Singapore's Developers and REITs Rocky Road Ahead - DBS Bank

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Singapore's Developers and REITs Rocky Road Ahead - DBS Bank
36
 SECTOR BRIEFING
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 DBS Asian Insights
  DBS Group Research • March 2017

                                        Singapore’s
                               Developers and REITs
                                    Rocky Road Ahead
Singapore's Developers and REITs Rocky Road Ahead - DBS Bank
DBS Asian Insights
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Singapore’s
Developers and REITs
Rocky Road Ahead

Derek TAN
Equity Analyst
DBS Group Research
derektan@dbs.com

Mervin SONG
Equity Analyst
DBS Group Research
mervinsong@dbs.com

Rachel TAN
Equity Analyst
DBS Group Research
racheltanlr@dbs.com

Singapore Research Team
equityresearch@dbs.com

Produced by:
Asian Insights Office • DBS Group Research

   go.dbs.com/research
   @dbsinsights
   asianinsights@dbs.com

Chien Yen Goh        Editor-in-Chief
Jean Chua            Managing Editor
Geraldine Tan        Editor
Martin Tacchi        Art Director
DBS Asian Insights
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04   Investment Summary
        Key Themes

07   Developers: Catalysts Abound to Lift
     Valuations From Multi-Year Lows
        Diversification to Remain a Key Strategy
        Improved Transactions in the Luxury End to
        Continue
        No Significant Price Cuts for Developments
        Potential Land-banking Opportunities in
        Singapore
        More En-bloc Transactions in 2017
        Merger and Acquisition Activity Could Pick up
        Will Developers Need to Deleverage?
34   Singapore’s REITs: Déjà Vu
        Key Issues in 2017
        S-REITs’ Debt-Maturity Profile
        Moderating DPU Performance
        Potential Risk to Property Values in the Industrial
        and Hospitality Sectors
        Acquisitions May Be Difficult to Execute
48   Appendix
DBS Asian Insights
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Investment Summary

                           T
                                   he property market in 2017 will remain a tenants’ market as a higher supply of new
                                   real estate will pose a risk to most subsectors. It will be another year of moderation
                                   for the Singapore property market as we believe that most subsectors will continue to
                                   see downside in rent and/or prices on the back of soft demand, given the economic
                           slowdown that may spill over into 2017.

                           Key Themes
                           Luxury end of residential market and office sectors bottoming out
         The bright spot   However, among the real estate sectors, we see brighter prospects in the luxury end of the
                           residential market and office subsector. We believe that luxury residential prices in Singapore
                           are attractive compared to luxury home prices in the region, thus we expect higher investment
                           transaction volumes in 2017, especially from foreign investors. The office sector is projected
                           to see slower rental declines of (5-10%), mainly due to better-than-projected take-up in
                           upcoming new buildings; we see the sector bottoming out by the end of 2017.

                           However, the retail, hospitality, and industrial sectors are still expected to feel the pressure
                           from projected negative net absorption, given excess supply.

                           Diagram 1. Singapore property clock

                           Source: DBS Bank
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                   Developers and REITs to continue seeking overseas opportunities;
                   en-bloc deals to pick up in 2017
                   Diversification remains a key strategy but opportunities will be limited as currency volatility
                   rises. We believe that property developers and real estate investment trusts (REITs) will
                   continue their strategy to diversify overseas for growth but we expect the acquisition
                   momentum to taper on the back of increased currency volatility and higher cost of funds.
                   Cities that we believe remain attractive on a currency-adjusted basis are London in the UK,
                   Melbourne and Sydney in Australia, as well as selected Tier-1 cities of China like Shanghai.

                   Apart from acquisitions, REITs could also capitalise on the increased development limits (25% cap
                   versus 10% previously, subject to conditions) accorded by the Monetary Authority of Singapore
                   (MAS) to take on more asset enhancement to rejuvenate their portfolios and boost returns.

 Hungry for land   We expect developers to continue participating more in the first half 2017 government land
                   sales (GLS) programme as they look to replenish diminishing land banks – which will mean
                   that land prices are likely to remain firm. In addition, we expect to see more en-bloc deals,
                   especially in the luxury end of the market. These activities, in our view, should signal that
                   home prices would remain fairly stable in the coming years.

                   Privatisations, mergers, and acquisitions to pick up
                   Privatisations, mergers and acquisitions (M&A) in the developer space will pick up. We believe that
                   more listed property developers will take the delisting route, alongside the wave of privatisations
                   that we saw in recent years. This puts valuations of property developers in the spotlight again.

                   Reasons behind this trend could be (i) the sea of capital looking to be deployed in Asian real estate,
                   and (ii) strategic capital partners or major shareholders looking to recalibrate their strategies,
                   given the lacklustre capital markets, and thus capturing the upside in the medium term.

                   We believe that such M&A activity highlights the attractive valuations of listed developers,
                   namely City Developments, CapitaLand, Global Logistics Properties, and UOL.

                   Deleveraging a focus as interest-rate risks loom
A major wildcard   In view of the uncertainty of the pace of interest-rate hikes in 2017, we believe that the
                   early refinancing and hedging of interest rates will be a key focus for developers and REITs
                   going forward. Noteworthy is close to S$6.3 billion worth of bonds (S$4 billion issued by
                   developers) expiring over 2017-2018, when issuers will need to source for refinancing or
                   alternative means to repay the bonds.

                   While we believe that refinancing for REITs are likely to be more straightforward, given
                   that credit is backed by consistent, recurring cash flow, we believe that certain developers,
                   especially those in the mid-cap space which have been more opportunistic in tapping the
                   bond market in recent years, could face more hurdles.
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                             The bond defaults in 2016 by oil & gas firms have cooled investors’ interest in bonds, and
                             we believe that they will be more selective in future bond issuances. As such, the inability to
                             refinance expiring bonds could mean that issuers (developers or REITs) might seek alternative
                             financing sources such as banks or even equity.

                             Strategies

                             Singapore’s REITs – Capital preservation a key strategy
       Rate hikes to limit   We see more road-bumps to further outperformance by Singapore’s REITs (S-REITs) going
            performance      into 2017, especially as they are faced with a slowing distribution-per-unit (DPU) growth
                             profile of 1% amidst a rising interest-rate environment. DBS’ chief economist is projecting
                             four rate hikes by the Federal Reserve over the course of the year and, as a result, the
                             Singapore ten-year yield is expected to increase another 0.7% to a normalised 3%.

     Capital preservation    In an environment of low growth and rising interest rates, we believe that investors will look
                    is key   at stock-specific catalysts to maintain relative outperformance within the sector. These are
                             S-REITs that provide (i) higher confidence in earnings sustainability and visibility, (ii) stronger
                             relative growth, and (iii) lower gearing which limits any impact of rising rates on distribution.

                             Our picks are Ascendas REIT (A-REIT), Keppel REIT (K-REIT), and Mapletree Commercial Trust
                             (MCT). In the mid-cap space, we like Croesus Retail Trust (CRT), Keppel DC REIT (KDC REIT),
                             and Frasers Logistics Trust (FLT).

