Analysing REITS

[soros]

Boon,

You should write to CapitaMall Management Co. and ask what they intend to do with leases for China Malls expiring in 26 and 27 years ??.

[Boon]

Boon,

You should write to CapitaMall Management Co. and ask what they intend to do with leases for China Malls expiring in 26 and 27 years ??.

From page 58 of the IPO prospectus:

There is uncertainty about the quantum of land grant premium which CRCT will have to pay and additional conditions which may be imposed if the Manager decides to seek an extension of the land use rights for the Properties.

Six of the Properties are, or will be, directly held by the Project Companies under land use rights granted by the Chinese government. Upon the expiration of the terms of the land use rights, the land use right as well as the ownership of the Properties will revert to the Chinese government unless the land user applies for an extension of the term of such land use rights. If an application for extension is granted, the land user will be required to, among other things, pay a land grant premium. As none of the land use rights granted by the Chinese government similar to those granted for the Properties has, as at the Listing Date, run its full term, there is no precedent to provide an indication of the quantum of land grant premium which the Project Companies will have to pay and additional conditions which may be imposed if the Manager decides to seek an extension of the land use rights for the Properties upon the expiry thereof. 
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[specuvestor]

CRCT is another Reit counter with substantial debt on its book and owns only leasehold properties in China with SHORT weighted average land lease term to expiry.

[Image: 15n0h94.jpg]

According to this link the commercial / industrial lease is about 40-50 years. No point asking CapitaMall because shorter leases for commercial is a given. In any case most investors won't realise the impact until closer to 30 years lease.
https://en.wikipedia.org/wiki/Chinese_property_law

Residential is more important cause people live in them and without stability it can affect the populace and politics. That's why I think it makes sense for residentials to be 99years so that the owner is assured a roof over his life, not too short like 50 or 75 years and not freehold like some cities where urban renewal becomes so difficult.http://www.chinasmack.com/2013/stories/chinese-land-use-rights-what-happens-after-70-years.html

The point I am trying to highlight is that as per the blog below, the terminal value of REIT is not like a bond par. Hence the actual yield is not close to the current distribution yield (which is both profit and capital in nature) and closer to the IRR to zero future value for a better estimate of attractiveness.
http://investmentmoats.com/money-managem...extension/

It's probably food for thought when we buy REIT above 1X Book Value.

[Drizzt]

thanks for bringing out something i didn't know i have written specuvestor! i was lurking and reading because you guys were having a great conversation here. i think it is a grey area, but someone seem to tell me that to renew land lease in China is not that expensive, perhaps it is like the HGB in indonesia.

i only know its not cheap in SG. Viva industrial trust have some properties that is really short lease. perhaps most prominent is VBP with 16 years. So this topic was brought up at the REITs symposium. what Wilson Ang the CEO said is that it is likely URA have zoned that area as a biz park, so they will keep going with it.

There is no official figure how much it cost to renew the land lease, but he hinted usually we can take reference from JTC, and he said it won't cost a lot.

However, i tried to do the math, and it seems it reaches a figure of $130 mil. i don't think that is a small sum. folks who have went down this route may be able to correct what i just said.

[CY09]

Govt land sale through competition or special award tend to have valuations made by valuers who go by market standards ( like for like or cap rate). Unless viva or others manage to renew at a market downcycle, the cost of renewing a land lease will not be cheap.

[gzbkel]

thanks for bringing out something i didn't know i have written specuvestor! i was lurking and reading because you guys were having a great conversation here. i think it is a grey area, but someone seem to tell me that to renew land lease in China is not that expensive, perhaps it is like the HGB in indonesia.

i only know its not cheap in SG. Viva industrial trust have some properties that is really short lease. perhaps most prominent is VBP with 16 years. So this topic was brought up at the REITs symposium. what Wilson Ang the CEO said is that it is likely URA have zoned that area as a biz park, so they will keep going with it.

There is no official figure how much it cost to renew the land lease, but he hinted usually we can take reference from JTC, and he said it won't cost a lot.

However, i tried to do the math, and it seems it reaches a figure of $130 mil. i don't think that is a small sum. folks who have went down this route may be able to correct what i just said.

Hi Drizzt, could you share more on the method you use to derive the renewal cost of 130 mil? Thanks!

[Boon]

Hong Kong Landlord Signs $1 Billion, 21-Year Renewal Lease on Prime Retail and Office Site

Commercial News » Asia Pacific Commercial News Edition | By Alex Finkelstein | June 13, 2012 10:20 AM ET

Wharf Holdings Ltd., one of Hong Kong's largest commercial landlords, has signed a $1.02 billion renewal lease with the city-state government for another 21 years of operation at Ocean Terminal, a landmark 922,467 square-foot (85,700 square meters) shopping and office complex in Tsim Sha Tsui, a major tourist district.

The deal was the biggest of its kind this year in the Asia-Pacific corridor.

Wharf will pay HK$7.9 billion ($1.02 billion US) in land premiums and an annual rent of 3 percent of the "rateable" value of the Ocean Terminal lot, the company said in a prepared statement.    That works out at about HK$690 per square foot.........................................................

http://www.worldpropertyjournal.com/asia...a-5736.php
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[Drizzt]

thanks for bringing out something i didn't know i have written specuvestor! i was lurking and reading because you guys were having a great conversation here. i think it is a grey area, but someone seem to tell me that to renew land lease in China is not that expensive, perhaps it is like the HGB in indonesia.

i only know its not cheap in SG. Viva industrial trust have some properties that is really short lease. perhaps most prominent is VBP with 16 years. So this topic was brought up at the REITs symposium. what Wilson Ang the CEO said is that it is likely URA have zoned that area as a biz park, so they will keep going with it.

There is no official figure how much it cost to renew the land lease, but he hinted usually we can take reference from JTC, and he said it won't cost a lot.

However, i tried to do the math, and it seems it reaches a figure of $130 mil. i don't think that is a small sum. folks who have went down this route may be able to correct what i just said.

Hi Drizzt, could you share more on the method you use to derive the renewal cost of 130 mil? Thanks!

Hi gzbkel, i did it some time ago but i could find some of the links to JTC and URA. I will try to recreate them!

[specuvestor]

I didn't know it's your blog drizzt. Well, better to promote a VB's blog than someone else's

[CY09]

http://www.jtc.gov.sg/industrial-land-an...sales.aspx

Link for JTC land sales. Click on the 'historical Data on IGLS sites sold by JTC".

As I mentioned previously, valuers working for stat boards often use the "market comparison" or "Cap rate approach" to ascertain the fair value of the land to be sold.