Thursday, December 22, 2011

Office Rentals

In the BT article dated Dec 22, "Office landlords sweeten deals as market weakens" by Kalpana Rashiwala, several industry experts were interviewed on the direction of Office rentals.
Jones Lang LaSalle....

predicts that the average monthly rental value for Grade A Raffles Place (excluding Marina Bay) will ease about 5.1-14.4 per cent over the next 12 months, from about $9.75 psf to $8.35-9.25 psf in Q4 2012. It also projects that the Grade A Raffles Place (including Marina Bay) office vacancy rate will rise from about 10 per cent this quarter to 12.5-13 per cent by end-2012, given a more bearish outlook on demand. Net office take-up for the same location will remain in positive territory in 2012 but weaken to 830,000 sq ft from about 1.75 million sq ft this year, according to JLL.

On the supply side, JLL notes that islandwide, between 2012 and 2015, some 5.5 million sq ft of new office space for lease (excluding strata-titled developments such as Paya Lebar Square) will be completed. Of this, some 1.3 million sq ft is already leased, leaving 4.2 million sq ft available. Adding the remaining 800,000 sq ft of the 2011 supply that has yet to be let gives a total of five million sq ft available over the next four years. This works out to 1.25 million sq ft per annum.

The historical average 20-year (1991-2010) islandwide take-up was about 1.5 million sq ft per annum.

Chris Archibold, head of markets at JLL, says:

'Given Singapore's enhanced international value proposition, one would logically expect average annual take-up numbers over the next 10 years to be higher.

'The demand numbers are hard to predict and are very much dependent on the global economy. Impact on rents is hard to gauge as it's very much dependent on demand and market sentiment. In the near term, the global outlook is likely to have a negative impact on office space take-up; however, in the medium term, Singapore is well positioned.'
So the truth is that the medium and long term outlook is difficult to predict.
However, analysts are generally bearish on the short term outlook due to the Eurozone crisis.

Knight Frank .....
They appear to be the most pessimistic.
Director (office) Robert MacDonald says:

'The first half of 2012 will almost certainly see landlords increasing incentives (rent-free periods), and additional benefits to attract tenants, such as fit-out capital contributions, will become more common.'
'...headline office rents could contract by up to 15 per cent by end-2012. All eyes are focused on the European debt crisis and the resulting economic reaction, which will have a direct impact on market sentiment in Singapore. The extent of decline will be more transparent towards the end of Q1 2012.'

BT reported increased agent commissions from one month's rental to between 1.2 months and two months' rent on a typical two or three-year lease.
Another perk , reported by BT...
"landlord of a brand new Grade A office development keen to maintain high headline rental levels in the building is said to be prepared to offer a 5-6 month rent-free period for a 2,500 square foot space - from 1-2 months half a year ago."
Mr MacDonald notes that new-build Grade A rents in Singapore are 45 per cent lower than comparable developments in Hong Kong.

CBRE .....
Executive director Moray Armstrong, says:
'Landlords will have differing reactions in a more competitive leasing environment. Some may wish to increase incentives or inducements while preserving face or signing rents, while others may just allow signing rents to adjust to the prevailing market level.'

CBRE figures show that the average monthly rental value for Grade A offices - covering the Marina Bay, Raffles Place and Marina Centre locations - has been flat in Q4 from the Q3 figure of $11.06 per square foot, translating to a full-year rise of 11.7 per cent. This follows a 22.2 per cent appreciation in 2010.

Mr Armstrong foresees Singapore office rents easing next year but does not expect any dramatic rental correction as was seen post-global financial crisis, when the average monthly Grade A rental slumped nearly 60 per cent over six quarters, from $18.80 psf at the peak in Q2 and Q3 2008 to $8 psf in Q1 2010.

'Rentals going into GFC were at artificially high levels, driven by extraordinarily low vacancy rates of sub-one per cent for over two years. This accentuated the rent correction. These conditions don't exist today; rentals are manageable and relatively competitive compared with other regional centres.'

Mr Armstrong expects office demand to remain positive in 2012. 'While there are precious few leasing requirements in the key banking sector - where the growth spurt appears to be over - we're encouraged by a number of new entrants coming into Singapore from a few sectors (such as) in the energy, commodities and consumer industries, and law firms.

'We've seen some initial signs that certain global industries are viewing Singapore favourably for expansion, partly due to uncertainty in the West arising from prospects of increasing taxes and an uncertain political landscape. Singapore could emerge a net beneficiary.'

Savills ....
Director (commercial space) Agnes Tay observes

'Tenants may want longer leases and more options for renewal as they seek greater security of space - and yet due to uncertain business conditions, they would also like some flexibility in the lease agreement that the landlord will consider taking back some of their space should they no longer need it, with an agreed compensation formula.'


My Thots.....

In the immediate near term, most experts tend to be cautious--- to be pessimistic.
CEO of KReit, Ng HL has to be very brave (or reckless? ) to call the timing and nudge Kepland to release OFC to KReit , during such a period of uncertainty.

Friday, December 16, 2011

ABSD Property Curbs

What is the intention of the Additional Buyer's Stamp Duty (ABSD) curbs ?
First, let's look at the policy measures introduced since 2010 to see the Big Picture:

Summary of policy measures in 2010 and 2011
Feb-10 ----- Introducing Sellers' Stamp Duty (SSD) on all residential properties and residential land that are bought after today and sold within 1 year from the date of purchase. Lowering LTV limit to 80% for all housing loans provided by financial institutions and regulated by the MAS

Aug-10 -----  Increased holding period for imposition of SSD from the current 1 year to 3 years. Increased minimum cash payment from 5% to 10% of valuation limit. Decreased LTV limit for housing loans granted by financial institutions from 80% to 70%

Jan-11 ----- Increased SSD period from 3 year to 4 years. Increase SSD to 16% within the first year, 12% within second year, 8% within  third year and 4% within fourth year. Lowered LTV from 70% to 60% for individual buyers and 50% for non individual buyers

Dec-11 ----- Foreigners and non individual buyers to pay additional buyers stamp duty (ABSD) of 10%. PRs owning one and buying second and subsequent property will pay ABSD of 3%. Singapore citizens owning two and buying third and subsequent property to pay 3% ABSD.
These are mainly demand-side measures---- calculated to discourage or defer real demand.
Remember that the govt also have supply-side measures----- land releases to ensure that developers can tender for plots to meet the supply spikes.
Ostensibly, the Dec 11 measures are anti-speculative since the ABSD targets additional purchase of properties beyond the 1st and it follows an incremental layering approach by the policymakers to prevent a bubble from forming in the property sector.

The only difference is that this time it discriminates  between SG citizens, PRs and foreigners with graduated deterrence's (ABSD).

Foreigner demand as a percentage of total transactions has risen from 13% last  year to 17% for 10M11. Recent data showed that foreigner buying activity had become increasingly broad based, moving into the mass and mid-end market segments, compared to the more high-end focus previously.
One way to look at the ABSD measures is to look at it as one of incremental policy layering ----- speculative  hot money from foreigners (corporate and individual) and  PRs being targeted was a logical policy outcome. Low interest costs, the high SGD and the desirability of SG as an attractive destination for HNWIs will facilitate hot money inflows which will gravitate towards properties; given the markets abhorrence for derivatives and hedge funds.

