Property News Weekly #2

Credit Crisis over?
That's what Warren Buffet said in the Annual Meeting of his company but sees more pain for people with individual mortgages. The CEO of Berkshire Hathaway said the global credit crunch has eased for bankers, and the Federal Reserve probably averted more failures by helping to rescue Bear Stearns.

The worst of the crisis in Wall Street is over,’ he said last Saturday on Bloomberg Television. The billionaire was interviewed before the annual meeting of the company, which is based in Omaha, Nebraska. Listed as the world’s richest man by Forbes magazine, Warren said the Fed acted properly when it arranged a US$2.4 billion (S$3.3 billion) buyout in March of New York-based Bear Stearns by JPMorgan Chase.

He said he turned down the opportunity to buy the troubled investment bank because he lacked enough capital and time to craft a solution. More failures and wider panic may have resulted if the regulators had not halted the run on Bear Stearns, he added. ‘The worry was that there would be contagion; it was a very real worry,’ he said. ‘If Bear Stearns had gone, the next day, somebody else would have gone. It could’ve been a very, very, very chaotic situation.’

Mr Buffett said he was contacted in March before JPMorgan, the third-biggest United States bank by assets, agreed to buy Bear Stearns. The person calling him, whom he would not identify, was ’someone responsible’ and was not from the Fed or the Treasury. ‘As I understand it, Bear Stearns had US$65 billion due on Monday and I didn’t have US$65 billion,’ Mr Buffett said. ‘I couldn’t get my mind around that situation in the required time.’ New York-based JPMorgan was the right buyer for Bear Stearns, he added.

JPMorgan agreed in mid-March to acquire Bear Stearns, once the fifth-biggest US securities firm, after customers grew concerned about the company’s health and pulled out their money, leaving Bear Stearns short on cash. JPMorgan, which received financial support from the Fed, raised the purchase price a week later to US$10 a share from US$2 to mollify Bear Stearns shareholders who said they were not getting enough.In a question-and-answer session at the shareholder meeting, Mr Buffett said that from a risk perspective, some banks got ‘too big to manage’. Berkshire’s own investment in derivative contracts has recovered US$500 million to US$600 million of lost value since end-March.

Middle Eastern investors still "strong" on South-East Asia real estate market?
That's what Standard Chartered (Stanchart) Bank’s group head for origination and client coverage, Mr V. Shankar thinks so. Stanchart is well-positioned to become a leading player in this area. In the past year, it has advised on more than 40 per cent of the deal flow from Middle East to this region, which totalled US$8 billion (S$10.9 billion).
The figure was up from the US$987 million in the 12 months preceding, and Mr Shankar believes it will continue to rise in the years ahead.

‘The financial ties between the Middle East and Asia are strengthening by the day and we are seeing more East-East relationships being formed,’ he said in a recent interview. Oil and natural gas from the Middle East are vital for China, Japan and all the fast-growing markets in the Asia-Pacific region, which are fast ramping up their infrastructure. And the oil-generated capital and liquidity in the Middle East are fuelling a search for investments with high returns.’

Mr Shankar added that a recent report by McKinsey estimated that Gulf countries would have US$9 trillion to invest by 2020. Stanchart began boosting its presence in the Middle East three years ago and now has a team of 50 corporate advisers there. Mr Shankar, who is also a member of Stanchart’s group management committee, said this put the bank in an enviable position as Singapore’s business with the Gulf looks set to soar. ‘Between 2004 and 2006, total trade between Singapore and the Middle East shot up from US$20.9 billion to US$30.8 billion, an increase of 47 per cent. Currently, Singapore companies are working on more than $6 billion worth of projects in the Middle East.’

Looking ahead, Mr Shankar said the bank would leverage on its experience and capabilities in the region to shore up its position as a major player. ‘Stanchart is well-placed to seize future opportunities, thanks to our growing geographical reach and the scale and breadth of our products and capabilities. We have an established history in Singapore, having been in the market for 150 years, and we have been operating in the Middle East for more than 50 years. We feel we can act as a strong local bank in all the different markets for our clients.’

