Yesterday I updated that First REIT will be doing a 5 for 4 rights issue to fund the purchase of 2 indonesian hospitals.
A concern on these 2 properties are that listed in the information is that the lease for these 2 properties for operation is for 15 years.
Under current assets, there are properties whose lease is also for 15 years.
The common understanding is that this lease enables First REIT to operate on these land leases for only 15 years, subsequently it has to be renewed so that they can continue operations.
Of course this comes at a cost and a risk as well, as the government can always not grant renewal which would really jeapodised operations.
I was pretty puzzled by this lease term issue so I emailed investor relations and First REIT as always, provided a prompt reply.
My initial question was for leasehold properties would eventually need to be renewed at the expense of new capital outlay. If that is the case new rights issue will have to be carried out.
Good day to you. I have some questions regarding first reit after some thoughts.
The indonesian property are leasehold with roughly 20-30 years left. I would just like to find out:
When the properties have no more lease, there is an option to renew the lease with the government. Would this new lease require additional capital outlay? that would mean rights issue isn’t it?
Victor (fr First REITs):
So far we have managed to successfully renewed a few of the titles for our Indo properties at a very low costs, unlike in Singapore where it attract a very high renewal fees.
I hope that answer your questions.
The renewal cost is still not very clear so I tried to get a further clarification:
how much roughly is the renewal cost as a percentage to existing asset value? I have a conception that the renewal cost is equal and higher to current asset valuation. is that correct?
No, the land renewal costs for Indonesia properties are very low.
In the past years, we have successful renewed a few plot of lands for only a couple thousand Singapore dollars.
For your info, 1 hospital could be sitting on a few plot of lands in Indonesia.
It is interesting to know that the cost of renewal in countries can differ so much but there is always a risk that it ends up inflating much higher than this.
2 new properties acquired with 15 years of lease
With the 2 new properties on board, a lot of investors are still worried of the short 15 year leased. so I posed a final query to the investor relations.
I saw the rights issues announcement yesterday and again the 2 properties bought is on a lease of 15 years operating lease.
It would seem most of the properties in First REIT are in this form. This is drastically short compare to the normal 30 years lease of other REITs.
My question is why is it so short, and what is the renewal risk and renewal cost to shareholders after this 15 years?
There isn’t this leasehold or freehold concept in Indonesia.
Our properties in Indonesia are under HGB title,
HGB title is quite similar to the leasehold title that we have in Singapore.
HGB title is granted for an initial period of 30 years, extendable for subsequent another 20 years, and follow by another 30 years period, so on and so forth.
The National Land Office (Indonesia) tend to grant an extension/renewal of HGB titles, subject to there being no change in zoning policies by the government, abandonment of the land, destruction of land, egregious breaches to the conditions of the current HGB title by the owners of the land, and revocation of the HGB title due to public interest consideration.
As I explained to you in my early email, we have so far been successful in our renewal of 2 HGB titles that have expired over last years at a very marginal costs of only a few thousand Singapore dollars.
To answer your question simple.
Yes, there will be risk that the Indonesia Land Authority will not renew our HGB title but we believe it is quite remote unless there is a strong reason for the Government to take over the land for infrastructure development (i.e. roads, etc), which we cannot foresee that to happen to our hospitals.
As 3 of the Indonesia properties (including the new acquisition) are inside our Sponsor, Lippo’s township. This non-renewal issue is unlikely to surface in these 3 properties unless Government wants to compensate Lippo to take over the entire township.
There is a formula to compute the cost of renewal. But this computed amount work out to be about a couple of thousand Singapore dollars, which is very cheap compared to Singapore standard.
In short, we have reasons to believe that renewal of HGB title is just an administrative process.
I hope my above answers provide some comfort to your concern on the HGB titles.
So apparently this township planning would likely work in favor of Lippo group. In summary the risk is still there, as is geographical risk and currency risk but I hope that by bringing this information to light, it enables investors and prospective investors to evaluate better.
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