Is US Commercial Office Recovering Or Crashing in 2025? Hope or Depression for Manulife US REIT, Prime REIT and Keppel Pacific Oak REIT?

Is the US Commercial Office recovering or going to crash further in 2025? I guess the answer is it depends on who you are asking this question. Long suffering unit-holders of Manulife US REIT, Prime US REIT and Keppel Pacific Oak US REIT have seen their investments pummeled to just a tiny fraction of their original investments. Worst still, distributions have been cut or halted for a long time. On one hand, the higher interest rate environment effect is still ongoing even in 2025 as some office landlords need to refinance their previous locked in offices loans at the current higher rates. On the other hand, there are lesser office supply coming online as well as surge in conversion of office into residential uses which lead some to believe that 2025 will be the market bottom for the US Commercial Office sector hence a rebound is imminent going forward.  

1. The case for market crash of US Office REIT in 2025 and recovery only from 2040.

The Straits Times on Nov 21, 2024 has published an article that has a forecast by Capital Economics that United States office buildings are unlikely to regain their peak pre-pandemic values until at least 2040 as demand for desk space weakens. It further mentioned that values of these offices are expected to plunge by 35 per cent from the peak by the end of 2025 and take an incredulous 15 years or more to recover! This seems to be an extremely pessimistic view. This is also in total contradiction to the view of CBRE and Jones Lang Lasallee. 

2. The case for belief that the US commercial office market has bottomed in Q4 2024.

I thought that the global real estate and investment managmeent group of Jones Lang LaSallee USA ("JLL") has gathered pretty interesting hardcore statistics to back up the case that US office market has bottomed in Q4 of 2024 and that 2025 may see the start of recovery of the office market. One can read more of it here for their report.

<Quote from JLL>:

The culmination of 2024 marked another key development in the recovery of the U.S. office market—as leasing activity has accelerated over the course of the year, Q4 was the first quarter of positive net absorption since Q4 2021, and just the second quarter of occupancy gain since the onset of the pandemic in 2020. Leasing activity has established post-pandemic highs for the past three consecutive quarters, and Q4 volume reflected more than 92% of pre-pandemic averages. 

</Quote from JLL>

Demand has returned to pre-COVID with Net absorption positive in Q4 2024.

Supply Reduction & Employer Pressure Return to Office

US Office Supply Reduction via Conversion of office to residential, revedopment and Demolition

Parting Thoughts

Personally, I though that the US Office market has bottomed given that Q4 2024 positive net absorption confirmed the Q3 2024 signs of rebound with the shifting patterns of office attendance and US Fed interest rate cuts in September 2024 and November 2024 driving slightly more favourable conditions for US office landlords. Nevertheless, I do not think it will be an instant recovery in 2025 and may take a few years for recovery. So US office REITs are not out of the wood yet. I have continued to hold my stakes in Keppel Pacific Oak REIT but will not be adding more units. I do hope that once Elon Musk and his Department of Government Efficiency start axing many US government employees that are stubbornly still working from home albeit the lack of productivity, it will send a message to the private sector employees to get back to office to work- the US office market may recover strongly in 2025 onwards if this is the case. 

Central Provident Fund Personal Updates 2025- Moving Towards Enhanced Retirement Sum Using Special Account.

Time to document my CPF retirement goal update. I will only be sharing my CPF Special Account here as I find the balances in the CPF Ordinary Account ("OA")  and Medisave account are irrelevant for my retirement income planning. Reason being that for CPF OA, amount here will eventually be fully utilised to pay down my housing mortgage as I do not plan to work till age 65 years old and targeting an early retirement. As for Medisave, my parents do not have much medical insurance coverage and I think that I will most likely exhaust all the balances here into their future healthcare. I have seen my cousins Medisave being drawn down to zero for medical expenses for medical payment on behalf as their parents similarly do not have much health insurances or sufficient medisave-this issue always reminded me of the Sandwich Generation video from Income Ltd in 2019.

1.Target for Future Retirement Account

Currently, my special account has a balance of S$266K as of 2 January 2025. My personal CPF special account target is for it to reach S$426K (based on the new 4 times basic retirement sum 2025). Even thought I think I can only achieve 3 times basic retirement sum, think it is good to have a higher benchmark target of S$426K. 

2. Interest Income- S$10.8K for Special Account

Hopefully, our Singapore government maintains the 4% risk free rate for all CPF holders for the next decade. With a passive S$10.8K of interest income being credited, this effectively mean at least another S$100K growth in the CPF Retirement Account every 10 years.

Parting Thoughts

I think that it is hard to beat a risk free 4% offered by the CPF board backed up by our Singapore Government. So I am contended to just let it grow gradually by itself instead of taking out for balanced fund investments albeit very tempted at times to do it. I will do my own retirement planning properly....I will be the last Sandwich Generation!