                             Singapore Developers – Catalysts abound to re-rate
          Potential policy   Our call on the developers is mainly due to valuations that are supported by an improved
     relaxation and M&A      outlook. Firstly, we view current trading levels - price-to-net-asset-value of 0.75x and 0.65x
      could lift sentiment   price-to-revalued-net-asset-value – as attractive, given that developers are trading at close
                             to -1 standard deviation of historical levels. We believe that re-rating opportunities will
                             come from the following data points:
                             (i) improved sell-through rates for existing developments on the back of improved transaction
                             momentum,
                             (ii) potential relaxation of selective government policy in 2017 driving demand for homes
                             and investors’ sentiment, and
                             (iii) potential privatisation, M&A activity among developers or value-locking events like
                             asset divestments which will provide a lift for net asset value – and thus share prices – for
                             developers. Our picks are City Developments and UOL.
  We see more
 road-bumps for              Risks
                             1. Faster-than-projected rise in shorter-term interest rates, which will negatively impact
Singapore’s REITs               earnings and potentially capital values in the medium term.
     in 2017                 2. External shocks hitting GDP outlook and unemployment rates in Singapore, which will
                                have an impact on demand/supply dynamics.
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Developers: Catalysts Abound
to Lift Valuations From Multi-
Year Lows
                         L
 Attractive valuations        ooking forward, we believe that Singapore’s developers can outperform the
                              S-REITs, especially as uncertainty in the number of rate hikes over 2017 could
                              mean limited re-rating opportunities for S-REITs.

                         We see re-rating catalysts for developers come 2017 on

                         1. expectations that the government may ease restrictions on the property market in
                            2017 as home prices fall by as much as 12-15% from the peak (the decline was
                            11% as of end-2016).

                         2. potential merger and acquisition (M&A) activity, and

                         3. improved balance sheets , thanks to expected asset recycling and deleveraging.

                         While we continue to expect Singapore’s residential prices to fall marginally in 2017,
                         most negatives have been priced in, in our view. We believe that we are closer to
                         the trough, especially with expectations that the government will likely tweak policy
                         measures to stem a further fall in prices.

                         Diversification to Remain a Key Strategy
                         Property developers have been acquiring and diversifying overseas over the past
                         few years, driven mainly by the lack of opportunities in Singapore and the attractive
                         prospects of higher returns overseas. We took a sample size of 22 listed developers
                         with combined assets of S$143 billion and found that only 44% of their assets are in
                         Singapore; the rest are in China (28%), the United States (8%), and Australia (4%).

                         This diversity in exposure has been mainly built over the past three years, after a series
                         of cooling measures on residential property purchases in Singapore. We estimate that
                         close to S$8.1 billion of capital was overseas, in contrast to S$7.6 billion invested in
                         Singapore since 2013. Prior to 2013, most of the capital was vested within Singapore
                         and the rest of Asia.
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                              Diagram 2: Developers’ exposure by geography

    While we
    continue
    to expect
   Singapore’s
residential prices
to fall marginally
 in 2017, most
 negatives have
been priced in, in
     our view

                                                                                 Source: Companies, DBS Bank

Diagram 3: Top investment destinations for Singapore’s developers (since 2013)

                                                                                 Source: Companies, DBS Bank
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                        Australia, London, and Japan have been the main markets of interest in recent years,
                        with commercial properties (office/hotels) being the main target asset class. The key
                        reasons are the relatively attractive returns compared to Singapore, boosted by a strong
                        exchange rate and funding rates that have remained anchored at low levels.

Limited opportunities   While we believe that developers will continue to seek higher returns overseas, the yield
                        compression seen for prime assets over the past few years will mean that their focus
                        will likely change.

                        According to property consultant JLL, a Singapore-dollar investor’s foreign-currency
                        (FX) adjusted total returns will diminish over 2016-2018 and is forecast to yield -3%
                        to +10%; Shanghai, Sydney, and Melbourne, which offer the highest returns, will
                        continue to feature regularly on developers’ horizon.

                        We believe that London will remain one of the key investment markets, despite Brexit
                        and JLL’s expectations that returns will moderate, mainly due to a weak British pound
                        in the medium term. Developers are likely to be still keen on the UK if it maintains its
                        financial-hub status in Europe.

                        As developers are expected to aim to grow their recurring income base, we believe that core
                        assets in the commercial space that offer stable cash flow will be key acquisition targets.

                        DBS’ economist believes that most major currencies will depreciate against the US dollar
                        over 2017, as the normalisation of monetary policy by the Fed and hawkish policies
                        from new president Donald Trump might lead to flows from emerging markets back to
                        the US. Looking ahead, currency volatility will continue to have a big impact on total
                        returns for investors diversifying into real estate outside their home markets, and it is
                        important to closely monitor currency movements.

        Landbanking     Developers looking to replenish their land-bank in Singapore turned up in force in the
                        government land sales programme (GLS) in 2016 and ventured into the en-bloc market
                        too. Looking ahead, we believe that another avenue will be outright acquisitions,
                        especially for listed developers trading at price-to-net-asset-value of 0.7x and certain
                        mid-cap developers trading below that.

                        As pressure increases from 2017 onwards from additional buyer stamp duties (ABSD)
                        on land purchases and Qualifying Charges (QC), we believe developers will ramp up
                        merger and acquisition (M&A) activity.
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Diagram 4: FX-adjusted returns over time

     Strong local partners

                                                                                  Source: JLL, DBS Bank

                             Diagram 5: Prime yields for commercial real estate

                                                                                  Source: JLL, DBS Bank
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Diagram 6: Singapore developers’ exposure (% of RNAV)

Developers                       SG Residential       SG Commercial             Overseas                Total

CapitaLand                             9%                   25%                   66%                   100%
City Dev                              27%                   52%                   21%                   100%
Ho Bee                                15%                   56%                   29%                   100%
Wheelock                              30%                   39%                   32%                   100%
UOL Limited                            7%                   85%                    8%                   100%
OUE Ltd                                9%                   56%                   35%                   100%
Wing Tai                              19%                   20%                   60%                   100%
Global Logistics Properties            0%                    0%                  100%                   100%
                                                                                                       Source: JLL, DBS Bank

                              Improved Transactions in Luxury End to Continue
 Pick-up in transactions      We believe that the luxury end of the market is approaching a near-term bottom,
                              judging by the higher number of transactions in the core central region. According to
                              caveats lodged with the Urban Redevelopment Authority, during the first nine months
                              of 2016, transactions by foreigners (excluding Singapore permanent residents) rose by
                              close to 12% from the same period a year ago. We note that the increase mainly came
                              from buyers in China, Malaysia, and Indonesia, up more than 15% y-o-y.

                              If transaction volumes are sustained, it will imply investors’ confidence in Singapore’s
                              fundamentals and prospects for long-term capital gains.

      Attractive relative     According to JLL, Singapore remains an attractive investment destination, especially
                 pricing      as other popular residential investment destinations such as London, Melbourne and
                              Sydney recently levied additional stamp duties on purchases by foreigners. This has
                              made Singapore attractive again for international real-estate investors. In addition, we
                              note that Singapore’s luxury home prices have corrected 11% over the past few years
                              and the gap between other cities such as Hong Kong, London, and New York – where
                              prices have continued to increase over the past few years – has widened over time.

                              Therefore, we believe that Singapore’s luxury homes will be attractive - on a relative
                              basis across countries with potential capital upside in the medium term – once the
                              current over-supply situation normalises.
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                     Diagram 7: Transactions in Singapore’s Core Central Region

                                                                                   Source: Companies, DBS Bank

                     Diagram 8: Transactions in Singapore’s Core Central Region versus the overall market

                                                                                   Source: Companies, DBS Bank
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Diagram 9: Increase in home prices across the region

                                     Source: URA, MAS, Christie’s Real Estate, JLL, Knight Frank, DBS Bank

Diagram 10: Average prices of luxury homes

                                     Source: URA, MAS, Christie’s Real Estate, JLL, Knight Frank, DBS Bank
DBS Asian Insights
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                           No Significant Price Cuts for Developments
     Firmer prices going   There were close to 22,500 unsold units (both completed and uncompleted) as of 3Q16,
                forward    of which 24% (or 5,464 units) were located in the Core Central region. The strong sales
                           seen in recent quarters (especially for recently re-launched completed projects such as
                           Gramercy Park and OUE Twin Peaks near downtown Orchard) has brought the number
                           of available units for sale down by 6% quarter-on-quarter, which is one of the sharpest
                           declines among all regions.