But, if the demand is genuine, that is if SG is so desirable to the HNWIs, would the measures be effective? IMHO, Yes, as it will skew foreigner demand towards the higher end sector ---- those who can afford high ABSD will be able to afford high end properties!! So the policy discourage speculation at the mid end and mass market sectors and is pro-SG citizens ( an important consideration during elections).
Foreigners from the United States, Switzerland, Liechtenstein, Norway and Iceland are exempt due to certain clauses in their free-trade deals with Singapore. However, buyers from these countries, excluding permanent residents, comprised only 1.7 per cent of all foreigner purchases of non-landed homes this year---- meaning that those most affected will be the Chinese, Indonesian and Indians.

What will the foreigners do, if they have to reside here for investment and biz reasons and cannot buy?
The answer is simple----- they will gravitate towards rental of properties!!

The other big question is one of timing----- why now?
Given the Eurozone uncertainties and the glacial pace of growth in the US, there is likely to be a period of  monetary easing (QE to be exact) and low interest rates in the West. Hot Money will flow to  Asia  eg HK, China, SG etc.....
So while the aneamic economic growth in Europe and the US slow global growth in trade terms, it will cause hot money to seek growth in faster growing Asia which has huge potential for economic growth due to domestic consumption arising from the surging population growth.
Hence, the direction of  hot money flows is not difficult to fathom----it will gravitate to where there is less controls.
SG due to its open and market friendly policies is a hot favorite.
The policymakers do not have a choice in coming up with the latest ABSD measures, if they want to slow down the rate of property price increases; given the drastic measures in HK and China.

Developers are of course "peeved" about the timing and the anti-speculative measures and are lobbying for their removal--- that is the raison detre for REDAS and it is no surprise that they do so.
Developers have come up with new tactics to keep sales going.
Latest BT update on Monday 12/12/2011, by Uma Shankari, says...

Other developers said it was 'business as usual' at their showflats, but admitted that sales were slower compared to a week ago.

For the most part, buyers are now waiting for prices to fall. Property agents noted that there was a 'steady flow' of potential buyers at showflats - but most left without buying anything.

This is even as many developers - including Far East Organization, Wing Tai Holdings and City Developments - are offering packages to offset the stiff new measures.

Far East is offering a 5 per cent relief package to affected buyers at all of its already-launched projects.

It will reimburse buyers 3 per cent of the unit price to offset the new stamp duty, and buyers will also get furniture vouchers worth 2 per cent of the flat price.

Wing Tai and City Developments are also offering relief packages at selected projects, BT understands.

But will property prices collapse 30%, as some analysts say?
That is NOT the intention of the policymakers; whom will adjust and recalibrate policies if the prices drop excessively.
IMHO, the policymakers seek a gradual incremental rate of property price rise------ not a collapse !!

Wednesday, December 14, 2011

Handing over the baton in China

According to Xinhua and reported by CNA , China will maintain property market restrictions and "prudent" monetary policies.

Many observers have their lenses zoomed in to the once-in-a-decade leadership changes.
No surprise on the "property market restrictions " as they were the fruits of  many incremental policies that finally managed to cool runaway property  prices. So any changes will be similarly targeted and incremental.

Xi Jin-Ping and Li Ke-Qiang are both groomed successors who have been given increasing exposures to policymaking and the top leadership changes should NOT be disruptive to the continuity in policymaking.

The signals sent out are therefore intended to ensure that 2 current "tenets":
-  Housing remains affordable
- Consumer prices (CPI) remain stable
remain in place even after the handing over of the baton. So it is very important that China do not give any nasty surprises here.

Monetary Policies and Fiscal Policies which has quite an impeccable record under the current leadership of Hu and Wen are likely to maintain "unswervingly " on course given the  signals sent out at the close of the annual Central Economic Work Meeting.

Let's look at the statements released after the meeting:

"the country will speed up the construction of ordinary commercial residential housing to increase the effective supply and promote the healthy development of the property market."

Since April 2010, China has imposed a raft of measures aiming to calm property prices. They include higher down payments, limits on the number of houses that people can own, the introduction of a property tax in some cities, and the construction of low-income housing.

The statement also said that :

"China will push forward the trials of property tax reform."

China introduced the property-tax trials in Shanghai and Chongqing at the beginning of the year as part of its efforts to curb skyrocketing home prices and contain asset bubbles.

Another part of the statement:

"China should appropriately handle the investment and financing, construction, operation and management of affordable housing projects, and progressively solve housing problems for low-income urban residents, newly-employed workers and migrant workers from rural areas."

The government has vowed to build 36 million units over the next five years in an effort to give more mid- and low-income households access to housing and stabilize runaway property prices, with 10 million units planned for both 2011 and 2012.

China's housing authorities said on Nov. 10 that the country has already met this year's goal of starting the construction of 10 million units.

This is what the incoming Li KeQiang said:

"The construction of affordable homes will help curb excessive price rises and fuel urbanization, which will in turn unleash consumption and investment potential and push the development of related industries,"

 VP Li Keqiang said in late November that the government should stick to its tightening measures over the property market and consolidate the regulative results it had achieved.

Hence the outcome of this meeting is no surprise.

More cities posted monthly home-price declines in October following the government's campaign to calm the property market.
In October, 34 cities in a statistical pool of 70 major cities saw declines in new home prices from September, compared with 17 in September, data with the National Bureau of Statistics showed.

This what the policymakers are trying to achieve: ----- a slowdown in the increase in home prices.
So the policymakers would not do an about turn now, when the policies are gaining traction. The policies have to be "calibrated" and the market would be monitored, the process of calibration via the feedback loop is a delicate balancing act.  However, if prices start plunging badly then policies would be adjusted incrementally

Gaming growth rates

A BT article today entitled...
"Gaming growth rates in Asia-Pac likely to moderate: S&P" by Grace Leong
says that in 2012:
- Singapore's net gaming revenue is expected to grow by 5-10% .
- Macau gross gaming revenue growth is 10-15 % .

The estimates were according to the analyst Joe Poon.
In the 1st 11 mths of 2011:
- Macau posted a 44 % jump in gross gaming revenues
- Singapore's net gaming revenues  soared 42 % to USD 5 b this year.

Regulatory uncertainties on  "junket approvals" and  "advertising" were cited as "dampers".

While Singapore's two IRs have exceeded performance expectations since their opening last year, several factors including regulatory uncertainty and projected slower growth in Singapore's economy could put a damper on local gaming growth.

Singapore's latest move to tighten advertising regulations to ensure the two casinos do not target locals, and expectations that the government may introduce more of such measures to tackle problem gambling, may crimp local gaming demand, the report said.

But the duopoly held by the two IRs until 2017 would also provide growth opportunities for them. And if the Casino Regulatory Authority were to approve junket operating licenses next year, Singapore's gaming growth rates would likely be higher than the current projected 5 per cent to 10 per cent.

