US Office Commercial REITs Facing Bleak Future Outlook Despite Back To Office Mandate.

While many US Corporations have been increasingly forcing their workers back to office, it seems that the hope for US Office Commercial REIT to rally closer to their NTA value per unit relative to the current depressed market trading price maybe dashed soon. The upside factor of interest rate cut and back to office mandate by the US Federal government and CEOs of US global corporations are being offset by the termination of office leases from rapid downsizing of the Federal government.

1. Interest Rate Cut by the Fed in 2024 Reduces Financing Pressure on Commercial REITs 

The 0.5% cut in September followed by subsequent cuts of 0.25% respectively in Nov 2024 and Dec 2024 brought down US financing rate by about 1% overall. This also makes it more conducive to borrow funds either for CAPEX or purchase of commercial building.]

2. Weaker Bargaining Chip of Workers Due to Increasing Signs of Softness in US Labour Market

US labour market have been showing signs of weakening. US workers thus does not have the same type of bargaining power that they once did. So, when the head of various US Corporations start to exert pressure for staff to be physically back office to work, workers have to suck thumb and follow the new guidance. JP Morgan and Amazon are leading examples of corporations clamping down harshly on remote work and expected their staff to be back in office 5 days a week. The era of remote working may soon be a thing of the past.

Also, Donald Trump has ordered US Fed workers to be back office. This lead by govrnment example also boosted the ground for the private sector bosses to recall back their remote working staff. Therotically, this should drive back up demand for office space.

3. DOGE Targets To Cut Federal Government Office Leases

Recently, there was a discussion based on report by Trepp Research and Insights which mentioned that a sizable user of office space is the federal government which leased almost 150 million square feet of office space across the US and contributed rental income of $5 billion to the office commercial sector. While Fed workers have been asked to go back office, DOGE seems to be right-sizing the number of Fed employees. In fact, the federal government has already started terminating short term office leases and is eyeing for bigger lease cut. 

Summarising, the dark cloud surrounding US Office REITs will not be over soon. The drag on demand and occupancies for office commercial may last for 4-5 years.

Thoughts on Alibaba Surging More Than 50% Within 3 Weeks- Time To Sell Or Hold On?

I have been extremely busy with work these days with major projects coming in one after another and not really fully monitoring my various investment portfolios. It therefore came as a big surprise to me (Stunned like a vegetable) to find that Alibaba (HK9988) has surged by more than 50% within 3 weeks. My position in Alibaba is neither big nor small....my current cost quantum is around S$33K per record at an average of HKD77. Recently, I was astounded when I looked at my trading App. The sleeping giant had suddenly awaken.

1. Beneficiary of DeepSeek Rally and iPhone AI Partner in China

The mind-boggling spike in share price seems to be primarily driven by the DeepSeek AI rally and also the announcement of Iphone partnering with iPhone for their China market. When Alibaba unveiled its own latest version of AI after the DeepSeek announcement, it created quite a big stir for its incredulous progress. In addition, Alibaba has also invested in many AI firms. Simply put, Alibaba is now China's AI darling. It has morphed from an E-commerce company to an AI Tech company- at least, this is what the market perceive for now. 

2. Sell Immediately To Take Profit or Hold On?

Alibaiba (HK9988) seems to be a very volatile counter. In 2022, it dropped a whopping 30% from HKD100 to HKD 71 in less than a week- simply too unpredictable. It also has periods where it  languished for the longest time in the HKD70-HKD80 per share range. While it is tempting to just sell off to lock in the profits based on the historical lesson of huge rally running out of steam and then self implosion shortly, I think that I will be holding on to it for a longer term to see whether its AI transformation story can take it futher to become a multibagger winner. Its financial PE ratio is also still attractive despite the sharp rally in stock price this past week. 

Parting Thoughts

Since my stake in Alibaba is neither here nor there (not material enough), I guess I will just leave it in my portoflio without further action. The China AI rally has also helped breathe life into my other current China holdings such as Link REIT, Ping An and China banking stocks. This does somewhat helped to offset the disasterous performance of SREITs recently. 

The End of Paragon REIT- Eaten Up By Hungry Lions!

The seemingly wonderful announcement of an offer by Cuscaden Peak to buy out the minority unit-holders of Paragon REIT at S$0.98 per unit lead to a sudden surge in its market perfromance as at 11 February 2025. While Paragon REIT soared 11.2% in a single trading day to become the best performing SREIT of the day, some unit-holders are crying poignantly as they have bought Paragon REIT at S$1.00 to S$1.10 per unit before the high interest rate environment became the norm post-COVID that leads to the downward spiral in its market unit price.