                           Based on the current run rate for residential transactions, we estimate that total
                           transactions in 2016 would likely have come in at close to 15,500 (about 8,000 primary
                           sales deals and 7,500 secondary sales deals), which implies y-o-y growth of close
                           to 10%. The increase is driven by a marked increase in both primary and secondary
                           transactions. The former was mainly due to more aggressive marketing and discounts.
                           The improvement seen in the secondary market came from transactions in the Core
                           Central region and innovative financing schemes and discounts offered by developers
                           for some de-licensed projects, which drew a fairly good response from buyers.

                           We expect the impact of ABSD deadlines to be limited as most projects continue to
                           enjoy healthy margins. Developers with projects subject to deadlines on the ABSD
                           remission on residential sites in 2017-2018 have also done well, in our view. According
                           to our analysis of selected projects with significant unsold inventory at the start of 2016
                           and which are likely to be under pressure to clear stock due to looming ABSD deadlines
                           in 2017-2018, most have cleared a substantial portion of their inventory. This is due
                           to more aggressive marketing as prices dipped slightly by 4-12% (with some staying
                           steady). This is against investors’ initial worries that developers might have to offer deep
                           discounts in order to move unsold inventory.

                           The pick-up in sales momentum, in our view, will likely give developers more optimism
                           to continue marketing existing projects; they could also step up property launches in
                           the Central region to capture the improved sentiment in that space. We believe that
                           developers are likely to pay the ABSD for most projects come 2017 as margins are
                           expected to remain healthy.
DBS Asian Insights
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Diagram 11. Pipeline of unsold private homes (excluding executive condominiums) as of end of Q316

                             Total Units      Core         Rest of       Outside             Remarks
                               (units)       Central       Central       Central
                                             Region        Region        Region
                                             (units)       (units)       (units)
Units Available for sale
(3Q16):
Unsold uncompleted units       20,577        4,711         7,130          8,736
Unsold completed units         1,925          753           543           629
Total unsold units             22,502        5,464         7,673          9,365
% Chg Q-o-Q                     -3%           -6%           1%            -5%
Demand :
Primary Sales (9M16)           5,253          444          1,715          3,094
Secondary Sales                6,337          1568          1792          2977
Total Sales                    11,590        2,012         3,507          6,071

Ratio (Supply/ annualised              3.2           9.2           3.4            2.3 Ratios for CCR and RCR
primary sales)                                                                        regions improved while
                                                                                      OCR ratios declined.

Primary Sales (2015)           7,440          407          1,884          5,147
Secondary Sales (2015)         6,677         1,452         1,944          3,281
                               14,117        1,859         3,828          8,428
Ratio of Supply/Demand          3.0           13.4           4.1           1.8        Ratios for CCR highest
                                                                                      due to low number of
                                                                                      primary sales.

Average Primary Sales          7,030          530          4,400          2,100
(2013-2016)
Average Secondary Sales        7,475         1,572         2,071          3,464
(2013-2016)
                               14,505        2,102         6,471          5,564

                                                                                                Source: URA, DBS Bank
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Diagram 12: ABSD payable for selected projects with high unsold inventory in 2017 / 2018

  ABSD Region            Project       Developer       Total   Unsold Unsold Unsold Unsold   Units     Land        Est
liability                                              Units    (Jan’  (%)    (Nov’  (%)     Sold      Cost      ABSD
                                                                 16)           16)            in      (S$m)      (S$m)
                                                                                             2016
ABSD Payable for projects from government land sites
Jan’17     OCR       The Trilinq     IOI Properties    755      528    70%    303    40%     225       408        52.1
Feb’17     RCR       Mon Jervois     Singapore Land    140      61     44%     45    32%      16      118.9       15.2
Mar’17     OCR       Kingsford       Kingsford         512      249    49%     22    4%      227      243.2        31
                     Hillview Peak
Jun’17     OCR       Vue 8           Capital Devt.     463      172    37%     84    18%      88       211        26.9
                     Residences
Jul’17     CCR       Pollen & Bleu   Singapore Land    106      94     89%     93    88%      1       113.2       14.4
Jul’17     RCR       Sant Ritz       Santarli Corp     214      24     11%     10    5%       14      114.8       14.7
Sep’17     CCR       The Siena       Far East Org.      54      22     41%     12    22%      10       45.8        5.8
Sep’17     RCR       The Crest       Wing Tai,         469      366    78%    325    69%      41       516        65.9
                                     Metro, UE
Oct’17     OCR       The Glades      Keppel Land       726      343    47%    134    18%     209      434.6       55.5
Dec’17     RCR       Alex            Singapore Land    429      173    40%    152    35%      21      332.7       41.6
                     Residences
Jan’18     OCR       The Panorama    Wheelock          698      126    18%     28    4%       98       550        70.2
Apr’18     OCR       Riverbank @     UOL Group         555      188    34%     64    12%     124      262.1       50.2
                     Fernvale
Jun’18     RCR       Highline        Keppel Land       500      320    64%    215    43%     105      550.3      105.3
                     Residences
Apr’18     OCR       The Santorini   MCC Land          597      390    65%    328    55%      62      289.7       55.5
Sep’18     CCR       Sophia Hills    Hoi Hup           493      437    89%    346    70%      91      442.3       84.7
ABSD Payable for projects from private land sites
Mar’17     CCR       Meyer Melodia Cang Properties      16      15     94%     15    94%      0         9.4        1.2
Mar’17     CCR       Robin Suites    Robin25 Pte Ltd    92      26     28%     6     7%       20        54         6.8
Jan’17     RCR       Ascent @ 456    Quest Homes        28      13     46%     10    36%      3         24         3.1
Apr’17     OCR       The Bently      Goodland           48      15     31%     5     10%      10        27         3.4
                     Residences      Group
Jun’17     RCR       Neem Tree       Aylesbury Pte      84      67     80%     64    76%      3         46         5.9
                                     Ltd
Sep’17     OCR       The Creek @     Chiu Teng         260      144    55%    107    41%      37       190        24.5
                     Bukit           Group
Sep’17     OCR       Rezi3Two        Tee, KSH and       65      22     34%     7     11%      15       22.6        2.8
                                     Heeton
Oct’17     OCR       Lotus Ville     JVA Venture        11       8     72%     7     64%      1         18         2.3
Nov’17     CCR       The Rise @      Hao Yuan          120      51     43%     25    21%      26       130        16.6
                     Oxley
                                                                                                     Source: URA, DBS Bank
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Diagram 13: Impact analysis of ABSD payment on margins