Amid credit tightening measures in China, the Macau market is expected to post stronger gaming revenue growth than Singapore next year because the opening of Sands Cotai Central, a 5,800 room casino development project starting next first quarter, will likely fuel demand and boost mass market growth.

Mr Poon said he believes bad debts aren't likely to have a significant impact on the credit profiles of gaming operators in Macau, as they have limited exposure to direct lending to VIP players.

'We expect more projects will start in the next few years in Cotai, but the city could face challenges such as inadequate infrastructure, labour shortages, and a cap on the number of gaming tables,' he said.

Elsewhere in the region, countries including Japan are likely to accelerate their plans to develop licensed integrated casino resorts to spur economic growth.

'We expect operators in the region, with their improving financial capacity, to aggressively bid for casino licenses and invest billion of dollars into gaming projects,' Mr Poon said.

'We consider gaming operators to be better positioned now than they were in 2008 to accommodate risks associated with investments in new gaming developments and any moderation in gaming demand,' he said.

He cited significantly improved cash flow from existing properties, 'resulting in a better balance between cash generating assets and assets under development'.

'As many of these assets move from the construction phase to stabilised levels of cash flow generation, they should provide operators with greater capacity to accommodate any unexpected moderation in gaming revenues or capital availability,' he said.

The report did not examine the effect of emerging gaming locations on SG; such as in Japan and the new Cotai strip in Macau.

However, B/Ss are expected to improve and be resilent...
 "As many of these assets move from the construction phase to stabilised levels of cash flow generation, they should provide operators with greater capacity to accommodate any unexpected moderation in gaming revenues or capital availability"

Friday, December 9, 2011

Comments on BT's interview with KReit's CEO

Today's BT, 9th Dec has 2 Letters to the Editor that gave very good rebuttals to Ng Hsueh Ling, CEO of KReitAsia regarding the remarks she made in interviews in 2 articles on Dec 6, as reported by Jamie Lee.

The 1st article was titled " K-Reit nudged parent to get hands on OFC" and the 2nd article
"K-Reit voting prompted query from MAS"

To make the whole discourse meaningful, I excerpted from BT with minimum cropping.....

1st Article excerpts...

It was K-Reit Asia that approached its sponsor Keppel Land to snap up Ocean Financial Centre (OFC). This was to have a say in rental negotiations now underway, get tax exemption and to lower the average age of its property portfolio.

The dynamics behind the deal were revealed by K-Reit's chief executive officer Ng Hsueh Ling yesterday, even as the real estate investment trust faces criticism that the deal is too expensive at a time when the office market may soften.

Ms Ng also rejected suggestions that Keppel Land got the sweeter deal. She noted that the $1.57 billion that K-Reit paid for Keppel Land's 87.5 per cent stake in OFC is still well short of the peak.

'If you look at the historic peak of the market, the highest transaction was about $3,120 (per square foot) for a plot of land along Robinson Road. We figured that $2,380 psf is very far from the peak, and it's one of the best buildings in Singapore,' said Ms Ng.

'How do we know the bottom? And to go out and get money in a bad market, people will say 'no'.'

Ms Ng added that Keppel was not urgently looking to offload the property.

'They are in no hurry to sell,' she said. 'A lot of people have asked me who started the negotiations first. I wanted to buy OFC because I don't want it to be fully leased.'

Some 20 per cent of the space in OFC is having its rental negotiated. She wanted to fill this space with tenants who wanted long-term leases, took up large amounts of space, and had a good credit backing.

'I didn't want Keppel to fill up the extra 20 per cent because Keppel is a developer. I want to fill up with Reit-like tenants,' she said.

'I can also wait for Keppel to fill up the space but you can't control the tenants and you will have to pay for a fully valued asset. If the market goes down, sorry, you would have paid at that price.'

She remains very confident that the space will be taken up by such tenants. And despite the grim economic outlook, customers have not asked for cuts in the rent rates, with Ms Ng saying these are large firms and long-term players.

Touching on the 17-for-20 rights issue to be used to foot the bill - a move that would be dilutive for existing shareholders - Ms Ng said cash calls are inevitable in order to grow the portfolio size, especially since purchases in the office space are big.

'Now that K-Reit is large in size, the chances of going out to do another rights issue will be much lesser than when it was smaller.'

Early this year, the Reit asked the Inland Revenue Authority of Singapore (IRAS) whether all income coming from OFC could be exempted from a 17 per cent tax payment if the corporate ownership structure was changed to a limited liability partnership from a private limited structure, under which a company has to pay that amount of tax.

The property trust was told by IRAS around June that this would be possible - making it the first time an office building here has been allowed such a tax exemption under this structure. This prompted the Reit to begin serious negotiations, Ms Ng said.

With the purchase of OFC - which will not require K-Reit to spend money on asset enhancement initiatives - the average age of the properties in the portfolio will be lowered to 4.4 years, she added. 'No other Reit has that kind of age. It doesn't mean that being young alone is good. You must be young and in the right location,' she said, though she had no figures on the industry average.

As for the compensation of Reit managers, Ms Ng argued that her remuneration is based on the performance of the Reit, noting that she needs to meet targets set for the managers.

Acquisition fees paid to the manager are in the form of units that can be sold only after a year, which means that the manager has to watch the units' market performance.

Ms Ng also defended the sponsor model that Singapore Reits operate under, noting that a sponsor provides a supply of assets to refresh the Reit's portfolio.

K-Reit noted that sponsors are also aligned with the Reit as cornerstone investors, and that working under this model gives Reits access to bank funding.


 2nd Article excerpts......

K-Reit Asia had conducted the voting over the purchase of Keppel Land's entire 87.5 per cent stake in Ocean Financial Centre via a show of hands to avoid the ire of minority investors, chief executive Ng Hsueh Ling told BT yesterday.

This has prompted a query from the Monetary Authority of Singapore (MAS) - which regulates property trusts - on the proceedings of the unitholders' meeting, she revealed, though no subsequent questions have been posed since then.

About a year ago, K-Reit had gone through a similar voting process to gain unitholders' approval for an asset swap with its sponsor Keppel Land.

This had Keppel Land selling its one-third stake in Phase One of Marina Bay Financial Centre to K-Reit, while K-Reit selling Keppel Towers and the adjacent GE Tower in Tanjong Pagar to Keppel Land.

But during last year's meeting, minority unitholders were upset with the decision to have voting done by poll, arguing that this voting method would silence the unitholders since institutional investors often hold a larger block of units.

With poll voting, each share translates to one vote, whereas under a show-of-hands system, each person gets a single vote, regardless of the number of shares he holds.

This year, about 350 unitholders present at the extraordinary general meeting were given the option to vote by poll or by show of hands.

Minority unitholders can call for a voting by poll so long as this request is supported by unitholders representing at least 10 per cent of the units held by those present - as stipulated in the Reit's trust deed.

But the poll request, led by an institutional unitholder and supported by a few retail unitholders, did not meet the requirement.

To compound matters, K-Reit's chairman Tsui Kai Chong told unitholders there were proxy votes representing 46 million units that favoured the deal, before calling for unitholders who wanted a poll to register with the company.