1. Hungry Lions Butchered Retail Investors

While this latest offer of S$0.98 per unit is way better than the S$0.9372 per unit offered back in 2022, it nevertheless is way undervaluing the crown jewel, Paragon shopping mall. Furthermore, it is actually a free-hold property but financial engineered into a 99 years leasehold when injected by the then SPH into SPH REIT (currently renamed Paragon REIT) and we all know that it is sitting in the prime area of Orchard Road.  

I will take it with a pinch of salt that Cuscaden is playing hero to take up the extremely risky option (as per their insinuation) of major asset enhancement initiative ("AEI") of S$300Mil to S$600Mil over 4 years hence willing to buyout the minority unit-holders due to the execution risk. The truth is that Cuscaden is a commercial organisation that seeks to maximise profits for its shareholders. Their accountants, along with their commercial team,  would have done a detailed financial projection of the future prospect to recoup back the upcoming CAPEX to achieve a favourable reward to risk outcome.  

In view of Paragon shopping mall's future outlook post AEI, I thus think that a more reasonable price would be at least 20% in premium to its NAV of S$0.915, that is, at least S$1.098 per unit.

2. Will I take up the offer or vote against the offer if vested?

Note that I do not hold any units in Paragon REIT directly but my family members held around 11,000 units since 2019. I think that most REITs investors are more interested in a decent & stable distribution yield of 5% to 6% per annum. The AEI initiative will lead to a drastic plunge in distribution for the next 3-4 years as Clementi Mall will be left doing the heavy lifting during this period. I will probably be lobbying for my family members to just accept the offer and then move on to invest in other opportunities. The only issue is that of the late payment timeline of May 2025 (even if the EGM went through). Of course, if the REITs price crash further during this period, then Paragon REIT holder will benefit from the locked in S$0.98 per unit and vice versa if market price suddenly surge if interest rate decline more rapidly than expected.

Parting Thoughts

Personally, I do not like this deal as I do not find it very attractive or compelling enough for unit-holders. It would be great if Cuscaden can revise its offer upward by another 10%. But then again, there is a lack of clear direction for the growth of Paragon REIT given that its major unit-holders seems to have bought it to strip out its remaining investment properties. So, I am leaning towards the just sell and move on to other investment opportunities albeit the non-attractive offer. 

P.S: Please see my previous other post on Paragon/SPH REIT on 2 May 2022

Take It With A Pinch Of Salt-The Reluctant Half-Baked Chain Offer for SPH REIT By New Major Shareholder Cuscaden Peak And 3 Points To Note.

The Rise Of DeepSeek That Does Artificial Intelligence at a Fraction Of Traditional AI.

Wow, the China developer of DeepSeek managed to setup and train its latest generative Artificial Intelligence ("AI") model at only US$5.6Mil relative to ChatGPT's US$100Mil which is just a fraction of its setup cost. Just when some folks were wondering whether this is a fake claim, the other shock that comes out is that it is open-source and anyone can just look in and see for themselves. 

This startling relevation will bring about chaos in the global stock markets for this week. Looks like AI sytems can be designed using cheaper Graphic Processing Units ("GPUs"). This is certainly not a too happy relevation for Nvidia and its stock price may decline while Advanced Micro Devices (AMD) GPUs may now be marketed as a serious and viable alternative to the faster GPUs from its rival Nvidia. Hopefully, the popular AI theme stocks do not decline too much else it may affect the overall global stocks markets. 

(Updated 28 Jan 2025: The bloodbath from DeepSeek threat wiped out US$1 trillion from worldwide Tech stocks with Nvidia valuation dropping by a whopping US$600 billion (-16.8%) overnight. Even SREITs with data centre focus theme such as Mapletree Industrial Trust , Keppel DC REIT and DigiCore REIT were not spared and saw a significant dip of -2.73%, -7.93% & - 6.03% respectively in a single day.) 

The Sabana REIT Disaster and Chaotic Infighting- 溏心风暴!

The latest fiasco revolving around Sabana REIT is an ex-director and unit-holder, Charlie Chan Wai Kheong, has made a requistion for an EGM after gathering support of several other unit-holders to have the minimum more than 10% holdings. Makes one wonder whether ESR is one of the myesterious unit-holders in support of Charlie given his close relationship and past dealings with them. The main essence of the agenda is to make the Manager of Sabana REIT undertake a sale discovery process for the market value of the investment properties held as a precusor to a sale. According to Charlie, the sales of all the major assets of Sabana REIT will offer the best return to all unit-holders instead of the current manager internalisation exercise which has already incurred additonal expenses of S$10.2Mil. For the fun of it, Charlie Chan had previously been rejected from his proposed nomination into the Board of Directors in 2022 AGM. Quarz Capital, an institutional investor who was leading a dissent against Chan’s appointment, had long pointed to potential conflicts of interest given his substantial stake in AIMS APAC REIT and given his prior business dealings with ESR Cayman. 