    Project         Est.        Est.      Selling    Selling    % Chg   Average     Margins        Margins
                 Breakeven   Breakeven     Prices     prices            (S$’psf)     (q/o           (with
                  (S$’psf)   with ABSD     < 2016    in 2016                        ABSD)          ABSD)
                              (S$’psf)    (S$’psf)   (S$’psf)                        (%)             (%)
 ABSD Payable for projects from government land sites
 The Trilinq       920          990        1,405      1,404      0%      1,404       53%              42%
 Mon Jervois       1,265       1,400       1,981      1,832      -8%     1,907       51%              36%
 Kingsford         1,010       1,090       1,367      1,286      -6%     1,326       31%              22%
 Hillview Peak
 Vue 8             780          830         983        992       1%       988        27%              19%
 Residences
 Pollen & Bleu     1,450       1,575       1,922      1,801      -6%     1,862       28%              18%
 Sant Ritz         1,000       1,080       1,419      1,358      -4%     1,388       39%              29%
 The Siena         1,500       1,650       2,067      1,826     -12%     1,947       30%              18%
 The Crest         1,350       1,470       1,698      1,718      1%      1,708       27%              16%
 The Glades        1,530       1,675       1,454      1,412      -3%     1,433        -6%            -14%
 Alex              1,350       1,500       1,705      1,943     14%      1,824       35%              22%
 Residences
 The               1,180       1,300       1,243      1,220      -2%     1,232        4%              -5%
 Panorama
 Riverbank @       850          940         976        992       2%       984        16%               5%
 Fernvale
 Highline          1,600       1,800       1,879      1,735      -8%     1,807       13%               0%
 Residences
 The Santorini     950         1,035       1,131      1,082      -4%     1,106       16%               7%
 Sophia Hills      1,450       1,650       1,995      1,916      -4%     1,955       35%              19%
 ABSD Payable for projects from private land sites
 Mayer             510          530        2,226        -        0%      1,113       >100%          >100%
 Melodia
 Robin Suites      1,450       1,600       2,496      2,276      -9%     2,386       65%              49%
 Ascent @ 456      1,400       1,580       1,506      1,527      1%      1,516        8%              -4%
 The Bently        1,000       1,050       1,408      1,229     -13%     1,319       32%              26%
 Residences
 Neem Tree         1,180       1,285       1,616      1,756      9%      1,686       43%              31%
 The Creek @       1,180       1,400       1,589      1,656      4%      1,622       37%              16%
 Bukit
 Rezi3Two          1,000       1,050       1,507      1,533      2%      1,520       52%              45%
 Lotus Ville       775          830         803        754       -6%      779         0%              -6%
 The Rise @        1,525     1,685       2,335        2,283      -2%     2,309       51%              37%
 Oxley

                                                                                             Source: URA, DBS Bank
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                            Land-banking Opportunities in Singapore
Turning to en-bloc sites    Following the dearth of land supply since the property market peaked in 2013 and the
               or M&A       fact that developers have pre-sold most of their inventory on hand, the government’s
                            residential land tenders have remained competitive, driving bids high. Looking ahead, as
                            the government continues to maintain a low supply in the land tenders in the first half of
                            2017, we believe that developers could turn towards the en-bloc market or even look to
                            M&A to continue land-banking and to seek growth.

                            Apart from government land sales, developers have turned to opportunities in the private
                            market as evidenced by the pick-up in en-bloc transactions in 2016.

                            Smaller developers, some of which on average trade at a 50% discount to book value,
                            could be attractive acquisition or privatisation candidates.

                            Limited government land sales (GLS) to result in sticky
                            land-bid prices
Lowest level since crisis   Since the property market peaked in 2013, the government has been moderating land
                            supply. Total gross floor area of government residential land sales tendered out in 2016
                            reached a trough of approximately 4.4 million square feet (sq ft), 75% below the peak
                            in 2012.

Unsold inventory at the     With the government having moderated land supply for a few years now, unsold inventory
    lowest since 2001       of residential properties has reached its lowest since 2001. As at 3Q16, unsold inventory
                            had almost halved since its peak in 2011.

       Land prices have     While land prices from the government land tenders have moderated marginally in 2014-
        remained sticky     2015, we saw an increase in the number of bidders at each tender with prices for selected
                            sites near the central region achieving new record highs, due to the limited number of sites
                            available for tender.

      Increasingly more     The spreads between the winning bid and the second and median bids have also narrowed
            competitive     from 15% in 2013 (peak of 62% in 2009) to 3% in 2016. The number of bids has increased
                            to an average of 12 in 2016, above the historical average of eight.

Developers could
turn towards the
 en-bloc market
or even M&A to
 continue land-
    banking
DBS Asian Insights
                                                  SECTOR BRIEFING 36
                                                                             19

Diagram 14: Land supply from the government

Diagram 15: Land prices

Diagram 16: Winning margins and average range of bids

                                                         Sources: Realis, DBS Bank
DBS Asian Insights
SECTOR BRIEFING 36
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                                 Diagram 17: Average number of bidders

                                                                                                             Sources: Realis, DBS Bank

Diagram 18: GLS sites awarded in 2016

  Date of     Location        Type of      Lease    No.        Name of           Developer    Successful     S$ psf        Units
  Award                     Development     (yrs)    of       Successful                     Tender Price   per plot
                                                    Bids        Bidder                          (S$m)         ratio
 6-Dec-16    Margaret       Residential     99      14     MCL Land              SG Listed      238.4         997.8          275
 (tender     Drive                                         (Regency) Pte Ltd                                 Source: Realis, DBS Bank
 closed)
 1-Oct-16    Fernvale       Residential     99      14     Sing Development      SG Listed      287.1         517.2          575
             Road                                          (Pte) Ltd and Wee
                                                           Hur Development
                                                           Pte Ltd
 5-Sep-16    Anchorvale     Executive       99      16     Hoi Hup Realty Pte     Foreign       240.9         355.2          635
             Lane           Condominium                    Ltd and Sunway
                                                           Developments Pte
                                                           Ltd
 1-Jul-16    Martin Place   Residential     99      13     First Bedok Land      SG Listed      595.1        1,239.4         450
                                                           Pte Ltd (Guocoland)
 30-May-16   Bukit          Commercial &    99      11     Qingjian Realty        Foreign       301.2         634.8          425
             Batok West     Residential                    (BBR) Pte Ltd. And
             Avenue 6                                      Qingjian Realty
                                                           (BBC) Pte Ltd
 13-Apr-16   Jalan Kandis   Residential     99       9     Dillenia Land Pte      Foreign       51.1          481.2          110
                                                           Ltd
 29-Feb-16   Yio Chu        Executive       99      10     Hoi Hup Realty         Foreign       183.8         331.1          520
             Kang Road      Condominium                    Pte Ltd
 26-Feb-16   New Upper   Residential        99       8     CEL Residential       SG Listed      419.4         760.8          570
             Changi Road                                   Development Pte
             (Parcel B)                                    Ltd

 18-Jan-16   Siglap Road    Residential     99       8     FCL Topaz Pte Ltd,    SG Listed      624.2         858.3          800
                                                           Sekisui House Ltd
                                                           and KH Capital
                                                           Pte Ltd
 Total                                                                                         2,702.8                     4,085
                                                                                                         Source: Companies, DBS Bank
DBS Asian Insights
                                                                                       SECTOR BRIEFING 36
                                                                                                                     21

Diagram 19: 1H17 government land sales programme

             Location          Site area   Proposed   Est. No. of   Est, No.    Estimated   Estimated         Sales
                                  (ha)        GPR      Housing      of hotel   commercial     launch          agent
                                                         Units       rooms        space        date
                                                                                  (sqm)
CONFIRMED LIST 2H15