The 46 million units included votes from institutional investors whom K-Reit had met to discuss the deal during its roadshow, Ms Ng noted.

'Even if every single person present at the meeting had voted against, what the chairman had in terms of the positive proxies would have (seen the deal) more than comfortably passed through the poll,' she said.

'Since people who called for the poll didn't meet the requirements, we thought, 'why should we go against the trust deed and have our discretion?' People might say, why did you use your discretion?

'I guess we could never win it,' she added.

The deal also won overwhelming support via a show of hands, with Ms Ng noting that the hands in favour were 'too many to count'. By Ms Ng's account, there were just six to seven hands raised to show disapproval of the deal.

Voting through a show of hands is a practice that the Code of Corporate Governance no longer accepts as sound governance.

This was reflected in the recent review of the Code, though the findings were announced two weeks after the deal was approved.

Click Read More to go to the Letters to the Editor

Wednesday, December 7, 2011

Electronic Proxy Process for Voting

The following announcement will hopefully make the proxy process more transparent.

Singapore Exchange (SGX) and Broadridge Financial Solutions have signed an agreement to introduce a new service for increased transparency, accuracy and efficiency to the shareholder communications and proxy process in Singapore.

The service is designed to support transition from paper-intensive to an electronic online interaction between listed issuers and their shareholders, both in Singapore and overseas.

The service will use Broadridge's shareholder communications suite of solutions that includes the automated capture of records from the shareholder register, the distribution of personalized communications including proxy forms, and a choice of voting channels, either online via a website or the more traditional printed mail.

The service will enable better reconciliation of voting activity by the corporate issuer and assurances to shareholders 48 hours prior to the meeting date.

The transformation to the new service will benefit issuers that include increased oversight, reduced printing and postage costs, improved authentication of voters, and a secure database to store shareholder preferences for future communications.

Broadridge Investor Communication Solutions, International President Bruce Babcock said that this agreement puts in place a strong foundation from which to further advance corporate governance in Singapore and transform the communications and voting process."


My Thots....

Yet, to see the details and how it works.
But, glad that SGX has done something about the voting by Proxy process.
Sometimes at AGMs and EGMs, U wonder if the Chair will care to substantiate the Proxy votes "for" or "against" the motion.

Monday, December 5, 2011

High End Deals

Savills did a study of High End Deals in the Housing Market and this was reported by  KALPANA RASHIWALA in the BT,  in an article "High-end home deals fewer this year: study" , on 5/12/2011.

Non-PR Foreigner share in the high end condos in choice districts  and bungalows in Sentosa have increased according to Savills; said the BT article.

Breakdown by Nationality
 From BT

1) Chinese fleeing restrictions on property buying in their home market and instead parking their monies in Singapore's property market.
2) Investors fleeing the economic gloom in Western economies  to favour the relatively healthier economies in Asia.
3) Singapore is seen as a property buying destination in Asia for its transparency, political stability and relative safety----AAA rating in the eyes of these HNWIs.

Who are these buyers ?

Breakdown by Country
From BT

High End Apartments for Jan-Nov 2011

Have been the top buyers since 2007---- Up from 15.4 % in full-year 2010 to 16.4 % during Jan-Nov 2011. However, the 236 upmarket apartments/condos they have bought this year is about 35 % lower than the total number of caveats last full yr.

 Mainland Chinese
Their share of total buying doubled from 5.8 per cent to 11.8 per cent.
Their purcahses of of high-end apartments has risen from 136 for full-year 2010 to 170 in Jan-Nov 2011

They were the fourth largest foreign buyers of high-end apartments in Jan-Nov 2011, with 31 caveats or a 2.2 per cent share of total purchases.
They  did not  feature among the top five nationalities of foreign buyers in 2007

A longer-term comparison reflects a similar picture. The number of high-end apartments bought by Indonesians has roughly halved from 438 in 2007 to 236 in Jan-Nov 2011, while the number of caveats lodged by mainland Chinese has quadrupled from 43 to 170.

Sentosa Cove for  Jan-Nov 2011
Chinese are the biggest foreign buyers (PRs and non-PRs combined) of bungalows.
They purchased five of the total 20 bungalows transacted in Jan-Nov this year.
Singaporeans bought eight bungalows.
Non-PR foreigners have 35% of th share of purchases.

Average price of bungalows transacted on Sentosa Cove has risen 11.1 % from $1,910 psf on land area for full-year 2010 to $2,122 psf for January-November 2011.
In absolute dollar quantum, the average price per bungalow transaction has appreciated 7.7 per cent from $17.1 million to $18.4 million.
The total number of Sentosa Cove bungalows transacted has slipped from 54 last year to 20 in Jan-Nov 2011.

Breakdown by Region
From BT

My Thots.....
As long as SG remains an open economy, HNWIs will continue to invest in high end properties here.
Note, that Non-PR Foreigners need approval to buy landed properties outside of Sentosa.

Will Italy do the Full Monti?

The key to ringfencing the Eurozone from the effects of contagion now lies in the austerity packages being forged in Italy and Sapin under their respective new technocratic bureaucrats.

The technocrat govt in Italy has come up with a meaningful austerity package, in effect a decree called the "Save Italy" decree----- which if carried out will put Italy back on track and away from the grasps of the bond vigilantes.

Reuters  says the 30b Euros package will be presented to the Parliament today.

Dubbed as a "Save Italy" package by Monti, it aims to raise more than 10 billion euros from a new property tax, impose a new tax on luxury items like yachts, raise value added tax, crack down on tax evasion and bring forward measures to increase the pension age.

Welfare Minister Elsa Fornero,  broke down in tears while presenting measures in the package that will mean an effective cut in income for many pensioners.

The three-year package includes a controversial pension reform that will increase the minimum pension age for women to 62 starting next year and fall into line with men by 2018, by which time both will retire at 66.

The number of years that men have to pay contributions to receive their full pensions will also be increased from the current level of 40 to 42.

The package also raises the value-added tax (VAT) -- which has already been raised by one percentage point this year -- by two percentage points to 23 %,  from the second quarter of 2012.

The whole package will be passed as an emergency decree.

Monti has said he will  be renouncing his own salary as prime minister in a gesture of solidarity, as he called on Italian to amke sacrifices.
For the decree to be in force, Monti needs parliamentary approval within 60days.

The populist Northern League, the only major party in parliament opposed to Monti's government, has said it wants a referendum on pension reforms.

Will the Italian parliament do the Full Monty (i)  and get the "Save Italy" decree passed?

Sunday, December 4, 2011

Solving the Eurozone Conundrum

In the coming days, The Eurozone will again be the focal point....

Take  a look at the 10Yr Govt Bond Rates of  Eurozone countries (courtesy of Der Spiegel and Thomson Reuters).
See how the bond rates have converged after the monetary union---offering the kind of stability needed for the EU (including the integration of East Germany) to grow and prosper in the last decade with stability in the member countries bond rate.

But, the flaw of a monetary union w/o  a political union has now been discovered by bond vigilantes and the fabric is tearing and unravelling---- in the form of a Sovereign Debt Crisis or what some call the Eurozone Crisis.
 With the onset of the crisis, these rates have become  unsustainable.

