Is it Time To Buy Into Singapore Industrial REIT And Earnings Recovery Coming Soon?

Back in 2012 and 2013, I was holding on to a number of industrial REITs such as Sabana, Cache Logistics Trust and Soilbuild. I had then exited industrial REITs as I noticed that there was an upcoming avalanche of industrial space and the rental psf for these space were dropping fast due to oversupply as well as deterioration in macro-economic conditions. For example, Tampines logistics hub of a few million sqft TOP with many big boys such as DHL, Schenker, Kerry Logistics, and Sing Post E-commerce taking up space there. In 2012, a warehousing facility for rent in western Singapore was going for S$1.56 psf for 3-5 years long term lease. In 2017, the rental rates for logistics space for a similar property dropped to S$1.26 psf. I am actually surprised that for early 2019,  the rates on offer by many of the REITs landlord have continued their decline to S$1.10 psf and there are plenty of vacant properties to choose from with regard to location. As a matter of fact, there was recently a REIT landlord that was willing to even offer a competitive S$1.00 psf to seal the deal with their prospective customer for a ramp up modern warehousing facility. Hence contrary to some analyst report which reported that prices have bottomed up and 2019 will see a recovery in industrial REIT rental, I am still rather skeptical on the outlook.

What are industrial properties?

This consists of light industrial production spaces, heavy industrial production spaces, warehousing spaces for logistical usages and also business parks. Generally, the main use are for industrial support purpose. The government agency will have requirements such as at least 60% for production usages and less than 40% for administrative office use. 

AIMS AMP Capital Industrial REIT, Ascendas REIT, Mapletree Industrial Trust, Cache Logistics Trust, Soilbuild REIT are prominent REITs with industrial properties among their assets portfolio.

Regulatory Risk Investing in Industrial  Properties

There is also another problem with industrial properties in particularly light industry business parks. Under the guidelines of the Urban Redevelopment Authority ("URA"), buildings approved for industrial use are meant primarily for activities such as manufacturing and warehousing. The misuse of industrial space is actually very rampant in Singapore. Businesses ranging from law firms, accounting firms, training providers, interior design firms etc have taken up units in industrial premises. This is due to the very low rental of between S$1.00 psf to S$2.00 psf relative in comparison to actual office rental of S$4psf  to S$6psf. 

I am not sure how stringent the government is going to clamp down on such illegal activities as Singapore is known for its rule of the law. But if it is strictly enforced, the overall industry will have more vacancies due to the exodus of such illegal tenants to real offices. This will surely depress the already low rental psf in the current market for industrial properties.  

Overall Singapore Industrial Property Market as per JTC Statistics and Updates

Screenshot 1: Extraction from JTC Report from J-SPACE- Base year is using 2015

Screenshot 2: Extraction from JTC Report from J-SPACE-Base year is using 2015

Screenshot 3: Extraction from JTC Report from J-SPACE-Forecast till 2021 new supply

Screenshot 4: Extraction from JTC Report from J-SPACE on future supply outlook

The quarterly reports by JTC seem aligned with my general observations as aforesaid mentioned. For the past 3 years, the average supply is 1.4 million sqm and demand is 1.1 million sqm. The current oversupply of industrial space is weighing down on price recovery for industrial REITs. Other than business parks, remaining sub-industrial remains in doldrums. The outcome of the US and China trade war is also unclear at this juncture.

Is there any hidden GEM worth investing right now?

I will probably pen down my thoughts on some of the industrial REITs that I think I will start accumulating in the next blog on this topic. Over the past few years, there is various M&A consolidation for industrial REIT. Also for some badly performing REIT since IPO, there had been a change in senior management which should set a better foundation for future growth. 

Parting Note

My personal thoughts are that Singapore Industrial REIT is a riskier class of asset among REITs hence the higher dividend yield demanded by the market. Soilbuild REIT pricing since IPO is a very good example of the risk associated with industrial properties. Investors who bought purely based on the highest percentage of dividend yield or net asset value per unit for investment should factor in additional assessment factors for risk mitigation. 

Politics and Business Review- The Legend of Hao Ran (皓镧传)

It has been a good Lunar New Year holiday break visiting relatives and friends as well as recharging one's human super battery in order to further one's journey and meet the constant challenges thrown at us in our daily lives. I have no time to do any finance blogging recently as I was too busy catching the latest TV drama "The Legend of Hao Ran (皓镧传)". The amazing thing about this drama is that it teaches everyone about how business and politics work in real life and I swear that it is even better than taking up MBA programmes.