Residential Sites
1     Toh Tuck Road              1.87        1.4         325           -           -         Feb-17           URA
2     Tampines Avenue 10         2.17        2.8         715           -           -         Mar-17           URA
      (Parcel C)
3     Lorong 1 Realty Park       1.31      Landed         50           -           -         Apr-17           URA
4     Serangoon North            1.72        2.5         505           -           -         May-17           URA
      Avenue 1
5     Woodleigh Lane             1.96         3          735           -           -         May-17           URA
      Total (Confirmed List)                            2,330          -           -
RESERVE LIST

Residential sites
1     Stirling Road              2.11        4.2        1110           -           -        Available         URA
2     Bartley Road / Jalan       0.47        2.1         115           -           -        Available         URA
      Bunga Rampai
3     Sumang Walk (EC)           2.71         3          775           -           -        Available         HDB
4     Yishun Avenue 9            2.17        2.8         715           -           -         May-17           URA
5     Owen Road                  1.38        3.5         605           -           -         Jun-17           URA
6     Jiak Kim Street            1.33        3.8         515           -         1,500       Jun-17           URA
7     Fourth Avenue              2.02        1.8         455           -           -         Jun-17           URA
Commercial & Residential Sites
9     Holland Road               2.3         2.6         570           -         13,500     Available         URA
Commercial Sites
10    Beach Road                 2.1         4.2           -           -         88,200     Available         URA
11    Woodlands Square           2.24        3.5         260           -         60,030     Available         URA

      Total (Reserve List)                              5,135          -        158,080
      Total (Confirmed                                  7,465          -        158,080
      List and Reserve
      List)

                                                                                                      Source: URA, DBS Bank
DBS Asian Insights
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22

                     More En-bloc Transactions in 2017
                     During 2005-2007, when there was a shortage of government land supply, we saw a pick-
                     up in en-bloc transactions. Following the implementation of property-cooling measures in
                     2011, the number of en-bloc transactions dwindled to zero in 2014. In 2015, only one
                     successful transaction – the sale of Thong Sia Building – was recorded.

                     Nevertheless, we saw a pick-up in en-bloc transactions in 2016 with Harbour View Gardens
                     being sold in August 2016 at an average price of S$1,300 psf, five en-bloc deals announced,
                     and more news on owners engaging property consultants (such as JLL and CBRE) to set up
                     collective sales committees. The five en-bloc deals announced (excluding en-bloc sales for
                     asset-recycling or specifically to be exempted from ABSD or QC charges) were:
                     1. Shunfu Ville, Bishan which was the first en-bloc sale of a privatised former Housing and
                          Urban Development Company (HUDC) estate in nine years at S$639 million (S$557 psf ppr),
                     2. Raintree Gardens, Potong Pasir, the second en-bloc sale of a privatised former HUDC
                          estate at S$334 million (S$593psf ppr) to the UOL-UIC joint venture,
                     3. No. 3 Cuscaden Walk, Orchard at S$103.8 million (S$1,826 psf ppr) to SL Capital, a
                          consortium led by Sustained Land,
                     4. No. 120 Grange Road, Orchard at S$48.5 million (S$1,841 psf ppr) to Roxy-Pacific
                          Holdings, and
                     5. No. 8 Hullet Road, Orchard at S$38.2 million (S$2,073 psf ppr) to a consortium led by
                          Patrick Kho of Lian Huat Group. According to news reports, properties for sale include
                          two apartments at The Claymore, Lakeside Towers in Jurong, Villa D’Este on Dalvey
                          Road, and Cairnhill Mansion on Orchard Road.

                     Despite the tighter rules on en-bloc sales and a more tedious process in completing an en-
                     bloc transaction, developers are now willing to undertake these deals, implying that they
                     are i) hungry for land, and ii) taking a more positive outlook in the medium term.

                     Diagram 20: Land supply from the government

                                                                                                Source: URA, DBS Bank
DBS Asian Insights
                                      SECTOR BRIEFING 36
                                                              23

Diagram 21: Land prices

                                             Source: URA, DBS Bank

Diagram 22: Trends in en-bloc sales

                                              Source: URA, DBS Bank
DBS Asian Insights
SECTOR BRIEFING 36
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                     Diagram 23: Total land transactions

                                                                                                   Source: URA, DBS Bank

                     Merger and Acquisition Activity Could Pick up
                     With the recent proposed privatisation of various property-related companies and news
                     reports of potential takeovers of United Engineers (UE) and Global Logistic Properties (GLP),
                     we believe that some of the smaller-cap developers which are trading at deep discounts to
                     net asset value could look attractive for potential M&A as an alternative to acquire assets/land
                     banking. Here is the summary of each of the small-cap developers. They are trading at an
                     average discount to net asset value of 29%, with most trading at a range of 40-93% discount.
                     Companies that are in deep discounts with attractive assets include Bukit Sembawang (93%
                     discount), Wing Tai (60%), Hiap Hoe (51%), and Ho Bee (50%).
DBS Asian Insights
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                                                                                                                               25

Diagram 24: Sample list of small-cap developers that could head down the M&A route

                       Bukit Sembawang                       Wing Tai                         Hiap Hoe

Bloomberg / Reuters    BS SP / BSES.SI                       WINGT SP / WTHS.SI               HIAP SP / HIAP.SI
Market Cap (S$m)                                     1,177                            1,298                              335
Shareholding           Lee Family                    44%     Cheng Family               50%   Teo Family                70%
Structure
                       Aberdeen                      11%     Others                     2%    Others                     1%
                       Asia Fountain Inv               5%    Free Float                 48%   Free float                29%
                       (Guoco Grp)
                       Free float                    39%
Disc / (Prem) to NAV                                 93%                                60%                             51%
Debt / Equity                                     no debt                               0.4                              0.7
Net debt / Equity                                 no debt                               0.1                              0.6
Cash balance (S$'m)                                    401                              966                               23
Cash % of Market                                     34%                                74%                              7%
Cap
Assets by business     Development                  99.6%    Development                57%   Investment                45%
units                  properties                            properties                       properties
                       Investment properties         0.4%    Investment                 39%   Hotel                     11%
                                                             properties
                                                             Retail                     2%    Development                8%
                                                                                              properties
                                                             Others                     2%    Construction               4%
                                                                                              Leisure                    0%
                                                                                              Others                    31%
Assets by country      n/a                                   Singapore                  47%   Singapore                 82%
                                                             Hong Kong                  29%   Australia                 18%
                                                             China                      11%
                                                             Malaysia                   13%
Key assets             Paterson Collection, Orchard,         The Crest, Singapore -           Signature At Lewis, Singapore -
                       Singapore - Residential               Residential                      Residential
                       St Thomas Walk, River Valley,         Le Nouvel KLCC, Malaysia -       HH @ Kallang, Singapore -
                       Singapore - Residential               Residential                      Industrial
                       Luxus Hill, Seletar, Singapore -      Winsland House, Singapore -      Zhongshan Park Integrated,
                       Landed residential                    Comm                             Novena, Singapore - Mixed
                       Watercove, Sembawang, Singapore       Development in Suzhou
                       - Landed residential                  Industrial Park - Comm
                                                             Lanson Place, Shanghai -
                                                             Hospitality

                                                                                                                  Source: DBS Bank
DBS Asian Insights
SECTOR BRIEFING 36
26

Diagram 24: Sample list of mid-cap developers that could head down the M&A route (continued)

                        Ho Bee                               Roxy                                 Wheelock

