Sabana REIT closed at $1.02 and touched a low of 97c at one point today. After the rather strong performance by MIT and GLP on debut not so long ago, the unenthusiastic response to Sabana REIT on its first day of trading by market participants was somewhat surprising. Let us do an analysis of the REIT and whether it is a good investment at the current price.
Sabana REIT has an aggregate leverage of 26.5% which is comfortable but bear in mind that a Shariah compliant REIT cannot lever beyond 35% while other REITs are quite comfortable levering to 45%. Its NAV per unit is 99c. So, it is trading at a slight premium to NAV and at 97c, the low of the day, it was only at a slight discount to NAV......
While many investors are attracted to see the near 8% dividend yield, my issue with Singporean Industrial REITs are the prices paid the acquire the individual assets.
I agree that the current initial yield for Singaporean industrial assets sits around the 8%, however in some cases the capital value amount being paid is a secondary consideration. This leads to a major flaw in the long term viability of REITs that operate on this basis.
Sale and Lease back agreements are the most common form of transaction in Singapore Industrial REIT market, whereby the previous owner (tenant) will offer the property for sale, and then lease back the property for a period of time at a negotiated rent. The buyer (REIT) will want to achieve an 8% yield, ie, Annual Rental Rate/Purchase Price = 8%. So basically, the tenant can offer to pay $1mill or $1.5mill pa in rental, with the REIT acquisition price being $12.5mill or $18.75mill, based on their aim of an 8% yield.
In this instance there is little consideration, in the underlying market rental for the property by the REIT as they are blindsided by obtaining a secure income stream and the 8% yield. For the seller, now the tenant, it is in his best interest to have the annual rental as high as possible, therefore higher selling value, and the shortest lease term, therefore lower rental cost.
Sabana’s largest property accounts for 40% of the portfolio rental and is secured on a 3 year lease at a rental rate of in of $2.46 psf of GFA per month. Is that sustainable after the 3 years?? What is the current rental rate for similiar properties in the area
Some issues have already come to surface within the Singaporean Industrial REITs, with the head tenant defaulting or lease expiring, resulting in the drop in property values by 15-20% due to the underlying market rental being below the Sale and Leaseback Lease agreement.
And this is my issue, if the REITS are acquiring under this basis, investors are essentially overpaying for their units. I would be more comfortable in paying market value for individual assets and not an inflated value, based on over- market rentals. I am happy to receive 8% but only pay 80c per unit, not $1.05 per unit.
You have painted the intentions of the buyer of the properties (the REIT) and sellers in an unfavourable light. I would avoid commenting on this since it would, at best, be guesswork.
As for whether the rental rate is sustainable beyond 3 years, I am sure that not even people in the industry could see that far. So, it is not a productive question.
When leases expire or are defaulted on, current market conditions would determine what the new rates are and whether new tenants could be found. This is part of the risk of investing in REITs just like there are risks in investing in any other instruments.
Are investors overpaying? This could be quite subjective. If you ascribe a 20% discount to the valuation of $1.05 to approximate 80c per unit which you are comfortable paying and are also happy to receive a 8% yield, then, there is no difference. I suppose you mean you would be happy to receive 8c in DPU but pay 80c per unit instead of $1.05 per unit. Of course, that would give you a greater margin of safety. I would like that too. :)