Li Hao Ran is actually the mother of Qin Shi Huang, the Qin King who united all of China and well known as the legendary first emperor of China. The Legend of Hao Ran is actually the story of how Li Hao Ran, a lady of a court official in the  Zhao State who rose to became Empress Dowager in the state of Qin during the Warring States era.

My favourite character in this show is actually Lu Bu Wei. Lu Bu Wei was originally a rich and influential merchant who met and befriended King Zhuang Xiang of Qin who was then known as Prince Yi Ren serving as a hostage in Zhao state. Lu Bu Wei plotted and helped Prince Yi Ren return to the State of Qin. Lu Bu Wei later became the chancellor of the state of Qin upon the ascension of Prince Yi Ren to the throne.

One of the interesting episodes depicts Lu Bu Wei during an auction event in the state of Zhao. At this auction was a Luminous Pearl that was well known to be pricey. Lu Bu Wei quickly offered a bid that is ten times more than the last one to win the auction. However, to the surprise of everyone at the auction, Lu Bu Wei only asked for the wooden box holding the Pearl and gave up on the Luminous Pearl. When the Prime Minister of the state of Zhao asked Lu Bu Wei on the reason for his strange request, he replied that there are many luminous pearls out there in the world but the delicately crafted box is made up of a rare red-earthed wood that can only be found on top of a  special mountain. It is a rarity that determines the valuation of any item. The Prime Minister upon hearing this was very impressed with Lu Bu Wei and thus highly recommend him to the King of Zhao who subsequently appointed Lu Bu Wei as a court official.

My favourite scene so far is the battle of Chang Ping between Qin and Zhao which involved armies sizes totaling close to 1 million men taking part in this historic war. Before the onset of this great battle, the state of Qin secretly switched the Commanding officer and sent their best General named Bai Qi to lead the battlefront and sealed all information about this move. They also spread rumors that the Zhao General Lian Po was a coward which the stupid King of Zhao believed and changed the Commanding Officer to a very young general called Zhao Kuo, who was an advocate of leading attacks instead of adopting a defensive strategy. As a result, the state of Zhao lost this war which led to their eventual demise. The loss of 450,000 men slaughtered by General Bai Qi of the state of Qin was too overwhelming devasting to the state of Zhao and marks a critical milestone whereby Zhao lost their superpower status during the period of the Warring State. This set the stage for the state of Qin to be the dominant military power in that era.

Whenever there are people, there will always be politics. Similarly, this is why there will always be office politics in all modern organizations which seems to bear striking similarities to the Warring State period. The main takeaways learned from the show is for one to be aware of the situation around oneself whereby one may be made use of like a chess piece by others in their political plot for promotion and other power play. While one ought not to do harm to others, we must be mindful not to be made use of by other big fish just like in "The Legend of Hao Ran". :) 

Investment Portfolio Updates- 1 Feb 2019 (Portfolio Yoyo With Market Bouncing Up And Down)

Stock Market Bounce Back Strongly

The stock market bounced back strongly during January of 2019. Even I was surprised by the wild swing in stock market valuation in just 1 month. My portfolio including cash rallied from S$405K (based on what I documented for 31 Dec 2018) to S$445K- an increase of almost S$40K (S$32K capital gain from favorable stock market volatility and S$8K capital injection in Jan'19) which brings the overall investment back to profitability. 

(i) Thai Beverage performed extremely well in January 2019 and it helped to offset the previous 2 months huge plunge in value for my First REIT investments. My only regret for this counter is that I did not accumulate more aggressively when Thai Beverage fell below S$0.60 as I was rather worried over the concentration risk given the already significant stake in my investment portfolio.

(ii) First REIT also rallied from a low of S$0.94 to S$1.10 after the more than 20% plunge from the Lippo Karawaci credit risk issue as well as fear of unfavorable master lease renewal coming up in another 2 years time.

(iii) Frasers Commercial Trust also seemed to have rallied upon the news that Google is in talks with the Trust for 400,000sqft of space at Alexander Technopark- Pls read here for reference.

Additional Investments

1. Have accumulated more of Sing Medical Group shares while awaiting its announcement of its Q4 and full year ending FY2018 financial results. Sing Medical Group has been performing exceedingly well for the past few years. But its share price has dropped drastically- pls refer to my previous blog post on the enigmatic case of Sing Medical Group.

A word of caution here, it is a fallacy to think that medical services earnings are resilient. Please refer to my post here on this topic. For me, it is also more of diversifying my investments into medical services businesses on top of my own personal view that the share prices are currently undervalued relative to other medical services players.

