REIT ASIAPAC
COVER STORY
HK’S REIT PREMIUM / (DISCOUNT) TO NAV
Spring REIT Beijing
Spring REIT’s original mandate was to invest in
commercial properties in China. Some investors
are unhappy about how Spring REIT has ventured
into car servicing centres in the UK – they say
this is outside of Spring REIT’s geographic and
property segment focus. How do you respond?
Though recently called off, Spring REIT had
proposed to purchase a mall in Huizhou.
Managing a mall involves a different skillset
from office in terms of mall design, tenant
mix, relationships with tenants, et cetera,
does Spring REIT have the necessary
expertise to diversify into retail property?
The core strategy for the REIT has always been commercial
properties in China. If you look at our total portfolio exposure,
the Beijing assets represent approximately 95% of our total asset
value. The UK portfolio is only about 5%, so we consider it a non-
core element of our strategy.
While there are factors unique to the retail sector that
differentiate it from office, I would like to make two points:
Firstly, it is possible to separate asset management from property
management. Huamao Place – the mall we had proposed to
purchase, was completed in 2011 and has had a consistent track
record of an occupancy rate over 90 percent with rising rents.
To ensure continuity of management, our plan in the transaction
was to retain the existing property manager and we as the asset
manager, would be responsible for monitoring and supervising
the performance of the property manager. We believe we had
done sufficient due diligence on both the asset as well as the
property manager to be confident in the transaction.
The UK transaction is unique and is more like a fixed income
instrument in that it comes with long-term and secured income
that enhance cash flows to Spring REIT.
We purchased a portfolio of 84 properties and which are rented
to one single tenant under a 25 year “triple-net” lease signed back
in 2007. The tenant is going to pay us a rental income equivalent
to approximately a 6.1% yield per annum. If the tenant decides
to break the lease before its expiry, they must pay us the rental
quantum for the full term anyway. And on top of that, the lease
also comes with a parent company guarantee for this cash flow
in case the tenant cannot afford the rent.
And secondly, Spring REIT itself may not have experience
managing retail assets, but that doesn't mean our team members
don't. Just using myself as an example, I joined Spring REIT about
two years ago, and I have about 13-14 years of retail real estate
experience. I was formerly at Link REIT and Sunlight REIT. If
you look at the experience of the team, we have the necessary
expertise and skills to run retail assets. Beyond the expertise
of the incumbent property manager, the REIT Manager can add
value with the knowledge and know-how from within our own
team.
A further benefit is — unlike a typical property investment —
that the tenant is responsible for maintenance function of the
properties. What this means is that Spring REIT doesn't have
to get actively involved in the day-to-day management of the
portfolio. We just have to ensure that we collect the rent on
a quarterly basis. Given these characteristics, we see the UK
portfolio as similar to a bond investment that has a remaining
term of about 15 years.
As far as expertise is concerned, these are the reasons we're
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Source: S&P Global Market Intelligence (as of 31 December 2018)
forward which is our mandate.
“Spring REIT itself may not have
experience managing retail
assets, but that doesn't mean
our team members don't.”
There will always be room for improvement, and we will
continue to review our performance – for example in the areas
of managing currency risk, ways to increase rental yield and
measures to improve our tenant mix. We will continue to listen
to any feedback and constructive opinions from our unitholders
and we will strive to improve.
comfortable diversifying into the retail segment and we’d
continue to see this as part of our core China commercial
properties mandate.
What is the investment thesis for Spring REIT?
What would be the reasons to invest in Spring?
Would there be any changes in how Spring
REIT is managed going forward in light of the
viewpoints put forth by some of your investors?
What is your business strategy going forward? Our core exposure is to the Beijing economy. For investors who
want exposure to China’s growth, Spring REIT is a good proxy.
Our office assets are strategically located and are among the best
offices in all of China.
We have heard their concerns, and we have read their documents.
We value the opinion of every investor. We have been actively pursuing opportunities and continuously
reviewing the strategies for Spring REIT. This has resulted in
two yield-accretive acquisition proposals, with ongoing capital
management exercises implemented to enhance Spring REIT’s
financial flexibility and stability.
We are following our strategy with discipline, and that's why
we had proposed to acquire an asset in China. We will continue
to follow the same approach of core PRC Chinese commercial
properties.
We firmly believe that an income-generating REIT backed
by high-quality commercial properties has its unique value
to investors, and we will continue our efforts in delivering
stable distributions to our unitholders with sustainable growth
potential, and continue to enhance the value of the real estate
assets in our portfolio.
We are aware of concerns about the fact that we are trading at
a discount to NAV. But again, the entire sector with just one
exception is trading at a big discount to NAV. We will remain
focused on delivering strong cash flows to our unitholders going
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