K-Reit nudged parent to get hands on OFC

Business Times: Tue, Dec 06

(SINGAPORE) It was K-Reit Asia that approached its sponsor Keppel Land to snap up Ocean Financial Centre (OFC). This was to have a say in rental negotiations now underway, get tax exemption and to lower the average age of its property portfolio. The dynamics behind the deal were revealed by K-Reit's chief executive officer Ng Hsueh Ling yesterday, even as the real estate investment trust faces criticism that the deal is too expensive at a time when the office market may soften. Ms Ng also rejected suggestions that Keppel Land got the sweeter deal. She noted that the $1.57 billion that K-Reit paid for Keppel Land's 87.5 per cent stake in OFC is still well short of the peak. 'If you look at the historic peak of the market, the highest transaction was about $3,120 (per square foot) for a plot of land along Robinson Road. We figured that $2,380 psf is very far from the peak, and it's one of the best buildings in Singapore,' said Ms Ng. 'How do we know the bottom? And to go out and get money in a bad market, people will say 'no'.' Ms Ng added that Keppel was not urgently looking to offload the property. 'They are in no hurry to sell,' she said. 'A lot of people have asked me who started the negotiations first. I wanted to buy OFC because I don't want it to be fully leased.' Some 20 per cent of the space in OFC is having its rental negotiated. She wanted to fill this space with tenants who wanted long-term leases, took up large amounts of space, and had a good credit backing. 'I didn't want Keppel to fill up the extra 20 per cent because Keppel is a developer. I want to fill up with Reit-like tenants,' she said. 'I can also wait for Keppel to fill up the space but you can't control the tenants and you will have to pay for a fully valued asset. If the market goes down, sorry, you would have paid at that price.' She remains very confident that the space will be taken up by such tenants. And despite the grim economic outlook, customers have not asked for cuts in the rent rates, with Ms Ng saying these are large firms and long-term players. Touching on the 17-for-20 rights issue to be used to foot the bill - a move that would be dilutive for existing shareholders - Ms Ng said cash calls are inevitable in order to grow the portfolio size, especially since purchases in the office space are big. 'Now that K-Reit is large in size, the chances of going out to do another rights issue will be much lesser than when it was smaller.' Early this year, the Reit asked the Inland Revenue Authority of Singapore (IRAS) whether all income coming from OFC could be exempted from a 17 per cent tax payment if the corporate ownership structure was changed to a limited liability partnership from a private limited structure, under which a company has to pay that amount of tax. The property trust was told by IRAS around June that this would be possible - making it the first time an office building here has been allowed such a tax exemption under this structure. This prompted the Reit to begin serious negotiations, Ms Ng said. With the purchase of OFC - which will not require K-Reit to spend money on asset enhancement initiatives - the average age of the properties in the portfolio will be lowered to 4.4 years, she added. 'No other Reit has that kind of age. It doesn't mean that being young alone is good. You must be young and in the right location,' she said, though she had no figures on the industry average. As for the compensation of Reit managers, Ms Ng argued that her remuneration is based on the performance of the Reit, noting that she needs to meet targets set for the managers. Acquisition fees paid to the manager are in the form of units that can be sold only after a year, which means that the manager has to watch the units' market performance. Ms Ng also defended the sponsor model that Singapore Reits operate under, noting that a sponsor provides a supply of assets to refresh the Reit's portfolio. K-Reit noted that sponsors are also aligned with the Reit as cornerstone investors, and that working under this model gives Reits access to bank funding. Source: Business Times