2. I have also invested into Mapletree North Asia Commercial Trust and accumulated 5,000 units at an average unit price of S$1.195. Maple NAC Trust has been doing rather well and a good track record of increasing value for shareholders. The current dividend yield is around 6%.

3. Since the more concrete plans to revamp Orchard Road came out, I have deployed additional cash into Starhill Global REIT. The REIT is trading below its NAV and I am expecting future earnings to bottom out soon in view of more positive rental reversion as well as new tenants contracted. The current yield for this Retail and Office REIT is more than 6%. 

The Worst Is Over?

I am a pessimist on this. Within a short span of just 1 month, there is not much improvement in overall macroeconomic conditions. However, share prices have rallied strongly. The risk of Donald Trump slapping an additional tariff on 1st March 2019 on US$200 billion of China goods is still there. China's growth has, in fact, started slowing down based on recent announcement.

Also, the Brexit crisis is still unresolved. There is still a high probability that UK will crash out of the EU without any deal. This may adversely affect not just UK but the entire Europe economy and spread to the rest of the world. For example, Nissan recently announced the pulling back of plans to manufacture the X-Trail SUV in UK due to loss of preferential zero tariff in the EU market. It will now most likely be manufactured from France. This thus does not bode well for the economy of UK in such event.

Hence I expect the yoyo in the stock market to continue.

Taking Profits And Building Up Cash On Hand

While no one can accurately predict the market, I have decided to continue to adopt a more conservative approach until we have more visibility over the global macro-economic conditions. 

As such, I have sold off part of my Singtel, Thai Beverage as well as First REIT to lock in on the January 2019 high valuation and raise cash level to S$10K. Going forward, I will be maintaining cash position level of S$10K to S$20K.

If a downturn does occur, one will be able to hopefully accumulate more businesses at a cheaper valuation with cash on hand and dividends payout to position the portfolio for future growth upon economic recovery.

Budget 2019 Goodies- General Election Singapore Also Coming In This Year?

I am looking forward to Finance Minister Heng Swee Keat's announcement of the 2019 Singapore Budget on 18th Feb 2019 after the Lunar New Year. It was also recently announced that the registers of electors will be opened for public inspection this month. A lot of people have been speculating that the next General Election may be held in 2019 itself even though it is only due on 15 January 2021. 

Maybe there will be Ang Pows given to all Citizens during the budget announcement this year?  

Cross Island Line First Phase Launch And Private Properties Nearby Snapped Up from the Excitment

The Land Transport Authority ("LTA") recently announced the 1st Phase launch of the Cross Island Line. 12 stations will be constructed initially. Soon after the news release by LTA, I got a few messages from property agent informing me that at least 15 units of Affinity at Serangoon were sold following the news. The Affinity at Serangoon was priced at an average of S$1,575psf. It turns out that the condo is just 350 meters away from the new Serangoon North Cross Island Line MRT station. The agent told me not to miss out and buy one as soon as possible before prices get adjusted upwards. Many folks seemed to place premiums in living near MRT stations. 

It has always been my dream to live in an apartment just beside the MRT station. Even better if it is a mixed residential and commercial development just right on top of an MRT station...but alas.... money always not enough and just can't seemed to catch up with the ever-raging property fever and perpetual out of reach property pricing in Singapore. However, seems that not everyone enjoys staying near the MRT. I used to have an Australian Expat colleague who preferred serene and remote environment close to nature rather than beside any MRT stations or shopping malls. Reason being that after a hard day's work, he wants to be away from the hustle and bustle of modern working life.

Is it better if one stay beside or on top of a MRT station for convenience sake? Or choose to stay nearer to nature such as more remote parts nearer to reservoir or areas with large parks such as the botanical garden?

Fu Yu Corp- Good Performance For FY2018 And Sustainability Of 8% Dividend Yield.

I am looking forward to February 2019. Well, not just because of the Lunar New Year but also because I am anticipating the release of the full year results of Fu Corp for FYQ4 2018 and its entire year financial performance towards the end of February 2019.

I have previously written on Fu Yu Corp being a dividend superhero. It virtually holds no bank borrowings on its statement of financial position and dishes out approximately 8% dividend yield. The revenue and net profit attributable to shareholders for the last 2 quarters have been shooting up.