 Bloomberg / Reuters    HOBEE SP / HBEE.SI                   ROXY SP / RXYP.SI                    WP SP / WPSL.SI
 Market Cap (S$m)                                    1,477                               501                                1,789
 Shareholding           Chua Family                    76%   Teo Family                 72%       Wheelock and              76%
 Structure                                                                                        Company Limited
                        Others                         1%    Others                      6%       Aberdeen                  6%
                        Free float                     23%   Free float                 22%       Free Float                18%
 Disc / (Prem) to NAV                                  50%                              45%                                 40%
 Debt / Equity                                         0.5                               1.9                                 0.0
 Net debt / Equity                                     0.5                               1.2                                (0.4)
 Cash balance (S$'m)                                   77                                327                                1,319
 Cash % of Market Cap                                  5%                               65%                                 74%
 Assets by business     Commercial                     63%   Development                57%       Development               58%
 units                                                       properties                           properties
                        Residential                    35%   Hotel                      11%       Investment                35%
                                                                                                  properties
                        Industrial                     1%    Investment                 16%       Investments               7%
                                                             properties
                                                             Others                     17%
 Assets by country      Singapore                      55%   Singapore                  42%       Singapore                 80%
                        The UK                         29%   Australia                  36%       Other                     20%
                        China                          12%   Japan                       8%
                        Australia                      4%    Thailand                    4%
                                                             Malaysia                    4%
                                                             Hong Kong                   5%
                                                             Indonesia                   1%
 Key assets             Turquoise, Seascape & Cape Royale,   Hotel properties in Singapore,       Ardmore Three, Orchard,
                        Sentosa Cove, Singapore              Japan, Australia, Thailand,          Singapore - Residential
                                                             and Maldives
                        Residential projects in Shanghai,    Sunnyvale Residences,                Scotts Square, Orchard,
                        Tangshan, Zhuhai                     Singapore - Residential              Singapore - Residential
                        6 commercial buildings in London     Trilive, Singapore - Resi / Retail   Fuyang project, Hangzhou,
                                                                                                  China
                        The Metropolis, Buona Vista,         New World Towers, South              Wheelock Place, Singapore-
                        Singapore - Comm / Retail            Brisbane, Australia -                Comm / Retail
                                                             Residential
                        HB Centre 1 & 2, Singapore - Ind     Land in Singapore, Australia,
                                                             Indonesia
                                                                                                                     Source: DBS Bank
DBS Asian Insights
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                                                                                                                           27

Diagram 24: Sample list of mid-cap developers that could head down the M&A route (continued)

                       Metro                 UE                         Aspial                   Oxley

Bloomberg / Reuters    METRO SP / MTHL.SI    UEM SP / UTES.SI           ASP SP / ASPA.SI         OHL SP / OXHL.SI
Market Cap (S$'m)                    844                        1,676                  525                             1,282
Shareholding           Ong Family    36%     Great Eastern      13%     Koh Family     84%       Ching Chiat           43%
Structure                                                                                        Kwong
                       Ngee Ann      10%     OCBC               10%     Others         6%        Low See Ching         29%
                       Dev Pte Ltd                                                               (Liu Shijin)
                       Others        6%      Lee Foundation     9%      Free float     11%       Tee Wee               12%
                                                                                                 Sien (Zheng
                                                                                                 Weixian)
                       Free float    49%     WBL Corp           3%                               Others                15%

                                             Free float         65%                              Free float             1%

Disc / (Prem) to NAV                 37%                        15%                    -60%                            -63%
Debt / Equity                         0.0                        0.6                       4.2                          3.1

Net debt / Equity                    (0.3)                       0.3                       3.9                          2.6

Cash balance (S$'m)                  418                        671                    72                               367

Cash % of Market Cap                 50%                        40%                    14%                             29%

Assets by business     Property      96%     Development        22%     Real estate    44%       Development            68%
units                                        properties                                          properties

                       Retail        4%      Investment         47%     Financial      10%       Hotel                 13%
                                             properties                 service
                                             Technology &       17%     Jewellery      5%        Investment             7%
                                             Manufacturing                                       properties
                                             Corporate          14%     Others         41%       Corporate             12%
                                             Services &
                                             Other Assets
Assets by country      China         79%     Singapore          85%     Singapore      99.9% Singapore                 97%
                       ASEAN         15%     China              10%     Malaysia       0.1%      Malaysia               2%
                       Others        7%      USA                1%                               The UK                 1%
                                             Malaysia           1%                               Japan                  0%
                                             Taiwan             1%                               Cambodia               0%
                                             ASEAN (ex          0%                               Others                 1%
                                             Singapore and
                                             Malaysia)
                                             Hong Kong          0%
                                             Rest of Asia       0%
                                             Others             2%

                                                                                                                Source: DBS Bank
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28

Diagram 24: Sample list of mid-cap developers that could head down the M&A route (continued)

                     Metro                   UE                        Aspial                   Oxley

 Key assets          Nanchang Fashion        UE Bizhub City,           Kensington Square,       The Flow, East Coast,
                     Mark, Jiangxi, China    Singapore - Mixed         Singapore - Retail /     Singapore - Comm
                     - Mixed                                           Resi
                     The Crest at Prince     UE Bizhub West,           City Gate, Singapore -   The Rise@Oxley, Oxley Rise
                     Charles Crescent,       Singapore - Ind /         Retail / Resi            Rd, Singapore - Residences
                     Singapore -             Comm                                               / Retail
                     Residential
                     Sheffield Digital       Mixed Development         Nova City, Cairns,       Floraville / Floraview /
                     Campus, Sheffield,      One North, Singapore -    Australia - Mixed        Floravista, Ang Mo Kio,
                     UK - Comm               Mixed                                              Singapore - Mixed
                     Middlewood Locks,                                 Land in Brisbane and     Space@Tampines,
                     Manchester, UK -                                  Penang                   Singapore - Industrial
                     Residential
                     Metro Tower / City,                                                        Novotel & Ibis on
                     Shanghai - Comm /                                                          Stevens, Singapore -
                     Retail                                                                     Hospitality
                     GIE Tower,                                                                 Development properties
                     Guangzhou, China -                                                         in Cambodia, Malaysia,
                     Comm                                                                       Myanmar, etc

                                                                                                             Source: DBS Bank

                             Based on selected privatisation transactions between 2010 and the latest practicable date
                             involving property developers listed on the SGX (list may not be exhaustive), the deals were
                             transacted at an average price-to-net-asset-value multiple of 1.0x and price-to-revalued-
                             net-asset-valuation of 0.8x as shown in the table below. However, we note that there may
                             be differences in terms of size, market capitalisation, financials, and portfolios that could
                             change the potential valuations for M&A.
DBS Asian Insights
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                                                                                                                        29

Diagram 25: Historical transactions involving listed property developers (since 2010)

Announcement       Target             Acquirer         Final       Deal          Premium/         P/NAV       P/RNAV
Date               Company                             Offer       Value         Discount
                                                       Price       S$’m        1-mth VWAP
Aug-2016           Sim Lian           Coronation        1.08        216            16.8%           0.9x          n.a.
                                      3G
Jan-2015           Keppel Land        Keppel Corp       4.38       2,749           25.0%           0.88x        0.66x
Apr-2014           Hotel              Wheelock          4.05        200            33.8%           1.32x        0.79x
                   Properties
                   Limited
Apr-2014           CapitaMalls        CapitaLand        2.35       3,025           35.8%           1.26x        0.89x
                   Asia               Limited
Feb-2014           Singapore Land United                9.40        650            16.9%           0.72x        0.67x
                   Limited        Industrial
                                  Corporation
                                  Limited
Dec-2012           SC Global          MYK               1.80        318            57.2%           1.15x         0.8x
                   Developments       Holdings Pte
                   Limited            Ltd
May-2012           Wing Tai           Ascend            1.39       1,104           14.3%           0.55x        0.62x
                                      Capital
                                      Limited
May-2011           Allgreen           Brookevale        1.60       1,060           40.6%           0.99x        0.81x
                   Limited            Investment
                                      Pte Ltd
Sep-2010           Soilbuild          Dolphin           0.80        113            15.6%           1.26x        1.07x
                   Limited            Acquisitions
Aug-2010           MCL                Hong              2.45        189            27.3%           0.96x        0.75x
                                      Kong Land
                                      Holdings
                                      Limited
                                                                    Min            14.3%           0.62x        0.62x
                                                                   Mean            28.3%           0.78x         1.0x
                                                                  Median           26.1%           0.79x         1.0x
                                                                    Max            57.2%           1.07x        1.32x