Investment Portfolios Updates (30 December 2024) - Net Investment of S$709K and Projected Annualised Passive Income of S$47K.

It has been 3 months since my last update of investment portfolios on 27 September 2024. The rally in S-REITs and China stocks fizzled out quickly in a short span and it seems that we are back to square one. Overall, real estate related investment assets still make up about 60% of my combined portfolios. I have continued to work on diversifying away from real estate related businesses and have continued investing into mostly bond related unit trusts via Endowus as well as buying into F&B retail business of Kimly Group. 

1. Portfolio 1- Stocks held in SGX Central Depository 
(Note: This portfolio is designed to provide immediate dividends for use as it is under my own CDP account and the dividends credited goes directly to my bank account.)

Main changes here as aforesaid mentioned is the addition of Kimly F&B retail group here. I have also took part in the preferential rights issue for Keppel DC REIT. I retained the additional units of KDC in my SGX account while selling off the additional units in my Margin Trustee account- see below.

2. Portfolio 2- Margin purchased securities

(Note: My margin purchased securities has grown to a sufficient scale to sustain itself and can pay off annual financing charges as well as to gradually pay down the margin loan through dividends generated.) 

Took part in the preferential rights issue for Keppel DC REIT and then sold off all the 4,000 additional units in my Margin Trustee account and bought 5,000 units of Mapletree Pan Asia Commercial Trust. 

In addition, I also invested into the Bank of China as well as ICBC Bank here. 

3. Portfolio 3 (with Tiger Brokers and MooMoo) 

(Venture into higher risk as well as capital growth stocks here)

Bought into additional units of Oceanus here as well as ICBC (Bank). 

4. Portfolio 4 (Endowus Unit Trusts & Other Investments)

The public and government objection to the Allianz acquistion of Income Ltd means that the 300% capital gain deal fell into the drain. Worst still, the suspension of public trading of Income Ltd shares on Alta platform as at 17 Octobet 2024 is a double whammy due to the fallout from the Allianz deal. Income Ltd management team screwed up big time on this one.

I have also decided to start drawing down the dividends and distribution from Portfolio 4 going forward.

Summary

I sincerely hope that 2025 will be a better year and that the run-away inflation has been tamed and that interest rate will remain as it is else any increase in rates will once again batter REITs and bonds asset prices to death. 

Would also like to take this opportunity to wish all a Happy New Year and may we all prosper together in 2025! :)😎

Singapore Buyers Got Misled Into Investing Into Malaysia Johor Properties Under Private Lease Scheme- Slim Hope of Winning Civil Suit.

It is shocking when I read the news that some fellow Singaporean buyers are in legal dispute with a Malaysian developer over the form of ownership of Johor condo purchases. Apparently, these fellow Singaporeans have bought into a property under a "Private Lease Scheme (PLS)" that is unique in Malaysia but not in Singapore property market. It is akin to being a tenant as all the rights associated with ownership are missing and the only rights is to be able to stay in the condominium apartment for 99 years. You need to seek permission from the Developer to sublease or re-sell the unit.  

1. What is PLS?

Under such a scheme, the Malaysian developer retains ownership of the property and you essentially have a long-term rental agreement and NOT TRUE ownership. One thus does not have full ownership rights such as voting on condo management or selling the property freely. 

2. Where is the Disputed Residential Properties?

According to the Edge, some residential properties in Medini, an area within Iskandar Puteri in Johor, were sold in 2013 and 2014 under a PLS and not as 99-year leasehold condominiums. 

3. Statutory Claims Limit in Civil Suit as well as Signing the Sales & Purchase Agreement with Eyes Wide Open

3(i) Considering now is 2024 and that this matter is only raised up now, there will also be an issue of statutory expiry of civil claims lawsuit which is 6 years in Malaysia. Can affected PLS Singaporean buyers even file the suit in the first place on being misled into paying for a PLS instead of a normal purchase?

3(ii) Also, even if they raise a claim successfully, how do these buyers argue their way out of an agreement that they have signed with eyes wide open in the first place?

Parting Thoughts

I thought that investing into Malaysian assets can become extremely risky if one is not careful in the due diligence process. Nonetheless, even if one is very careful, we should not forget about the constantly changing policy by the Malaysian government (depending on who is in power). We have seen the aftermaths of the 1998 CLOB issue where many Singaporeans lost their hard earn money overnight due to political risk. We have also seen Forest City which was marketed to many folks in China and Singapore as a 2nd residential home under special visa stay programme but which Mahathir's government subsequently reversed hence turning it into a ghost city. 

