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First REIT’s land lease info: Hak Guna Bangunan (HGB) Rights

I was debating with Nick and YYT about the details of REITs as trusts and went back to my past correspondence with First REIT’s investor relations.

For folks thinking that First REIT is just like Singapore property, I think there are differences.

For one, when First REIT buys the hospital from Lippo it is buying that property and the land rights.

The land rights here is under Hak Guna Bangunan, HGB for short which gives the right to construct and own buildings on land. HG is transferable and may be encumbered.

Land with HGB title may be owned by (i) Indonesian citizens and(ii) legal entities established under the Indonesian law and domiciled in Indonesia, including PMA companies,

HGB is granted for a period of up to 30 years and extendable for a farther 20-year period. Upon the expiration of such extension, new HGB title may be granted on the same land. This is the title most PMA companies use to hold real estate.

In other words there seem to be no freehold concept over there. For me, First REIT is like a concession as K-Green Trust.

The grey line is that First REIT bets on that the renewal after 30 years and subsequent new rights acquisition will be smooth sailing. We do know that the cost of rights renewal is low (few thousand dollars) but we are not sure how much it cost for a new HGB title.

Take a property Mochtar Riady Comprehensive Cancer Centre:

  • Purchase price S$170 mil
  • Appraised value S$216 mil
  • Annual Rental S$18 mil
  • Year of building completion 2010
  • Lease Term to Lippo 15 yr with option to renew for 15 yrs

The income yield on purchase price is 10.5% and on current value is 8.3%

It means also that it takes almost 10 years to break even if rentals do not grow.

I did a check on older property as well. For First REIT it typically takes 10 years. That roughly means that we have 20 years left to earn the profits above our cost of investments.

Compared to K-Green’s concession, this looks like a much better deal. I will do more study in the future.

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Thursday 23rd of June 2011

Hi Drizzt,

We know that First REIT is a very good counter to hold for long term, no doubt about that. Just wondering how much percentage should we put it in our portfolio....I hope it will never become another FSL Trust, price dive down sharply just because of 2 ships terminated, sad to say that i am having big paper loss with averaging price at 0.60.


Wednesday 22nd of June 2011

Since HGB is granted for a period of up to 30 years and extendable for a farther 20-year period, I would think it is pretty safe to put money in this counter in the coming years, unless Indonesia has another crisis like 1998 RIOT and Next election will be only held in yr 2014.


Thursday 23rd of June 2011

you have to take a look at how great these assets were to First REIT. here is an spreadsheet comparing properties across REITs. note the price purchase and income earn (assuming 75% margin on rental) First REIT takes the cake versus the industrial reits.

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