Tuesday, 28 February 2017

Stock Market Today:Sabana REIT's purchase of Changi South property from Vibrant draws scrutiny

Sabana Shari'ah Compliant Industrial Real Estate Investment Trust is proposing to acquire a four-storey light industrial building at 47 Changi South Ave 2 from its sponsor, Vibrant Group, at a per-square-foot price that is well above recent transactions in the area. That raises questions about the independent valuations provided by the three big-name property consultancies in support of the transaction.

Sabana REIT said in December that it would acquire three properties costing $77 million. None of the those properties are likely to be immediately yield-accretive, even though two were purchased with income support packages. The property being acquired from Vibrant has been valued at $23 million by Savills and Knight Frank, which were engaged by Sabana REIT. A third property valuer, Colliers, which was engaged by Vibrant, also arrived at a valuation of $23 million.

The property received its Temporary Occupation Permit in 1998 and has a remaining lease of 10+30 years from JTC. Vibrant, which acquired the property in 2010 for $10.9 million, will lease back 74% of the gross floor area (GFA) for the property for 10 years. In those 10 years, Vibrant will pay a total rent of $17.1 million to Sabana REIT. The company has indicated that it would make a gain of $9.06 million from the sale of the asset to Sabana REIT. The company expects to receive JTC permission for transfer of ownership by April 10.

All in, the property at 47 Changi South Ave 2 will cost Sabana REIT $25.3 million, which includes a stamp duty of 3%, acquisition fee of 1% to the REIT's manager, fees to the valuers, and $1.1 million land premium for 10 years. The transaction requires the approval of Sabana REIT's unitholders at an extraordinary general meeting, which has yet to be scheduled. Vibrant owns 12% of Sabana REIT, some of which is held through the manager, in which Vibrant holds a controlling 51% interest. Vibrant will not be allowed these 41.24 million units in the manager at the EGM, as it is an interested party.

Even on just the $23 million valuation alone, Sabana REIT appears to be paying a relatively high price compared with recent transactions in the area. Taking account of just the land area, the $23 million valuation translates into $362 psf. A transaction in the same area was done on June 27 last year at a price that translates into just $210 psf on the same basis. Another transaction on June 6 last year was done at a price equivalent to only $269 psf. All the properties have the same plot ratio of 1.6 times. The 47 Changi South Ave 2 property has a GFA of 8,507 sq m (91,569 sq ft) on a land area of 5,453 sq m, suggesting that there is limited redevelopment potential.

According to filings by Sabana REIT, Savills used three valuation methods: income capitalisation, discounted cash flow and direct comparison. To arrive at its income capitalisation valuation, it used the rental commitment from Vibrant and applied a capitalisation rate of 6.25% and terminal cap rate of 6.5%. It used a discount rate of 8% to get the net present value estimate. It is unclear which transactions it used for the direct comparison method. The filings do not reveal how Knight Frank reached its valuation for the property.

On Feb 17, the Singapore Exchange queried Sabana REIT's manager on the acquisition price for 47 Changi South Ave 2. SGX asked the manager to disclose whether the increase in valuation since Vibrant acquired it reflects the trend of industrial properties, and whether the property can be easily disposed of by the REIT at the market price of $23 million on the open market. The REIT's manager replied that Vibrant "agreed to inject 47 Changi South into Sabana REIT on a sale-and-leaseback basis for a lease term of 10 years at the proposed rental terms... of approximately $17.1 million" for 10 years. "Based on such terms, the valuation of $23 million was arrived at by two independent property valuers, Savills and Knight Frank, the manager stated.

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