Sabana Industrial REIT sells 200 Pandan Loop below IPO valuations and Annual Valuations

Sabana REIT, an industrial REIT announces the divestment of its industrial property at 200 Pandan Loop.

The industrial property will be sold for $38 mil.

In the announcement it was mentioned that the book value of the property stood at $44.9 mil. This property was added to Sabana during IPO at $41 mil.The last appraised value was mentioned to be $36.8 mil.

The property is not coming to the end of the land lease. The land lease starts at 99 years from 1984 which means it has 68 years left which is more than the new industrial properties since under the new rules their land lease is shorten to 30 years.

The reason given for the divestment was that the net property income yield of this property is underperforming and they are struggling to fill the 50% of the space.

Sabana’s management tries to justify that the sale was accretive after factoring all the acquisition costs, capital expenditures over the years.

Future Dividend Outlook

The impact on DPU would be minimal.

However the bigger problem is not this but if you take into account all the news that is release about Sabana or industrial properties as a whole.

In November 2015, we updated that 3 master lease, leased to Sabana’s sponsor Vibrant Group, was renewed 1 year at negative rental revisions.

They still have a few lease expiring.

The overall climate seem to point to a marked lower future dividends per unit due to lower occupancy, negative rental revision.

Judging a REIT by historical yield, which was high at 10% is dangerous without factoring the future outlook going forward.

After all we are buying an asset that is a summation of its FUTURE CASH FLOW.

Reflecting on the negative sale price

What is interesting is that the latest appraisal value is 18% below the book value which should be revised annually for REITs.

We always thought that freehold and length of land lease plays a part in the value of the property but in this example the land lease is still abundant.

My conclusion (which may be wrong) from all this is that for this segment, while land lease is important, the location of the property, its functionality to cater to the targeted customer and the future economic outlook which charts the demand seems to matter more than the land lease.

The overall industrial market

It seems that based on the most recent results, only Sabana is having an issue. While the results of the other industrial REITs show little growth, the story have been that net property income looks to be coming down.

The ones to watch are the smaller players like Cambridge, Aims Amp, Cache, Soilbuild and Viva.

Cache is converting some of their master lease to multi tenanted, and it seems the theme.

Cambridge is still having positive rental revision.

My assessment is that the demand problem for the industrial segments seem to matter more than all the interest rate mumbo jumbo.

If you are using Price to Book to assess the REIT’s cheapness, be careful. I suspect their portfolio valuations will be lower. This might make their debt to asset ratio looks more risky and affect their borrowing capability.

And this is directly linked with the high cost of production and manpower in Singapore. Other than tax savings, is there a secular reason to manufacture in Singapore?

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