Small developers may feel the impact of the Credit Crunch
Given the current turmoil in the financial market, some of these small developers might face financing problems as they move to finalise deals, reports BNP Paribas. In fact, some may be forced to cancel the deals and walk away, it warned. The report by the French bank said that most of the collective sales done in the second half of last year were by small private developers, contractor- cum-developers and non-core developers.

They included Soilbuild, Hiap Hoe, Lian Beng, KSH Holdings, Koh Brothers, Popular Holdings, Aspial Corporation and Eastern Holdings. ‘In the near future, we are concerned that some smaller players that have secured big and expensive en bloc sites may walk away from the deals as securing financing is not easy at this time, especially for non-core developers,’ said the recent report.

Already, a small private firm, Bravo Building Construction, said to be backed by a one-time big property player, has bailed out of three collective sale deals. In all three deals, it has had to give up its deposit, which ranged from 1 per cent to 10 per cent of the sale price. The biggest of the three deals was the $516 million purchase of Tulip Garden, for which Bravo had to forfeit its $25.8 million deposit.

Is Government doing enough for Enbloc regulations?
Regardless of regulations and structured conditions, the current laws under the Building Maintenance and Strata Management Act and the Land Titles (Strata) Act (Amendment) are insufficient to patch all loopholes. How can anyone stop creativity in the name of monetary returns?

On April 27, Bayshore Park and Mandarin Gardens both held annual general meetings. These two estates, with more than 1,000 units each, sit on 1 million sq ft of land next to the sea. Both have got a collective sale initiative off the ground, with sale committees elected. With the support of pro-sale residents, voting powers are then used to control the rest of the estate, even though the votes represent only a minority of residents.

In Bayshore Park, the pro-sale group outvoted other residents on crucial issues and in selection of council members. Averaging 60 per cent of votes cast at the AGM, this roughly 20 per cent of residents (as only 30 per cent of owners were represented at the AGM) voted down a proposed increase in maintenance charges in line with current inflation, voted for a lower increase in the sinking fund, voted down crucial replacement of copper pipes in the common corridors and voted down any exploration of corridor upgrading. In addition, they voted for a reduction in council seats to nine, making sure four sale committee members were voted into the council, and ensured that four of the five previous council members retained had exhibited pro-sale inclinations. They made sure two previous council members who did not favour sale were not re-elected. I was one of the two.

At Mandarin Gardens, in a similar vein, the pro-sale camp mustered enough proxy forms to control 65 per cent of the votes in the AGM. They defeated a motion to reduce water ponding of walkways and lift lobbies to improve safety, and passed a resolution to reduce management council (MC) expenditure limits from $300,000 to $50,000 making it almost impossible for the MC to function. Consequently, the incumbent council refused to stand for re-election. Even more devastating, the pro-sale camp fielded no candidates for council. Hence, no council was elected. The law was not broken at either AGM. Just a creative twist to the ending.

Mapletree - Singapore's Temasek property asset management sets to grow even bigger
Mapletree Investments’ total asset size, comprising assets under management as well as on its own balance sheet, has nearly doubled to around $10.5 billion - inclusive of the recently announced acquisition of a $1.7 billion portfolio from JTC Corp - from $5.6 billion a year ago. In a year’s time, it could grow further to $15 billion-$20 billion, Mapletree Investments CEO Hiew Yoon Khong told BT in a recent interview.

The increase will come largely from new private funds the fully-owned unit of Temasek Holdings is starting, including the US$1.5 billion-US$2.0 billion Mapletree India-China Fund (MICF) focusing on development and opportunistic redevelopment of real estate in the two mega markets. ‘This fund will invest in office, retail and residential property,’ Mr Hiew said. The first closing, which has just been completed, has raised US$600 million, contributed equally by Mapletree and an international institutional investor that has declined to be named.