The politicos in the Eurozone countries know that some thing must be done to solve this conundrum, the question is what can they possibly agree upon......

There are many emerging scenarios, I will like to share 2 possible Options.

Option One
Bilateral on-loans thru IMF
The ECB under Trichet and now Mario Draghi has been reluctant to lend ( thru bond markets or bailouts) to countries like Italy and Spain, citing moral hazard. It has also been reluctant to allow itself to be leveraged by the EFSF by acting as a lender of last resort, aka print money ----again citing moral hazards (as profligate countries will be let off the hooks and the taxpayers of the core like Germany will be left to handle the consequences associated with a weaker Euro i.e. higher long term bond rates).

Neither are they willing to buy Italian bonds of which 10yr rates are at close to 7% (making Italy’s debt financing unsustainable).

Now the talk is IMF involvement. But given the IMF’s small coffer ---- currently, the IMF has USD 389 billion (291 billion Euros) available to lend to its member countries----this may NOT be the bazooka, to shock and awe the bond vigilantes. So the talk now is to use “bilateral loans”------CBs (Central Banks) from Eurozone member countries OR even the ECB itself, loaning to the IMF (yes U read it right) and then allowing the IMF to on-loan those monies to the peripheral countries like Italy and Spain, under the IMF’s strict fiscal probity conditions. In this way, moral hazard is avoided.

Option Two
Fiscal Union thru Treaty changes in Eurozone
After talks with Sarkozy, Merkel is now pushing for Fiscal Union in the German Parliament. This is the inevitability that I have long forecasted.

Well, in essence Fiscal Union will necessitate treaty changes.
W/o Fiscal Union (i.e. treaty changes), Merkel cannot answer to the Germans (Parliament and People) for any decision to allow the ECB to be used as a leverage for the EFSF. Any bailouts ----in fact, any help to the peripheral countries like Italy or Greece---- will come with moral hazards. Leaders like Berlusconi (previous Italian PM) could just renege on their vague promises for austerity w/o consequences.

Countries like Britain (Cameron faces challenge from his Conservative base) may resist any such treaty changes to the EU thru the EC. So, if there are deep seated objections, the treaty changes may just be limited to the 17 Eurozone countries, NOT the 27 member EU.

Can CBs solve Fiscal Woes?
Definitely, Not!!

But, CBs can buy time for Fiscal Solutions.

By allowing the crisis to roil and boil, Merkel has created the urgency and the need for action. The 17 member states of the Eurozone and the electorate in each of them knows that the monetary union is at the precipice. It would breakup and fall off the cliff w/o an accompanying fiscal union. The will and the justification for that change is there; past debate.

But, we can see 3 interesting scenarios that have emerged with regard to CBs actions:-

1) Britain with Inflation > 2%. But, with BoE prepared to do QE.

2) US with inflation <2%.

But with the hawks like Plosser, Lacker and Fischer calling for a stop to such easing; pointing that such liquidity measures cannot replace fiscal measures and will lead to massive inflations, if not properly managed. Operation Twist involves NOT just changing the mix of the type of Treasurys (in terms of length of maturities) but could also involve large scale re-investment into Housing MBS, to drive mortgage rates down. This is tantamount to the FED venturing into Fiscal Policies, which Plosser has warned ---- “ he would oppose such a plan, which he sees as crossing the line into fiscal policy since it represents de facto credit allocation to a specific sector.”

3) The question now is what will the ECB under Mario Draghi do?

The lastest PMI results, I have posted all shows the Eurozone contracting; both the core and the periphery!!

Under Trichet, the ECB acted to lower bond rates in the peripheral countries like Italy but, any such buys were sterilized, so as NOT to be inflationary in nature.

Draghi has been very careful with his bond buying, signaling that there were moral hazards and until the politicians sort it out--- the ECB will not get involved in a BIG way.

The signals are that Draghi will act decisively only if  moral hazard is removed with a firm road map to Fiscal Union via treaty changes.

So what the ECB do will depend on the outcome of the Merkel-Sarkozy Summit, today and the crunch Brussels Summit; in the coming days to forge that Fiscal Union.

My Thots….

Option One is probably the fall back Option, should Option Two fail.

But the situation has become so dire that given the stakes involved, the Fiscal Union Option might just be pushed thru; allowing Draghi and the ECB to act.

Friday, December 2, 2011

PBoC news

Here is collection of various reports  concerning PBoC....


M2 statistical coverage has been changed.

It now includes 2 new items...
1) Deposits of non-deposit-taking financial institutions (Investment Banking, Wholesale Banking)  in deposit-taking financial institutions
2) Deposits of housing provident fund
The change is to reflect and take into account the development  and use of  newer financial instruments. Both are already in substantial volume and have relatively large impact on money supply.

Based on the expanded coverage,
M2 posted 81.68t RMB (in Oct 2011)  and 72.35t RMB (in Oct 2010),
OR 12.9% yoy UP.
That is, (81.68-72.35)/72.35*100%=12.9%.

Note that this is  already reflected in the Oct 2011 statistics

FOREX Reserves

Officially stands at  USD 3.2t

 Home Prices

A Reuters report dated December 2, 2011, says that the PBoC think that Home Prices are at a turning point.
          BEIJING -
Chinese home prices are at a turning point and banks are concerned about a possible 'chain reaction' if they were to fall by 20 per cent, the central bank said on Friday.
'Real estate investment growth eased, developers' cash flows tightened, land transactions and prices fell, property loan growth moderated and there are early signs that property prices are at a turning point,' the People's Bank of China said in a statement published on its website.
Chinese home prices fell in October from September for the first time this year, official data showed, but a private survey has indicated that November could mark a third consecutive monthly fall

What does this means, in policy terms?
Likely, there will be a turning point in the monetary policies.
The polcymakers wants to see a gradual incremental trend in housing prices.
NOT a precipitous 20% drop that will have drastic consequences on banks and their NPLs.

PMI News


US ISM Manufacturing PMI was the surprise this round.

New Orders

If seen together with the ADP Employment data, the US Private Sector, in particular the Manufacturing sector seems to be on the mend.


 China's CFLP PMI (at 49.0%) and HSBC PMI ( at 47.7%)  both correlates and tells the story that policymakers have over tightened and that the Manufacturing Sector is in contraction.
These two sets of data is likely the key reason for the announced cutting by the PBoC, of the RRR by 50 basis on 5th Dec. This can be seen as an inflexion point where the policies could be reversed (i.e. loosened) from now on.


Eurozone PMI data is rather bleak.
Countries ranked by Manufacturing PMI® (Nov.)
Ireland 48.5 2-month low
Germany 47.9 28-month low
Austria 47.6 28-month low
France 47.3 29-month low
Netherlands 46.0 29-month low
Italy 44.0 2-month high
Spain 43.8 2-month low
Greece 40.9 2-month high
Both the Core and the periphery are in contraction .

