it was stated that more young people in London prefer to be renters in recent years.

Does renting make more sense in Singapore now as well with sky high prices? 


Well, according to the "Rule of 15", it could make sense anywhere in the world. 

In a nutshell,

"Rule of 15" says that if we could buy a home at a price that is 15 times or less the annual rent a similar property would fetch in the area, it makes more sense to buy than to rent.


Personally, I prefer to own the apartment I stay in but I can see how renting could make sense especially if prices of homes are sky high. 




2. HDB flats

Of course, as Singaporeans, we are lucky because we have good quality public housing. 

It is reasonable to assume that for most Singaporeans, their first apartment will be from the HDB. 

Of course, there has been and will always be debate on whether HDB flats are priced fairly but unless we want to move to Johor, we have to accept that HDB flats are the most affordable housing choice for most Singaporeans. 

Using the "Rule of 15" will help us stay grounded and avoid the atas DBSS which were going for as much as $888,000 at one time, for example. 

(Thank goodness, DBSS has been thrown out together with MBT.)

Although we could choose a housing loan with a duration that terminates at age 65 and I am assuming that most people need a loan to buy their first apartment, I think we should aim to keep the cost of borrowing down. 

This should become a more important consideration in an environment where interest rates are more likely to increase. 

3. Condominiums

Of course, there will always be people who would prefer to stay in private housing and anecdotal evidence shows that the numbers are probably larger than what we might think. 

If we think that HDB flats are expensive real estate, then, condominiums in Singapore are simply too extravagant. 

A new 5 room HDB flat in CCK costs about $300.00 per square foot. 

An executive condominium in CCK will cost at least 2.5x that amount while a 99 years leasehold private condominium in CCK will cost at least 4x that amount.

So, for those who want condo living and if they qualify, buying a new executive condominium seems to provide a margin of safety compared to buying a new 99 years leasehold private condominium.

After 10 years of occupation, executive condominiums will attain full private condominium status.







Remember, condo living is not a need. It is a want.

Consider carefully whether we can really afford it, which is an objective exercise, and consider carefully if it provides value for money, which of course can be quite subjective. 

It would be utter misery if we were to become a slave to our home as we sweat to service the loan instead of enjoying our home with peace of mind.

"If to stay in a condominium, we are forced to live like paupers, the price is too high."

MAS has a good page on "Buying a Home":
http://www.mas.gov.sg/moneysense/life-events/buying-a-home.aspx

If you are going to buy your first apartment soon, you might want to bear these in mind as you think of the options available. 

You might also want to read the related posts below which this blog draws from.

Buying an apartment is probably the single biggest financial transaction for most people. 

Don't be swept away by emotions.

Staying grounded will help people to keep their finances healthy and, also, their homes.




Related posts:
1. To rent or to buy: Rule of 15.
2. Slaving to stay in a condominium.