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.

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