Thursday, December 1, 2011

MAS must clarify threshold levels for demanding a Poll

The following BT article by Jamie Lee, dated 1/12/2011  and titled
"Sale of KepLand's Ocean Financial Centre stake to K-Reit surprises analysts.
They say it may have been disadvantageous to the Reit's unitholders" have higlighted some points that MAS must clarify...


(SINGAPORE) The sale of Keppel Land's entire 87.5 per cent stake in Ocean Financial Centre to K-Reit Asia for $1.57 billion has raised eyebrows.

Several analysts who spoke to BT on condition of anonymity argued that the deal may have been disadvantageous to K-Reit unitholders.

For one thing, while the prime Grade A office building in Raffles Place has a tenure of 999 years, K-Reit will get the stake with only a 99-year lease for now, though it can exercise a call option to re-gain the property after 99 years.

Without the income support from Keppel Land of up to $170 million, the sale price of the office building translates to about $2,400 per square foot (psf), which K-Reit unitholders deem high at a time when the economic prognosis is grim.

In a third-quarter report, Colliers International noted that the office market has cooled further, with many companies taking a longer time to commit to new space amid caution over expansion plans.

The office market remains highly correlated to the country's economic performance and employment in business and financial services, CBRE said in a recent report.

'They should have left some meat on the table for both parties. Otherwise, what is the point of a Reit if the trusts are stuffed with assets at high prices,' said one analyst.

A second analyst said: 'Given the economic uncertainty, the deal is overpriced. The crux of the matter is that the deal was done when the office market is at an inflexion point.'

Another analyst noted that after stripping out the income support, the yield of about 3 per cent is not attractive. 'The price is at the top of the market. Granted that it's a Grade A office building but why now? Why acquire at a time when the macro-economic situation is deteriorating?' he said. 'The deal is skewed towards the parent.'

He also criticised the 17-for-20 rights issue that would raise about $976 million used to foot the bill, arguing that it is dilutive to existing shareholders. 'It's a good idea if it is being used to purchase depressed assets,' he said.

Still other analysts, while cautious, were more optimistic over the deal.
'It is too premature to pan the deal, especially when unit prices of office S-Reits have probably over-discounted the severity of the forthcoming downturn,' said a Daiwa report. The big concern is whether the income support is sustainable, it added.

Ocean Financial Centre has a committed occupancy rate of 80 per cent, with existing leases at about $9 psf. The income support, by Daiwa's estimates, should raise the overall current rent to $14 psf and be 'just enough' to last until 2016.

If in 2015 and 2016 - when nearly 30 per cent of the leases are up for renewal - spot rents hit $10.60 and $11.70 respectively, there would be 'significant decline' in Ocean Financial Centre's contribution in 2017, it said. 'However, if spot rents reach the mid-teens when the renewals take place, there might not be much drop-off, if any.'

In a client note, Credit Suisse said 'admittedly, market conditions are a little uncertain, and perhaps timing may not be perfect'.

But comparing with the Marina Bay Financial Centre transaction that involved K-Reit and Suntec last year, the acquisition price is fair from a long-term view, it added.

The approval from unitholders also came via a show of hands at the extraordinary general meeting - a practice that the Code of Corporate Governance no longer accepts as sound governance - and amid criticisms from minority unitholders over the price and timing.

'Given the size of the deal and the fact it was a related-party transaction, the vote should have been carried out by poll, with the results tabulated to include the percentages of voting for and against the acquisition,' said Lee Kha Loon, head of the Standards and Financial Market Integrity division of CFA Institute for the Asia-Pacific region, in a blog post for the institute.

A K-Reit spokeswoman said minority unitholders can call for a voting by poll so long as this request is supported by unitholders representing at least 10 per cent of the units held by those present. But the poll request, led by one institutional unitholder and supported by a few retail unitholders, fell short of this number.

All interested parties that included Keppel Land were not allowed to vote.
BT also understands that a proxy voter holding a significant block of 46 million units had already been instructed to vote in favour of the deal.
Keppel Land said the sale would 'unlock part of its investment holding especially given the strategic commercial reasons and the volatile economic climate'.

As for K-Reit, the acquired Ocean Financial Centre will also provide strong branding, making it a key office landlord in the Marina Bay and Raffles Place areas, with the transaction boosting the size of its assets under management from some $3.9 billion to about $5.9 billion.

The deal is also expected to be accretive to the Reit's distribution per unit from the cash flows generated, and should improve K-Reit's lease expiry profile such that no more than 11 per cent of its portfolio by net lettable area will expire in any one year over the next five years.



My Thots....

Much of the issues raised in this article has been discussed.

The section highlighted in blue, however raises issues that MAS/MoF must clarify....

In June 2011, there was actually a Rule Change Proposal by SGX to mandate compulsory polling at all shareholder meetings; see proposal.

Unfortunately, after public consultations, the recommendations was that a poll was deemed NOT a necessity altho if U attend any CMA or Capitaland-related AGMs or SGX AGMs or SingTel AGMs (i.e. the more progressive and transparent listcos) , U will have been given a electronic polling device and polling would be conducted; irrespective. Remember all dual listed listcos (i.e HKEX and SGX) must comply with HKEX rules.

What happened, was that at the KReit Asia EGM, the electronic polling device was distributed and the expectation was that polling will be done. So at one stage there was confusion, when the Chairman said polling will not be done becos there was no requirement.
No explanation was given!!

So those who were more knowledgeable, guessed that they were invoking the 10% rule.
See Recommendation 2.2 and a few of us went to the back of the room to register our shareholdings with the scrutineers to see if we had 10% shareholdings.

It was later announced that we did not satisfy the "requisite" holdings requirement and a show of hand voting commenced, immediately, to which those opposing were Out-Voted. But it was never clearly stated what was that % requirement, that we did not meet, during the EGM.

Later, I checked and found that the required % shareholdings threshold have been reduced from 10% to 5%!!!
After the EGM,  I went to read Recommendation 2.2, again and it appears that there is  a 5-members request rule---there are in effect two thresholds in section 178(1)(b)----- the 5 member rule in i) and the now effective 5% rule in ii) !!

In effect, a polling had to be carried out as there were more than 5 of us demanding a poll. We have been "robbed" of a fair poll which Kepcorp and Kepland as IPTs and together own 76.3% of votes, had to abstain.
Yet, we were denied!!!
A poll would be more favourable to dissenting unitholders, since we have some IIs (Institutional Investors) and some big unitholders amongst us!!

 This BT article appears to imply that a 10% threshold was used; which does NOT conform to the Companies Act.

Will MAS or MoF, please clarify!!!

4 Positives

Positive One
ADP Employment  report

The ADP Employment Report  for Nov 2011 has continued to trend up.

U.S. Nonfarm Private Employment Highlights – November 2011 Report: Total employment: +206,000
 Small businesses:* +110,000
 Medium businesses:** + 84,000
 Large businesses:*** + 12,000
 Goods-producing sector: + 28,000
 Service-providing sector: +178,000
 Manufacturing industry: + 7,000

As with previous mths, the Service Producing Sector  and Small and Medium Bizs continues to be the star performers.
The surprise is that manufaturing carved out a 7K gain; giving the previously moribund Goods-producing sector aboost to 28K jobs added.

