Say you're a landlord whose renters include ANZ, DBS Bank, BNP Paribas, Standard Chartered, UBS and Barclays, which have together pruned their global workforce by almost 24,000 since early 2012 and are continuing to pare headcount as we speak. A market-weighted index of these top tenants' shares has slumped 22 percent over the same period. How might you be doing?
If you're Keppel REIT, one of Singapore's biggest office-property owners, the answer is, "Very well, thank you." The real-estate investment trust has seen its stock gallop 23 percent in U.S. dollar terms this year, which not only beats each one of its struggling customers but also offers a dramatic contrast to its down-on-luck parent Keppel Corp., the world's biggest builder of oil rigs.
The glut in Singapore's commercial property market may not be anywhere as bad as the global oversupply of oil rigs -- but there's still plenty of unsold, unoccupied office space in the city-state. Nevertheless, the landlords are hardly breaking a sweat.
On Tuesday, Keppel REIT announced a third-quarter payout of 1.6 Singapore cents per share, broadly unchanged from the previous three months. That gives a trailing four-quarter yield of 5.9 percent. With 90 percent of its lease renewals occurring only in 2018 and beyond, according to HSBC, there's a good chance the trust's attractiveness to investors will survive the city's commercial property downturn.
The performance has been driven partly by cheap borrowing costs. A 100-basis-point decrease in benchmark interest rates improves Keppel REIT's payouts to shareholders by about 13 Singapore cents. The decline in the Singapore swap offer rate this year has been more than 100 basis points.
It's not all dumb luck. Low interest costs have proved rewarding because of the lesson the landlords learned from the 2008-09 financial crisis. Back then, Singapore REITs were heavily reliant on debt raised by mortgaging their assets. When securitization froze up, refinancing became very expensive: The spread on one triple-A tranche of a collateralized mortgage-backed security went from 39 basis points at the time of origination in 2004 to 200 basis points in April 2009, according to a Fitch Ratings report.
That was then. Now, Singapore landlords finance themselves almost entirely via unsecured debt, and banks have no problem in lending to them. Ever since Keppel REIT prepaid its CMBS in late 2010, its weighted-average cost of capital has collapsed in line with the decline in global interest rates, creating room for higher dividends:
Keppel is hardly alone. In early 2012, the average debt-to-asset ratio in Singapore's office REIT industry was close to 36 percent. That's down to 33.5 percent now. Prudence is also practical. The 3.8 percent yield on prime offices in Singapore is second only to Madrid, according to real-estate adviser Jones Lang LaSalle. With reasonable leverage, that yield can be souped up to produce superior returns for Singapore's REIT owners. With interest costs so low, there's no need for managers to be greedy.
Next time the CEOs of Barclays and StanChart visit Singapore, they should go see their landlord. Maybe Keppel REIT's Ng Hsueh Ling can teach Jes Staley and Bill Winters a thing or two about how to get juice out of their assets -- without overheating the juicer.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Andy Mukherjee in Singapore at firstname.lastname@example.org
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