                                                                                                           Source: DBS Bank

                                Will Developers Need to Deleverage?
 Average indebtedness           Property developers have generally been conservative in their approach towards capital
       has been stable          management and, over the past few years, kept net gearing in the range of 0.4-0.6x.
                                Tracking the average indebtedness of developers over time, we found that mid-sized
DBS Asian Insights
SECTOR BRIEFING 36
30

 Most mid-sized            developers (defined as those with market capitalisation of up to S$2 billion) have generally
developers could           taken on more debt in recent years and thus have an average gearing of c.0.8x in the last
                           four years, higher than the sector’s average of c.0.7x over the same period. On average,
be crowded out             over the same period, large-cap developers have an average net gearing ratio of about 0.5x.
 by their larger
  competitors              Developers that stand out in terms of gearing as of the latest reported quarter are the likes
                           of Guocoland (large developer) at 1.2x – which has the highest gearing among the group –
                           and in the mid-sized developer space – Oxley, Tee Land and Roxy-Pacific which all have net
                           gearing in excess of 1.0x (Diagram 26). Chip Eng Seng and Tuan Sing also have high net
                           gearing of above 0.9x.

           Developers to   2017 will turn out to be a tough year for developers to deploy capital. Firstly, we expect the
             deleverage    land-banking climate to remain competitive in Singapore, given limited land sites available for
                           tender from the government. This means that most mid-sized developers could be crowded
                           out by their larger competitors or foreign developers. Secondly, increased currency volatility
                           is expected to be a drag on returns when they deploy more capital overseas. As such, given
                           limited avenues to deploy capital and fairly strong balance sheets, we believe that they could
                           choose to deleverage their balance sheet or pay higher dividends going forward.

                           The spike at the end of 2016 in swap-offer rates (SOR) could imply higher refinancing costs
                           going forward. As such, faced with a slowing top-line growth and increasing prospects
                           of higher interest obligations, property developers would be better served if they utilised
                           proceeds that will be recognised from subsequent years’ pre-sales to pare down debt
                           obligations when they come due in 2017-2018.

                           From our interest-rate analysis, we estimate that developers’ Profit After Tax and Minority
                           Interests (PATMI) would take a hit of 4-40% if interest rates rose by 1%.

                           Diagram 26: Gearing of developers

                                                                                          Source: Bloomberg Finance L.P., DBS Bank
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                         Diagram 27: Net gearing of selected mid-cap developers (Q316)

                                                                                        Source: Bloomberg Finance L.P., DBS Bank

    Bond issuance has     With strong investor demand for yields in recent years as interest rates remain low, we have
             increased   seen an increase in new bond issuance in Singapore. In the real estate space, we have seen
                         close to S$34 billion of new bonds over the past five years, which is more than 20% of the
                         total amount of new bond issuances over the preceding five years.

                         In the real estate sector, bond issuances peaked in 2011, and reached new highs again in
                         2012 and 2015. In 2015, bond issuances by real estate firms totalled S$8.7 billion, with
                         mid-sized developers increasingly tapping the bond market. A total of S$3.5 billion worth
                         of bonds will be due in 2017.

                         The average cost of funds has also fallen over time, and has stabilised at about 3% since
                         2008.

                         Continued access to funding is a key enabler of a healthy real estate development and
     Real estate         investment market. However, recent bond defaults in the oil & gas space has turned
   firms need to         investors off bonds. In addition, the market for future issues appears to be largely shut for
 refinance about         now. If the risk-off sentiment persists, it might become a headwind for real estate firms that
   S$4 billion of        need to refinance about S$4 billion of bonds – out of the market’s total of S$6.3 billion –
                         due in 2017-2018.
  bonds – out of
the market’s total       We note that among the bonds due in 2017, developers like Guocoland and OUE will need
 of S$6.3 billion        to refinance expiring bonds. Developers such as OUE and Heeton’s existing cash balance
  – due in 2017-         and receivables may not be sufficient for repayment of bonds. Additional financing may
       2018              be required.
DBS Asian Insights
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                     Diagram 28: Bond issuance by developers

                                                               Source: Bloomberg Finance L.P., DBS Bank

                     Diagram 29: Profile of bond expiry

                                                               Source: Bloomberg Finance L.P., DBS Bank
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Diagram 30. Selected property developers’ outstanding bonds, 2017-2018

Issuer                                                   Maturity        Amount Outstanding (S$'m)

SingHaiyi Group Ltd                                       Jan-17                        100
Fragrance Group Ltd                                       Jan-17                        85
OUE Ltd                                                   Feb-17                       300
City Developments Ltd                                     Feb-17                        250
GLL IHT Pte Ltd (Guocoland)                               Feb-17                        160
UOL Group Ltd                                             May-17                        75
Oxley Holdings Ltd                                        May-17                        150
Heeton Holdings Ltd                                       Jun-17                        60
CapitaLand Treasury Ltd                                    Jul-17                       50
GLL IHT Pte Ltd (Guocoland)                               Aug-17                        170
Keppel Land Ltd                                           Aug-17                        100
GLL IHT Pte Ltd (Guocoland)                               Sep-17                        105
Chip Eng Seng Corp Ltd                                    Oct-17                        150
TEE Land Ltd                                              Oct-17                        30
Hongkong Land                                             Dec-17                        50
City Developments Ltd                                     Mar-18                       100
Perennial Treasury Pte Ltd (Perennial)                    Mar-18                       100
UOL Treasury Services Pte Ltd (UOL)                       Apr-18                       175
Global Logistic Properties Ltd                            May-18                        67
Centurion Corp Ltd                                         Jul-18                       65
Roxy-Pacific Holdings Ltd                                  Jul-18                       60
GLL IHT Pte Ltd (Guocoland)                               Sep-18                        75
Citydev Nahdah Pte Ltd                                    Sep-18                        50
City Developments Ltd                                     Sep-18                        50
Perennial Real Estate Holdings Ltd                        Oct-18                       300

                                                                              Source: Bloomberg Finance L.P., DBS Bank
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Singapore’s REITs: Déjà Vu

                             A
                                         t the end of 2015 – after the first rate hike by the Fed in December 2015 – the
                                         market was pricing in three rate hikes. This resulted in a correction in S-REITs in
                                         January 2016. However, as the year progressed, the impact of negative interest
                                         rates in Europe and Japan, further correction in oil prices, disappointing nonfarm
                             payroll data in May, and uncertainty caused by Brexit caused expectations for rate hikes to be
                             dialed back significantly.