This set of data which correlates well with BLS data bodes well for the Friday release.

Postive Two
CBs Act


Central Banks (CBs) take co-ordinated actions by providing liquidity swaps.
Mainly, involves ECB and the FED; to ease the credit crunch in Europe.
There is apparently a  credit crunch in the USD wholesale market and the FED is opening swap lines for the ECB to ease that crunch.
The participation of the CBs from Canada, England, Japan and Switzerland helps to boost the Bazooka effect  and shows that the CBs are united in helping the ECB , if  indeed it needs the help.
It shows  that ECB's head Mario Draghi, may be stepping up--- now  that it is clear that the politicos (Merkel & Sarkozy)  have agreed that the path to fiscal union is the way to go.

Positive Three
US NAR Pending Home Sales

Pending Home Sales Index for Oct 2011; which is a leading indicator of EHS ( Existing Home Sales) jumped 10.4%

Positive Four
China cuts RRR

In my last post on this topic, Reuters suggest that the cuts in RRR will happen, only next year .
As in the past, the PBoC wrong footed them again.
The RRR will be  cut by 50 basis pts from Dec 5.
This suggests that the policymakers are ready to ease the tightening measures that have made credit difficult to get for many SMEs .

Sunday, November 27, 2011

Return on Capital for Reits

Return on Capital
Given the propensity for cashcalls (i.e. Capital Outlays) in SG Reits, the correct metric for a Value Investor, should not be the dividend yield but the ROC ( return on capital).
Teh Hooi Ling of BT's, "Show Me the Money" series, did a calculation for the ROCs of 22 Reits listed on the SGX .

On that metric, of the 22 that she studied, only 17 made it to positive territory.
She did not state the date for the prices she used. But if we take her "prices today" (as at 25/11/2011), then we are taking prices at quite a trough, given current bear market conditions.

KReit Asia Positive ?
For the emblematic KReitAsia, which has been the most prolific in issuing rights, the surprising outcome is that it still managed to eke out a positive return on ROC, even tho the rights issue (at 85c) has pushed prices on that day to 86.5c.
So Reit, has a place in a value investor portfolio, just as Ben Graham, advocated in his book "The Intelligent Investor". Better still if they are trading below intrinsic book value.

But, the issue as highlighted in the EGM is the timing and frequency, with which the cash calls are made. In effect, the sponsors have abused the Reits vehicle, so that their interests (to monetise the assets at their  timing to recycle cash for sponsor use)  have been done at the expense of unitholders who are subjected to nasty surprises of cash calls, at a time when the markets are on the precipice  of falling and huge opportunities for purchases of  contending "stocks' could be on the horizon.

Against Sponsor's own interests
As pointed out in the EGM, these nasty surprises, if repeated often, work against the long term interests of the sponsors. Such frequent calls necessitate sponsors having to underwrite to take up any excess rights, reducing trading liquidity as the shares are concentrated in the hands of the sponsors. Loyal unitholders and IIs (institutional holders) with high stakes have to rejig and make sudden changes to their "Portfolios"; including selling in a distressed market to cough out the cash. Worst still, retirees and Mom N Pop investors who buy the Reits for dividends only (i.e. defensive plays) may not be able to cough up the extra cash at such short notice, leading to dilution or a need to sell their rights/shares at  "rights"-depressed prices. Other Unitholders, tired and fed up with the frequent and hasty cash calls, will sell.
In the end, the Reit vehicle which is the last piece in the food chain for the "asset recycling model" may fail, much to the detriment of the sponsors own interests.

MAS must act
Growth should never be the over-riding aim of a Reit; and growth for the sake of growth must never be the excuse for any acquisition.
As I have highlighted many times, accretive  property acquisitions ( to DPU) should only be made when it is certain that the property market has more or less bottomed (test is that valuations  are less than NPV for DCFs) or when the property market is stable; not anticipating a fall. The Reits biz model have that luxury to wait  and the regulators (MAS) should see to it that the sponsors stop ramming their cash calls down unitholders throats as and when they fancy!!
The Reits must be  a vehicle where the recurrent incomes have stabilised; those that have not stabilised must be incubated at the Sponsor level, NOT Reit level. Rental support is a gimmick and must be stopped.
Incentives for Reit Managers must be aligned with unitholders, NOT sponsor's interests!!

Saturday, November 26, 2011

Reits, A Mystery?

The KReitAsia case has been discussed at length in BT by Wong Wei Kwong. The 3 main issues of Corporate Governance, viz the voting vs the polling process during the EGM, the incentive scheme for Reit managers, the independence of the IDs, were all correctly identified.

But, I guess  the KReitAsia issue has turned out to be a hot topic, so that some in the media wants their one-minute of fame. and  in TodayOnline , there is an article on Reits by Colin Tan  dated 25/11/2011 entitled  "A decade on, REITs remain a mystery".

Wow, what a eye-balls grabbing title; and coming from a property professional, I am quite baffled that he find Reits, a property "staple", a mystery!!

Contrary to the spirit of the BT article, which was to seek clarity and had a a value-add  in pointing to ways to improve Reits, as an asset class on SGX, Colin's article sought to mystify and muddy the Reit vehicle; in fact, the entire fleet of 23 listed Reit vehicles, at that.

First, lets start with the positives, what Colin got right.....
This may have to do with the existing reward structure - the payoff is better with acquisitions than getting the existing assets to perform better. Is this what the Monetary Authority of Singapore (MAS) intended when it drew up the regulatory framework for REITs?

There may be better justification for a hands-off approach in the early days when the industry was in its fledging stages and when the MAS needed to build up the industry.

However, as the recent K-REIT Asia controversy has highlighted, it may be time for further regulation, especially in the areas of independence and avoidance of conflict of interests.

Many times in the past, I had prodded journalists to look further into certain REIT issues but all have declined, citing a lack of understanding of the subject matter.

Also, as pointed out by one reader, most REIT unitholders are not sophisticated enough to look after their own interests because of their lack of understanding. Even a representative of an institutional fund I spoke to immediately after the K-REIT controversy erupted showed a lack of understanding of the issues. They simply trust the management to do the right thing.
Colin thinks that Reit holders, even IIs are not sophisticated enuff to understand the issues.
He probably pushed it too far....
The rest of the article is peppered with  serious assertions that are highly contentious and unsubstantiated.

Colin might be an expert. But he needs to back up his assertions which must be challenged!!

Excerpts... must be said that REIT managers have mostly had to acquire their properties on the higher side of valuations if only because it is the only way they can get the owners to sell it to them
This is a gross generalisation.
The property market is cyclical.
Reit managers acquire most properties at close to valuations.
Property prices rise and fall; subject to demand and supply, so do valuations.
Remember, property prices and rents are cyclical,  at any time there will always be valuation "gaps" and differing opinions creating opportunities for buy or sell.
Reit managers actually have the luxury to choose their timing so that they buy (only) in a down cycle, when assets are fairly priced or under-priced (hence, my objection to KReit timing for OFC's purchase), so long as the properties are reitable (able to be let out to good tenants and generate NPI  after Op Expenses and Interest charges) and that the Net Present Value of the DCF  exceeds valuations.