This means that the requested EGM will add further complication to the already ongoing tussle and further distract the management from its main business of running Sabana REIT.

1. Price Discovery Request Not At All Bad- Depending on One's Entry Price

The current market unit price of Sabana REIT is trading at S$0.370 per unit as at 20 January 2025 while tangible book value per share is at S$0.520 per unit. This is an almost +40% upside if the price discovery process turned out that there are willing buyers who can pay as much as what the valuers are forecasting and offer a good opportunity for all unit-holders to to exit their investments. But don't be too surprised if ESR Group turned up to be one of the buyers. They have been eyeing on the investment properties of Sabana REIT for a long time and very nearly got away with a good bargain price before Quartz came into the picture to frustrate their efforts. Personally, I thought that Quartz and ESR are eternal rivals and the current tussle for control is far from over.

2. Valuation Reports Done and Price Discovery Process Request Can Be Very Different Creature Altogether.

Another point to note is that the valuation done during the financial year end by management and relied on by external auditors is just an abstract and assembly of valuation techniques. It can be as simple as a present value of all future rental income forecast over the expected life of the properties or just an adjustment of parameters of another similar propery in the vincinity to derive a market value. But this year end valuation report may not reflect the exact realisable value and thus a totally different creature relative to the price discovery requistion from Charlie.

For example, there were a lack of buyers for US Office Commercial real estates as banks were unwilling to lend them funds for acquisition even if the valuation appears to be high.

Parting Thoughts

Personally, I thought that the current fiasco will only further distract Sabana REIT's management team from focusing on the running of the business and ongoing internalisation exercise. All stakeholders will be equally worst off. Nevertheless, being listed means that one has to respect the wishes of all other unit-holders who maybe having second thoughts on the initial support for internalisation and wanted a quick exit strategy.

First REIT Announced Major Tenant Buying Over Hospitals- The Art of Destroying Unit-Holders Value.

In August 2024, it was announced in media that Indonesian conglomerate Lippo Karawaci has officially sold most of its stake in local hospital chain Siloam International Hospitals to CVC Capital Partners, which has become the majority stakeholder. Following hot on the heel of this major acquisition, the new owner, CVC Capital Partners, has made another offer to buy over the physical buildings from First REIT where their hospital businesses are being operated. Siloam makes up approximately 39% of First REIT annual rental income which makes this upcoming deal a major one. First REIT has a very interesting history and I was once vested in it. It used to trade at S$1 per unit and then got thrown under the bus by its sponsor, the Lippo Karawaci group to become its current sorry state. Let me recap below.

History of First REIT being run to the Ground by its Sponsor and Management Team

In 2020, Lippo Karawaci plans to default on the rental income support for Siloam hospitals stipulated in the rental agreements. The sponsor has cleverly crafted it as a "rental restructuring" instead of a planned default. Since the "rental restructuring" forced down on retail unit-holders, First REIT market unit price has collapsed from its glorious day of S$1 per unit. 

The subsequent rights issue exercise at 50% discount off its last traded market price of S$0.405 per unit as at 24 December 2020 sunk First REIT into oblivion. For those interested, can read my previous post here:

"First REIT Twisted The Knife Further Into The Heart Of All Unitholders- Nightmare of Nightmares Right Issues Announced At More Than 50% Discount Off Last Market Price."

2. Is this deal good for Unit-Holders?

We have to await further news from the acquirer, CVC Capital Partners, on their exact offer package. But since the ulitmate owner, Lippo Karawaci, already "signalled" abandoning the Siloam ship, it seems that First REIT will most likely be selling it off and then buying other medical properties or nursing homes with the sales proceed.  

My guess is its current direct Sponsor OUE Healthcare (related to Lippo Karawaci), will start to inject and monetise some of its assets into First REIT given the sales proceed from the sales of Siloam hospitals. Whether you like or dislike the properties owned by OUE Healthcare is another issue. 

Parting Thoughts

I will not be surprised if Lippo Karawaci starts to throw unit-holders of First REIT under the bus again with the kick off of the disposal exercise relating to the Siloam assets. In the meantime, the poignant saga continues. Strange that there are finfluencers who are recommending First REIT as a good buy since medical REITs cashflow are deemed resilient in nature- but from what happened during these past 4 years, I am highly skeptical of such assertion. 

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.