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REITs Land Lease Renewal and Extension

We mentioned in the past that Indonesian lease renewal and extension looks to be extremely cheap.

MRCCC extend their land lease for 20 more years for a sum of SGD 28k.

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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Friday 9th of September 2011

Hi Drizzt, thanks again for such an informative article. I learnt a lot about REITS just by reading that. Never could figure out why are almost ALL REITS trading below their book values, and in many instances, below NTA as well.

I'm not vested in REITS, and don't intend to but this is indeed a very detailed post.

Thanks for the info.

*Noticed a new stake in Asia Entprise Holdings on the 8/8/2011 for you at 0.21. I accumulated more around 0.2, 0.205, 0.21 as well. Optimistic that it'll turn out well for us in the long run. At these prices, yield is around 5%, and we have a fairly strong moat. NAV is ard 0.31 if I rem correctly. Good luck!


Wednesday 7th of September 2011


Interesting article on SREITs, the low lease life of industrial properties in Singapore and the high premium required for lease renewal. I have a few ideas how this may pan out, but it really depends on the accounting used by the REIT. I am not an accountant, so it's just my speculation.

1. Expense the leasehold premium straight away, since the premium is expensed, net income is affected and we might see a drop in DPU for that year itself and then the DPU comes back up next year after paying the premium.

2. A more likely scenario though is that the leasehold premium is capitalized. The fair value of the property is affected in 2 ways 1) Declining lease life 2) Capital appreciation. So the 90% income distribution should already take into account the declining lease life as an expense and build up cash over time to pay the eventual premium.

On renewing the lease, the fair value of the property will assume to shoot up by at least the premium paid. If the capital appreciation is high enough though, debt may be raised since the fair value of the assets would have been higher anyway lowering the debt to asset ratio. Equity financing may not be necessary for lease renewals.

It would be interesting to see how it works out later, but it will be quite a number of years before we will see a S-REIT undertake a huge lease renewal exercise.


Thursday 8th of September 2011

1. How can that happen when the lease land premiums is much more than 1 year?

2. The cash was never built up! Remember REITs paid using AFFO which is essentially all or near 90% of free cash flow. There is no cash saved!

3. By then what is left the NAV will approximate to zero and there is no new capital financing. You would have just gotten your capital back.

I am sorry but even the managers of Cambridge, Mapletree and Sabana is not able to sugar coat this portion. Indirectly the are telling us that this would happen.


Monday 5th of September 2011

Hi Drizzt 151 Lorong Chuan is sold to Sabana for a 45 years lease out of 999 years lease to CDL. So I would suppose Sabana would have been able to renew it at lower than market rate.


Tuesday 6th of September 2011

hi bryon, thanks for the info. i was using Sabana as an example but still it will entail signficant costs to Sabana. Unless there is some kind of pre-agreement i don't think that lease renewal would be close to zero cost.

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