A REIT can get a property on the cheap only when the owner is ignorant of its true market value or if it is a forced sale - many investors still do not realise this.
Wow, unless the property is miniscule in size terms , which then means that it is not reitable, most  properties will be properly valued before sale. Many investors know this!!  Try taking a  property loan or a Refi, the banks will make U pay for a valuation, not to mention a SPA for a property.

At the same time, the REIT manager can only justify the acquisition to shareholders if it is yield-accretive. Otherwise, the REIT is better off not doing anything.

So, a spot of financial engineering is required to get it to be so. This will buy the REIT manager some time to get the asset to perform to expectations or for the market to turn around and justify the values. In a rising market, this is not a problem.

Otherwise, for the acquisition to be yield-accretive, the REIT will have to buy a property of lower quality or one with higher risk because such properties have higher yields
Serious accusations!!
If the Reit manager do any of the 3 mentioned above:
1) A spot of financial engineering
2) Buy an asset of lower quality
3) Buy an asset  with higher risk,
 then that Reit is surely headed for disaster.
Of the 23 surviving Reits on the SGX, will Colin care to substantiate with just 1 example, which Reit Manager, do any of the above to get accretive yield?
As more properties in Singapore are acquired by the REITs, there will be fewer available on the market. As such, the asking price by the remaining landlords can only get higher. Given more time, it will become clear, if it is not so now, that the current model is not sustainable in the long run.

Sounds prophetic and self congratulatory.

Contradicts the point he, himself made earlier----- that Reits can only justify their acquisitions, if the DPU are accretive. Reits, can simply say "NO", if prices are too high.
I can cite many cases Katong Mall, Chinatown Mall, Yew Tee Point, Parc or Bugis Junction---- the landlords chose to sell becos of certain internal issues such as a change of strategy or biz direction. For 77 King Street that was acquired by KReit, the owner was a Greek, who had personality issues with the tenants and hence could not get the occupancy higher.

Reits is an asset class that has worked in many jurisdictions eg US, UK and Australia.
The model is sustainable and has worked;  the biz model can evolve as the size grows----- with AEI (Asset Enhancements), Development ( up to 10% of asset value), sale of Old Properties. There is also less need for cash calls as size evolves, since placements will be  smaller  and bite- sized, relative to the size of the evolved Reit (Kreit will become No 2 in size in SG)  and easier to find subscribers; after the growing pains.

REITs are often presented as defensive plays as it relies on revenues generated from income-producing properties held in its portfolio. While it may be so in more mature economies, the situation is different in Singapore.

In mature economies, a typical portfolio of properties in a REIT is a lot more stable. The leases are longer, which means the payout is much more consistent. In Singapore, most REITs are on the acquisition trail and their portfolios are always expanding.

Is SG, not a maturing economy?
Colin should check out the WALE, before and after the acquisition  for most of the acquisitions by Temasek-linked Reits,  before he makes all the bold statements, above.
Almost all the Reits, I am vested in or know of ( i.e. with good sponsors), have no issues with consistent divd payouts.With the exception of some Reits hit by the Japanese triple whammy, most Reits have a stable portfolio of properties.

As a vested Property Professional, Colin should clarify
NOT sensationalise and mystify.

Friday, November 25, 2011

Li DaoKui on China

This article by Grace Segran appeared on Today , on 25/11/2011.
Those who follow me on the CNA Forum will know that he is one of my fave commentators on China.

By all accounts, the Chinese economy is thriving. While America and Europe continue to struggle with debt and unemployment, China is moving from strength to strength. Still, Chinese economists and policymakers are looking ahead to see what problems China may be facing in the not-too-distant future and, more importantly, how to prevent or mitigate them.

For a start, Professor David Li Daokui (picture), a     member of the Monetary Policy Committee of the People's Bank of China and the director of the Center for China in the World Economy at Tsinghua University, believes that China is heading into a major grain shortage.
China already has a very limited amount of per capita arable land, he told INSEAD Knowledge. However, as China industrialises and urbanises, labour costs are rising quickly. These costs will be capitalised into the price of agricultural products such as grain. The Chinese consume grain in very large quantities - not just whole grains but also as raw materials for the production of other food items. Together, these factors are leading to a perfect storm that will result in an increased demand for grain.

The increase in demand for grain is a global problem, according to Prof Li. It would only take one bad crop to throw the world into a major food shortage. "We can imagine that, with the frequency and severity of natural disasters in China as well as in other parts of the world, the overall global grain output will be decreased, which will pose a potentially grave threat to grain security, leading to worldwide food shortages and resulting in global inflation in food prices," he says.

It is important for China to think carefully about its agricultural strategy. Prof Li recommends that the Chinese government takes measures to increase the scale of grain production by investing in agricultural technology. He also suggests that China invests in grain production overseas.

He opines: "This will not only work towards China's self-interest but will also contribute to helping to solve the wider global grain supply problem."

Prof Li predicts that, like grain, there could be a global shortage of oil that could adversely affect China's development. However, he points out that oil and grain are different kinds of resources.

"The risks associated with oil and grain are different, as the geographical supply of oil is relatively concentrated," he says. "Oil responds much more dramatically to changes in the global economy. The downturn in the European and American economies has depressed the price of oil. However, even a small economic recovery could cause an upward surge in oil prices."

Since China is dependent on external oil supplies, a dramatic increase in oil prices could be devastating to the Chinese economy. In Prof Li's view, China must be prepared for these possible fluctuations by building a domestic supply of crude oil equivalent to three to six months of domestic consumption. China should also diversify risk factors by establishing long-term contracts with countries that supply oil and begin to rely on other energy sources.

Over the past three decades, China has experienced a steady increase in its supply of money. It now has an overall money supply of US$10.5 trillion (S$13.7 trillion), which is higher than that of the United States and is equivalent to nearly double its gross domestic product.

Prof Li explains that this excessive circulation of cash presents many risks for the Chinese economy. Without viable options to invest this money, asset price bubbles could develop and the prices of certain assets could climb. "We saw this in the housing market bubble in the US ... When asset prices reached unsustainable levels, the bubble burst, causing a nationwide economic meltdown."

Prof Li suggests that China shifts its monetary policy to reduce the amount of money circulating in the economy. He says: "China should tighten its supervision on financial institutions to control systemic financial risks in this sector and prevent excessive price increases."

China could also let excess capital flow out of the country, by allowing companies and individuals to convert their yuan into other currencies. Eventually, these measures should facilitate a two-way flow of capital, allowing China to regulate the flow of money into and out of the country.

On the whole, the Chinese economy is in good health, Prof Li asserts. Still, it is vitally important not to underestimate the risks that, if left unchecked, could devastate China and undo years of economic progress.

This article first appeared in the latest issue of INSEAD Knowledge. David Li Daokui, who received his doctorate in economics from Harvard University, is Mansfield Freeman Professor of Economics and part of a trio to replace Fan Gang as academic members to the Chinese central bank's monetary policy committee.

"Wisdom is purified by virtue and virtue is purified by wisdom. Where one is, so is the other."