Moreover, even if there are capital gains of 100% in say 10 years, the depreciating currency based on historical trend against SGD will mean that the investment gain will be be wiped back to zero. Therefore, buying into Malaysian property is definitely more for staying or living in rather than as a form of investment. 

To put it bluntly, I think that the affected Singaporeans on PLS have very little room to maneuver to get the ownership title restored and will just be incurring more unnecessary legal fees expenses. The only stakeholder that will surely benefit the most will be the Malaysian lawyers. 

Investing into "The Flavours of Life"- Kimly F&B Retail Group.

Since REITs prices have rallied somewhat over the past few days over Christmas period, I decided against investing more into Mapletree Pan Asia Commercial Trust and Link REIT. Instead, I have decided to invest into the F&B group with the "Flavours of Life" slogan- Kimly. Strangely, Kimly Group 's share price has fallen dramatically off its peak of S$0.436 per share back in 2021 while its business have expanded from 148 F&B outlets to 191 F&B outlets from FY2021 to FY2024- see Retail Footprint for details.

1.Retail Footprint

2. Financial Outlook and Dividends Payout + EPS Thoughts

2.1 Strong Balance Sheet with Loads of Hard Cash

I am extremely impressed with the S$98.5Mil of cash on Kimly's balance sheet. Cash is King. This huge pile of cash can be used for immediate business expansion as well as immediate paydown of S$17Mil of short term and long term bank loans during emergency liqudity crunch time.

2.2 Dividends Payout

With a dividend payout of 2 cents for FY2024 and a EPS of 2.55 cents, this means  a payout ratio of almost 80% while retaining 20% earnings in the business. At the market trading price of S$0.325 per share as at 26 December 2024, this represented an extremely attractive dividend yield of 6.15%. 

2.3 EPS on Higher Side- But Need to Consider Room For Growth

Also, Kimly's PE ratio based on EPS of 2.55 cents is about 12.94 times. F&B industry in Singapore (based on data from Simply Wall Street on Singapore Industry) range from PE of 8 to 10 so apparently 12.94 times seems a tad high on SGX. Nevertheless, I thought that its Halal "Tender Best" sub-branded restaturant has lots of room to drive growth & profitability for the future. 

Interestingly, its share price has remained in the S$0.310 to S$0.325 range despite the announcement of its full year financial results and 1 cent final dividends declared on 26 November 2024. Ex-dividend will be on 4 Februray 2025 (Tuesday) and payout date on 14 Februrary 2025 (Friday).

3. Possible Downside Risks

Of course, not all is entirely eventful for Kimly and its management team over the past few years as well as recently. There are a couple of serious downside risks:

3.1 Pokka Deal & Conflict of Interest in 2022

In February 2022, 2 former directors of coffee shop operator Kimly were fined for their role in failing to notify the Singapore Exchange (SGX) that Kimly's acquisition of drinks company Asian Story Corporation (ASC) involved a conflict of interest. This unfortunate incident also led to the disqualifcation of the above mentioned officers of the Group to act as director for 5 years.

3.2 Illquid Stocks As Most of the Share Capital Owned by only a Few Substantial Individual Holders.

The stocks (50%+) are held in the hands of 3 indviduals. General public holds the remainder. Hence trading of this counter is not very liquid. It maybe tought to sell off the stocks during unforseen situation.

3.3 The Competition is Intense in F&B.

There are many rival coffeeshop businesses in operations in Singapore. There are also other F&B operators. I am not sure why some folks think that Kimly is a relatively defensive business with resilient cashflow. The fact is that it is extremely price sensitive and  not all costs can be passed on immediately to customers. For example, we have seen the impact of the recent high inflation on Kimly Group's financial performance. There were also various closure of non-profitable stalls and resturants by Kimly over the past few years. 

3.4 Resignation of Financial Controller of Kimly Group announced on 27 November 2024.

Personally, the resignation of the Head of Finance & Accounting is a downside for me that signals possible other issues internally albeit the standard crafting of the "personnel left to pursue other personal and career opportunities". The Financial Controller joined Kimly in 2021 and then left 3 years later.

It is also strange that the Senior Finance Manager is left to hold the fort and that the Group did not look out for experienced replacement CFOs/Financial Controllers to take over.  

Parting Thoughts

For diversification away from my REITs heavy portfolios, I have decided to invest a small amount (20,000 shares) into Kimly Group given that it has demostrated stable growth in its F&B businesses. While challenges such as intense competition, inflation and cost pressures present great business risks to its profitability, I think that Kimly's senior management is experienced enough to steer the group forward given their sharp business acumen and historical track record.

