We mentioned in the past that Indonesian lease renewal and extension looks to be extremely cheap.
Today we got news that LMIR have renewed their land lease for another 20 years.
The Board of Directors of Lippo – Mapletree Indonesia Retail Trust Management Ltd, as Manager of Lippo – Mapletree Indonesia Retail Trust (“LMIRT”), wishes to announce that title to the retail space in the property known as “Plaza Madiun” (address : Jalan Pahlawan, Madiun, East Java) (referred to as Retail Space in LMIRT’s portfolio) under a “right to build” title (Hak Guna Bangunan) covering total land area of 5,583 sqm, has been successfully renewed for another 20 years from the date of expiry of 10 February 2012. Therefore, the new expiry date of title of the retail space at Plaza Madiun is now 9 February 2032.
Based on the non existent discussion on additional cost we can assume it is quite cheap as well.
Renewing or Extending Singapore Land Lease
This is in stark contrast to industrial REIT land lease renewal in Singapore. For info, most Singapore industrial building’s lease is typically less than 60 years.
Taken from Cambridge Industrial Trusts Investor Relations:
Question: When a building is purchased from one seller to another buyer, is there an automatic extension of the lease to 60 years for the new buyer?
No, there isn’t an automatic extension, whatever the balance term is on the land lease, the purchaser will assume. Also, majority of the industrial land in Singapore are not freehold and generally land leases range from 30 to 60 years. Extension of land lease has to be requested through the relevant land authorities (i.e. JTC or HDB).
Question: A summary of the process of lease renewal. Will this involve a large capital outlay roughly equivalent to the purchase price of a new building or an amount consider relatively small to the original purchase price.
As mentioned above, extension of land lease has to be requested and approved by the land authorities, and the capital outlay will be dependent on the value-adding proposal for the land usage / extension.
Question: If possible have CIT carried out any industrial lease renewal in the span of their operation.
No, the Manager has not carried out any industrial land lease renewal. CIT’s balance land lease is about 36.2 years
As stated, this means that the safe estimation is that Cambridge on average have a finite lifespan of 36.2 years. It will be prudent to value a REIT as if this is a non-perpetual asset with a finite lifespan and calculate the internal rate of return as accordingly.
I suspect the IRR on Cambridge is close to 5% than the current high yield.
How much does it cost to renew or extend the land lease in Singapore?
I did an enquiry with JTC and the main reason for not renewing every land lease is due to redevelopment plans.
Should the REIT meet all the criteria of JTC or Land Authority to renew and extend, the REIT will have to pay a premium.
After lease expiry, land and building (if any) will revert to the original lessor (JTC). In line with JTC’s policy, lessee(owner) is to reinstate site before lease expires.
Upon fulfilling all the requirements for renewal, lessee (owner) is required to pay for the prevailing land rental/ Premium.
Here is a page off JTC showing the latest land rental/Premium that the REIT will have to pay [Link here >>]
Suffice to say, I calculate Sabana’s biggest building at Lorong Chuan and should they need to renew it for 30 years, it will come up to almost 16% of the current building valuation.
What can the REIT do when the building is near end of lease?
A REIT may choose never to hold on to this asset till its expiry. When the property is less than 15 years, renewal or extension process will start.
The mentioned balance land lease of 36.2 years is the average of all CIT’s land lease expiries. As such, some land lease will expire earlier or after this tenure. Therefore, the expiries will not all happen at the same time.
In the case of a land lease renewal, each asset is handled on a case by case proposition. For instance, the Manager may need to raise cash to fund plant and equipment expenditure for land lease extension purposes. Alternatively, the Manager may choose to divest the assets ahead of their expiry. In the latter case, the projected lifetime of any building is limited and it is envisaged that in many instances, well before any ground lease reaches its termination, the asset will have been sold for conversion to a better use than that represented by the continued use of the current building on the site.
What does this mean for investors in REITs?
As investors, know that unless your building are freehold properties, the assets are not perpetual. It would be safer to value their yields as if there is a maturity date to this asset.
Also note that the cost of renewing or extending land lease in Singapore and some other countries are quite substantial. We know that REITs need to pay out 90% of their earnings to investors, that leaves them with little to no money to save for these extension.
While not all the buildings will need extension at the same time, it would mean that the 2 ways that financing such a renewal can take place is through taking on debts or a cash call.
Know well the certain risks in investing in REITs.
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