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Saturday, July 30, 2005

Mapletree LogREIT @ 89.5 cents ( Property / Singapore ) 8 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Bubbling optimism about REITs and post-IPO price surge

2.Rent cuts by JTC suggests downward pressure on industrial property rents

3.Stagnant distribution yield predicted; current yield is unattractive compared with peers and alternative income instruments

4.Limited geographical diversification of logistics property portfolio

The IPO for Mapletree LogREIT was launched recently, and the price shot up from the IPO price of 68 cents to the region of 90 cents on the same day, thus reaping handsome gains for its subscribers.

The timing of the IPO was impeccable, following on the heels of some favourable news relating to the property sector, such as the government's relaxation on property purchase regulations and the purchase of Raffles Holdings' hotels by a US investor. The red-hot REIT trading theme has also added to the optimism surrounding the Mapletree LogREIT IPO, thus resulting in its over-subscription and 30% price appreciation on its first day of trading.

It is precisely due to this optimism that one should query whether the initial enthusiasm over the IPO might have overpriced the stock at its current price. One has to be careful not to buy high when the price has surged so significantly for what is essentially a defensive investment instrument. There are other reasons that I will list below.

A big concern is in relation to an announcement from JTC also around this time that appears to have been brushed off by the market. JTC has implemented a new round of rent cuts on industrial land by an average of 20%, commencing July 2005. This follows the last round of cuts just 6 months ago in January 2005. This is part of the government's drive to make business costs more competitive in Singapore, and reflects the urgency to keep manufacturing from moving abroad to low-cost countries like China and India. This puts a downward pressure on rental yields, and surely is a negative for industrial land owners like Mapletree.

Those looking for rising unit distributions from the REIT should think twice. The prospectus clearly forecasts that annualised distribution yield is not likely to rise much from FY2005 to FY2006, with gross revenue for FY2005 (if annualised, reasonable since property yield is not seasonal) of S$38M being similar to projected FY06 revenue of S$39M. In fact, I wonder if the FY06 projections might be a tad optimistic given the downward pressure on industrial rent yields mentioned above.

Mapletree promotes itself as a play on the Asia-Pacific logistics sector, which is forecast to grow at more than 10% annually up to 2009. I do not dispute this figure, as I am generally bullish on economic growth in the Asia-Pacific due to outsourcing trends. However, look at Mapletree's initial property portfolio of 15 properties: they are all located in Singapore. This is hardly a regional property portfolio; regional diversification is just not there. The REIT plans to invest regionally following the IPO; perhaps one should buy when there is evidence of such plans being brought into fruition. Furthermore, the current property portfolio is nearly fully occupied; this reduces the potential for increasd revenues accruing from higher occupancy rates and leaves higher rental yields (which is quite unlikely; see above) or further asset acquisitions (needing fresh capital injections) as possible ways to grow revenue.

Finally, the current valuation prices the REIT at 4.5% dividend yield. At 68 cents and rental yield of 6% it was about fairly priced; at its current price the yield looks unattractive compared to a comparable REIT, that of Ascendas', of about 6%. Borrowing costs (interest rates) are on the rise, which (1) going to further reduce the attractiveness of REITs as a play on the spread between REIT yields and bond yields; (2) reduces the capacity for REITs to use debt gearing in new asset acquisitions to increase return on equity.

The price stabilisation exercise for the IPO is ending soon. It will be interesting to see how the REIT performs further on. It is not a long-term buy for me by any means.

(1) JTC's announcement on June 30 2005




Blogger Stargate said...

Reits as an asset class are still relatively new in the region and especially so with Mapletree Logistics Trust (MLT) since some of their assets appear to have exclusive uses. Indeed local investors who have only encountered retail or commercial reits so far should ask hard questions regarding the long term valuation and prospects of MLT.

The regional strategy of MLT should also be investigated. Despite the long term promise of the logistics sector, the sector can be further segmented i.e. petrochemical, hazardous material, autmotive etc. MLT has to make the right bets.

7/30/2005 1:48 PM  
Anonymous tankie said...

I hv the fllwg comments,

1. JTC targets all segments of biz fm small businesses to large MNCs. I think many small businesses are suffering and MNCs are also re-locating outside of S'pore. MapleTree, on the other hand, is focussed on logistics biz, and with parent Temasek's contacts, may still enjoy better occupancy than JTC.

2. Ascendas annualised yield is 4.814% based on latest DPU 2.84cts @ $2.36 and not 6% as per your post. But, it should move to 5%+ with the recent acquisitions.

3. MapleTree, with its small asset base and Temasek already announcing its plans to inject in more assets, subject to getting waiver fm MAS, can easily raise the yield fm its current low. Of course, the stake of existing shareholders will be diluted.

Yes, I do agree that in the longer term, we have to be carreful and selective on which REIT to put our money in. However, REITs are now in the high growth stage and offers a lot of potential profits for investors.

The danger signs would be when the REIT is very big in asset base, low in yield and operates in a rising interest rate environment. In this case, any yield acretive acquisition would be difficult, and the size of acquisitions have to be substantially large enough to make any big impact on its yield. That's when the price will have to fall for the yield to become attractive again.

7/30/2005 7:00 PM  
Blogger DanielXX said...

Hi tankie,
Thanks for your comments. Admittedly, many are now investing in REITs for the capital gains rather than for yield, so perhaps looking at the reduced yield might be a wrong valuation method after all. Let's see what new assets Temasek injects to the Mapletree portfolio. It is probably a collection of the assets in Asian that they have been buying up these few years.

All things being said, I am suspicious of a situation where an investment grade instrument suddenly becoming seen as a growth play.

7/31/2005 6:56 PM  
Blogger Decipher Labs said...

hi daniel,

I was very happy to see that Stargate and yourself has began covering SGX in the form of blogging. We have the same wave length!

I had linked up your blog and stargate's blog with mine.

Together we can create a investing/trading blog community for Singapore retail investors and allow the young to have an easier time picking up the art of investing/trading.

Can you link me up with yours as well? Mass is power!


8/03/2005 10:48 AM  
Blogger DanielXX said...

Hi Decipherlab,
Glad that you like my site. Have been busy these few days and I'll pay your site a visit over this weekend. Ciao!

8/03/2005 10:38 PM  
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10/05/2005 10:42 PM  
Anonymous Anonymous said...

u seems to be generalising reits. Logistic reits generally yield accretive, esp. regional diversification, than traditional reits. Are u avoiding all the reits?

11/26/2005 12:09 AM  
Blogger DanielXX said...

As at the date when I wrote the Mapletree blog, I was indeed avoiding all the REITs. You may say I was doing a sweeping statement on all the REITs then; the general point was that the market had become too bullish on an instrument whose main long-term attractiveness lay in its dividend yield; that had declined as unit prices rose. Out of all the REITs, I then chose Mapletree to cover in my blog due to its recent IPO status, its sharp price rise (indicative of frothy sentiment and expectations), and a property portfolio which was hardly diversified in terms of country location. Well, it has since sought to acquire assets in China, and combined with JTC's announcement to divest of its industrial property portfolio, I think I might just take Mapletree off the not-to-buy list.

11/27/2005 12:40 PM  

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