Oceanus Group Makes An Immediate S$10.5 Mil Profit From Disposal of Non-Core Aquaculture Farms in China.

Oceans Group has finally released some positive news that it is selling 4 plots of land used for acquculture farming in Fujian Province of China for S$19.2Mil. The cost of the 4 plots of land in the books of Oceanus is at S$8.7Mil. This is a 120% return from this deal and an immediate gain on diposal of S$10.5Mil. Given that the Sale and Purchase Agreement ("SPA") is signed on 20 December 2024, the gain on disposal booking in will only be in early 2025 upon completion of all the warranties in the SPA. 

1. Annoucement on 23 December 2024

The interesting thing here is that no market valuation benchmarking exercise was carried out and the deal is crafted as being on a "willing-buyer and willing-seller" basis. Personally, I am not a fan of willing-buyer and willing-seller as there is a degree of lack of transparency with regard to whether a deal is fairly done if benchmarked to the market.  

2. Immediate Positive Financial Impact Upon Completion of the SPA:

The NTA of Oceanus Group will go up by approximately 22.7% upon the completion of the deal. The S$10.5Mil will be re-deployed into working capital.  

Parting Thoughts

Interestingly, if one had purchased Oceanus recently at S$0.005 per share last week, the current market price of S$0.007 per share would mean a +40% capital gain from holding Oceanus in just one week.

Overall, I thought that Peter Koh, the Group Chief Executive Officer of Oceanus Group, executed a good deal of realising hidden intrinsic value from its non-core assets. Current market value of Oceanus Group is trading at S$0.007 per share as at 24 December 2024 relative to the revalued NTA per share of S$0.0027. This deal maybe essential as Oceanus Group has been making losses at the net profit level and will help to recapitalise the company without further issuance of shares via equity fund raising.  

Selling Excess Rights Keppel DC REIT For Mapletree Pan Asia Commercial Trust.

Surprisingly, I managed to get all my rights and excess units subscription for Keppel DC REIT ("KDC") preferential rights offering, that is, 5,000 units @ S$2.03 per unit. As per my previous post, I think that KDC is overvalued, so I decided to keep only 1,000 units of the allocated KDC units while selling 4,000 units from the rights allotment to lock in a tiny profit to the market price of S$2.10 per unit and prepare for redeployment in view of the sharp correction in the prices of many blue-chip REITs.

1. Reassessment of Mapletree Pan Asia Commercial Trust ("MPACT")

On the crown jewel front, Vivocity shopping mall continued to shine brightly in terms of its financial performance for the 1st half of FY2024/25. Its other local jewel of Mapletree Business City seems to have lost some of its luster with commited occupancy dropping from 96.8% on 30 September 2023 to 92.5% as at 30 September 2024- nonetheless, its quarter on quarter occupancy has held on well. 

MPACT's Hong Kong segment also seems to have finally some signs of optimism sprouting. I think that the fear of all Hong Kong folks going over to Shenzhen to shop and dine via the high speed train and thus marking the end of Hong Kong shopping malls, may have been over-exaggerated. Festival Walk is a major shopping mall in Kowloon and not strictly just catering for tourist. It remains a popular hangout place for the Hong Kong local folks as per my chit chatting with Hong Kong colleagues.

1.1 Hong Kong star property- Festival Walk finally seeing lights at the end of the tunnel with rental stabilising.

The negative rental reversion has slowed down for Festival Walk albeit my Hong Kong colleagues still feeling gloomy with their economic outlook. 6 mths ago, the reported rental reversion is a miserable -8.7% while the recent announcement is a tad lower -6.1%.

 There are also ongoing efforts to curate the right retail mix to cater to local's demand for experiential and lifestyle concepts.

1.2 The Accretive Divestment of Non-Core Asset Mapletree Anson on 31 July 2024

The successful divestment of Mapletree Anson at a fair value gain while MPACT is trading at 29% off its NTA thus managed to lower its aggregate leverage to 38.4% (below 40% level) and boost unit-holders return.

1.3 Sharp Drop in market price back to S$1.20 per unit as at 20 December 2024 range from S$1.53 per unit on 3rd October 2024.

MPACT has corrected by approximately 20% in less than 3 months. This is despite the continued interest rate reduction by the US Federal Reserve that was just announced. It is also giving out an attractive distribution yield of 6.5% per annum based on the recent distribution.

Parting thoughts

After selling off my KDC excess stocks, I have snapped up 5,000 units of MPACT last week @ S$1.21 per unit in view of the significant price correction. Come to year end, I intend to invest another S$10K to either MPACT or Link REIT as I think that Hong Kong will eventually rise and shine brightly again given the latest developments- Hong Kong's economy is set on a recovery path with five consecutive quarters of positive GDP growth.