The fund’s second closing, slated for July, will also see Mapletree and the investor putting in US$200 million each, with another US$500 million to US$1 billion to be subscribed by third-party investors. MICF has secured two seed investments in China. One is a residential and retail development named Future City in Xi’an’s Beilin District. The project has a total development value of $196 million and will span almost 1.56 million sq ft in gross floor area. Future City will have four residential towers and a nearly 400,000 sq ft mall to be named VivoCity Xi’an. Construction began in March last year and the development is slated for completion by July 2010. The targeted opening date for the mall is October 2010.

The second seed investment for MICF is an existing office block in Beijing’s Central Business District with a gross floor area of around 400,000 sq ft and an investment value of about $165 million. Upon completion of the acquisition in June 2008, an anchor tenant will lease 35 per cent of net lettable area. ‘We expect to seal a third investment in China soon for MICF - a retail and serviced apartment development in Guangzhou,’ said the 46-year-old former investment banker. As for India, the fund has identified two investments in Bangalore - an office and residential project, and a pure office development.

Over the next 12 months, Mapletree also expects to start sequel funds to the Malaysia-focused CIMB Mapletree Real Estate Fund (CMREF) and the Mapletree Industrial Fund (MIF). The latter has so far bought some $300 million of non-warehouse industrial properties in Singapore, Malaysia and China. ‘For CMREF 2, we are targeting to raise about RM1 billion (S$430 million); CMREF 1’s RM500 million is almost fully invested,’ Mr Hiew said. The group has held back plans to float more real estate investment trusts or Reits in Singapore because of unfavourable financial market conditions. One of these is the Mapletree Commercial Trust, which will hold about $3 billion of Mapletree’s Singapore assets in the HarbourFront and Alexandra Road areas. ‘With the deferment, we’ve been focusing on growing the net income of the initial assets planned for the commercial trust and working on building a strong pipeline of assets for possible acquisition by the trust,’ Mr Hiew said. ‘We’ll launch the trust when the market stabilises, hopefully before the end of the year,’ he added.

The centrepiece of the trust will be VivoCity, valued at about $2 billion. Other assets are likely to include nightspot St James Power Station, HarbourFront Centre, PSA Building and Merrill Lynch HarbourFront, which is slated for completion in the third quarter of this year. The future acquisition pipeline for the trust includes two projects currently under construction - Mapletree Anson, a 19-storey Grade A building at Anson Road/Enggor Street slated for completion in Q3 2009, and Mapletree Business City, which which is expected to be ready in the second half of 2010.
The latter project is being built on the site of the former Alexandra Distripark (Blocks 1-3) and on an adjacent plot at Alexandra Terrace. ‘This will be a modern business campus with about 1.7 million sq ft net lettable area (NLA) comprising an office block and three business park blocks with amenities like a 350-seat auditorium, big function rooms. We’ll have a foyer for cocktails, gym with lap pool, even a childcare centre and convenience store, plus roughly 1,100 carpark lots,’ Mr Hiew said. The development will also have a foodcourt and al fresco-style restaurants.
So far, two tenants, including a financial institution, have leased a total of about 200,000 sq ft. Mapletree Business City will be integrated with Mapletree’s adjacent properties - The Comtech and PSA Building - to form the group’s Alexandra Precinct assets. PSA Building will be directly connected to Labrador MRT Station under the Circle Line opening in 2010.

As for Mapletree Anson, with about 325,000 sq ft NLA, about 40,000 sq ft has been leased so far. ‘The building’s completion in Q3 2009 will be ahead of the completion of the first phase of Marina Bay Financial Centre,’ Mr Hiew noted. Plans to float Embassy Reit here - in partnership with India’s Embassy Group - have also been put on the backburner as structuring issues relating to changes in Indian laws on foreign funding and consequential tax issues are being ironed out first. The proposed Reit will hold business parks in Bangalore.