I have always wondered over the sustainability of its 8% dividend yield and agreed that the huge cash on hand can no doubt sustain it for a few years. The only long term concern is that I do not see how the high dividend rate can be sustained perpetually if the results were like FY2017 of merely S$4.48Mil per year and the Company keep paying out from accumulated earnings. Sooner or later, it will be used up. Good news is that for Q2 FY2018 and Q3 FY2018, Fu Yu has performed exceedingly well. A cool S$8.4Mil earned in just 2 quarters relative to the whole year of only S$4.48Mil for FY2017. This is at least a 100% jump in profitability for upcoming FY18 barring unforseen circumstance such as unannounced substantial losses during Q4FY2018.

Things to watch out for:

1. On 18 Sep 2018, Fu Yu Corp announced the resignation of its Group Business Development Director (last day with the organisation is on 7th October 2018) to pursue other personal interest. Now the strange thing about such announcements for resignations of key personnel is that the reasons given are usually those very polite responses such as "pursuit of personal interest" or "retirement".  Personally, I think one has to ponder more deeply into it. It could reflect internal disagreements among the senior management team or unhappiness over the political/cultural undercurrent in the organization. It can also mean an ex-staff setting up a rival company. Hence it can indicate future development for the better or for the worse. The still unannounced Q4 result is thus crucial to see whether the current wind blowing has changed direction.
2. Again, another weird trait of mine is that my risk tolerance level is not high in particular for manufacturing business. Despite the huge jump in its net income for Q2 2018 and Q3 2018, Fu Yu Corp still made up less than 3% of my current stock portfolio. The business itself faced much competition from other rivals and is very dependant on marco-economic changes as well as the talent of the management team in resource control of daily operations. Look at the previous years of financial history as well as the principal activities which point to challenging business conditions at times.
3. During my accumulation phase (bought 61,500 shares at an average of S$0.171) last year, I often find it hard to get my hands on the stocks of Fu Yu as it is thinly traded. Hence vice versa, if one wants to sell urgently, you may find yourself encountering a problem trying to liquidate it.

Parting Thoughts:

Keeping an eye out for the upcoming results announcement of Q4 FY2018 financial performance. Also, if there is no major deterioration in its future financial performance and business outlook. I will probably keep holding on to the current stock on hand for Fu Yu Corp. The debt-free balance sheet does offer some form of safety and security to one's overall investment. In addition, Fu Yu Corp is a potential M&A target by other industry players. Maybe the current management may decide to retire and sell off their entire shareholdings in another 4-5 years time.

P.S: Please refer to my previous posting- "Fu Yu Corporation- SUPER Hero cash generating abilities".

Frasers Commercial Trust Roared Back Into Life With News of Google In Talks For 400,000sqft of Space At Alexandra Technopark

Fraser Commercial Trust("FCT") bounced back strongly this week with news that Google is on an expansion drive in Singapore and in talks with Fraser Commercial Trust for 400,000sqft of space at Alexandra Technopark. Its unit price which used to hover around S$1.36 to S$1.40 for the past 2 months shot up yesterday and even hit S$1.48 at its highest point for the week. It eventually closed off at S$1.45 as at 18 Jan 2019, Friday.

Completion of AEI at Alexandra Technopark and Google Expansion into Singapore

Alexandra Technopark is a high tech business space campus located at the prominent Alexandra business corridor. A $$45Mil asset enhancement initiative was announced on 23 January 2017 and is currently nearing full completion. It aimed to transform and reposition Alexandra Technopark into a contemporary, vibrant, and engaging business campus. A new 13,300sqft amenity hub has been added, which provides seamless connectivity to the two business space blocks and houses a wide array of food and beverage, social and other amenities. Its current occupancy rate is around 68.6%.

If Google were to really take up the 400,000sqft, this will drive occupancy rate to more than 90%. Market analysts have been suggesting the rental cost will be S$4 per sqft. This will mean S$1.6Mil per month or S$19.2 Mil per annum of rental income contribution.

Financial Results Review for Q1 FY2019 Announcement:

As we can see, the results show a deterioration mainly due to the divestment of 55 Market Street as well as the AEI work for Alexandra Technopark and also China Square Retail podium.

If FCT managed to sign up Google, its earnings will get boost up and support the unit price.

Note that FCT equity accounts for the UK Farnborough Business Park on a 50% stake basis. The current Brexit crisis might have some detrimental impact on the rental income but not expected to be significant due to the high-quality tenants and long WALE of 7.3 years at the UK Business Park.

Parting Thoughts:
With a healthy gearing of 28.4%, FCT will be able to tap on the opportunity to acquire new assets that are yield accretive following the divestment of 55 Market Street property last year. The completion of the AEI on Alexandra Technopark and China Square Retail Podium in this year should also further strengthen the REIT for long term growth.