                             Consequently, the S-REIT Index (excluding dividends) rallied by 11% by early September,
                             outperforming the 0.4% rise in the Straits Times Index and 2% fall in the property developers
                             index. But this reversed on the improving US economy and the victory of Donald Trump in the
                             US presidential election on November 8; the S-REIT index fell 8%, more than the 0.4% and
                             0.3% drop in the Straits Times Index and the developers’ index.

     S-REITs’ performance    Going into 2017, consensus expectations are for three rate hikes; DBS’ economists are more
             to be capped    hawkish, forecasting the Fed to increase the Fed Funds rate by 25 basis points once every
                             quarter, with the US ten-year bond yield rising to 3.25% (versus consensus forecasts of 2.5%).
                             The Singapore ten-year bond yield is also expected to increase in tandem to 3.05%. Should our
                             DBS house view come to fruition, we believe the performance of S-REITs will likely be capped.

      Deteriorating rental   Revenues across the office, retail, industrial, and hospitality sectors were under pressure in
                  outlook    2016 due to a combination of sluggish demand as well as increase in completed projects and
                             anticipated supply. Demand for the more cyclical sectors – office, hotel, and industrial property
                             – was also negatively impacted by the uncertain economic environment. Meanwhile, the retail
                             sector was affected by Singaporeans spending their disposable income overseas and shopping
                             online. Going into 2017, we believe these negative trends are likely to continue, resulting in a
                             modest 1.1% growth in DPU for the sector.

                             Current forward yields offer some buffer, with yield spread at average levels, assuming a
                             normalised 10-year yield of 3%. While S-REITs are likely to face headwinds in the form of falling
                             rents and rising interest rates, we believe the correction in 2016 has provided some downside
                             buffer. The current FY17F yield spread to a normalised 3% bond yield stands at 4%, which is
                             slightly above the historical average spread of 3.8% and close to the 4.1% average since 2010.

          Impact on DPU      While investors are rightfully concerned about the impact of an increase in interest rates on
                             DPU, based on our analysis, the full impact will only be felt over the course of the next two
                             to three years. This is because S-REITs in general have hedged 75-85% of their debt into fixed
                             rates and have only 9%, 21%, and 20% of total debt up for refinancing over 2017, 2018,
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                    and 2019 respectively. We estimate that a 1% rise in interest rates will have a 2.9% and 4.9%
                    impact on distributions in 2017 and 2018, respectively.

                    In terms of sectors, our preference is for office REITs despite the expected decline in office rents,
                    given that the sector trades at 20% discount to book value and 10-30% discount to recent market
                    transactions. In addition, we think the sector remains under-owned relative to other sectors.

                    Our second preference is the retail sector for its resilient income stream (i.e. exposure to
                    suburban shopping malls) and the fact that it is trading at close to 1x price-to-book-value versus
                    the sector’s typically 10-20% premium to book value. The industrial sector’s ranking is mainly
                    attributed to our positive view on the larger REITs, such as Ascendas REIT, which offer strong
                    balance sheets, decent yields, and growth potential.

                    While we see long-term value in the hospitality sector, given that the sectors trades at 20-40%
                    discount to book, we believe there is limited re-rating catalyst at least for the first half of 2017
                    as RevPAR is expected to remain under pressure. However, we recommend that investors look
                    for opportunities to re-enter in the second half of 2017 on the back of a potential recovery in
                    2018 as the oversupply situation in Singapore normalises.

                    Key Issues in 2017
 The full impact    With a sense of déjà vu, as we approach 2017, we are faced with the same issues confronting
                    investors at the start of 2016 and 2015. These include risk of rising interest rates, slowing
of an increase in   growth, higher cost of capital potentially constraining the ability to raise capital to fund growth
interest rates on   plans, and heightened risk of write-downs of property values given falling rents.
DPU will only be
  felt over the     With the economic outlook now softer than at the start of 2015 and 2016, we believe that
   next two to      S-REITs with stronger growth will command an increasing premium. In addition, S-REITs which
   three years      were resilient in the past and trade at a premium but are now only able to offer flattish DPU
                    growth might be vulnerable, given rising risk of earnings disappointment. Key themes in 2017
                    are as follows:

                    Impact of an increase in interest rates on share price,
                    distributions
                    We believe investors’ attention has been focused on the pace of interest-rate hikes. So far,
                    consensus is expecting three rate hikes in 2017, with the US ten-year bond yield forecast to rise
                    to 2.5-2.6%. With share prices for S-REITs having already corrected in anticipation of this, we
                    believe S-REITs will likely deliver steady returns. In contrast, the more hawkish forecasts by DBS’s
                    economists, who anticipate four rate hikes (25 basis points once a quarter), would take the
                    Fed funds rate to 1.5% by end-2017, the US ten-year bond yield to 3.25%, and the Singapore
                    ten-year bond yield to 3.05%. Under our house view, the overall performance of S-REITs will
                    likely be capped.
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         Trump’s policies   While the market remains focused on rate hikes, there is a possibility that 2016 could repeat
                            itself, with the Fed holding off on hikes. This could happen if the European Central Bank (ECB)
                            and Bank of Japan (BOJ) decide to push interest rates further into negative territory and if the
                            markets – and the Fed – get nervous about the potential breakup of the euro on the back of
                            (possible) victories by nationalist parties in several European elections . Furthermore, the policies
                            actually implemented by Trump may not be as inflationary as first thought and/or concerns
                            over the policies’ impact on global trade/economies may weigh more on long-term bond yields.

      Potential return of   The Singapore dollar strengthened against the US dollar between 2009 and 2013, when the
       capital to the US    Fed implemented three rounds of quantitative easing. During this period, the carry trade was
                            prevalent with US dollar-based investors taking advantage of the stronger Singapore dollar
                            by taking positions in yield instruments including S-REITs. This resulted in the FSTREI Index
                            rallying about 44% to its peak in May 2013. However, as the quantitative easing programme
                            ended and interest rates started rising from December 2015, the FSTREI Index has become
                            more volatile, moving in sync with changes in interest rate expectations and movements in the
                            greenback. Going forward, should US interest rates continue on an aggressive path upwards –
                            in line with DBS’s economists’ view – capital from Asia would likely return to the US, presenting
                            a headwind to the performance of S-REITs.

                            Diagram 31: DBS’s forecast of interest rates

                                                      Current          1Q17F          2Q17F           3Q17F             4Q17F
                                                     (8 Dec'16)
                             US 10-Year Bond            2.35%          2.65%          2.85%           3.05%              3.25%
                             US 2-Year Bond             1.10%          1.50%          1.70%           1.90%              2.10%
                             US Yield Curve             1.25%          1.15%          1.15%           1.15%              1.15%
                             (10Y-2Y)
                             SG 10-Year Bond            2.34%          2.65%          2.75%           2.85%              3.05%
                             SG 2-Year Bond             1.17%          1.50%          1.65%           1.80%              1.95%
                             SG Yield Curve             1.17%          1.15%          1.10%           1.05%              1.10%
                                                                                               Source: Bloomberg Finance L.P., DBS Bank

                            The policies actually implemented by Trump may not be
                                          as inflationary as first thought
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                     Diagram 32: Singapore REITs versus currency

                                                                                       Source: Bloomberg Finance L.P., DBS Bank

                     The current FY17F yield spread to the spot ten-year bond yield stands at 4.7%, which is above
                     the historical average spread of 4.1% since 2010. However, assuming a normalised 3.05%
                     bond yield, the yield spread will drop to 4%, which will be in line with its historical mean.
                     This implies that current share prices have priced in the possibility that rates will inch back to
                     normalised levels.

Growth to compress   Assuming the long bond yield spikes to 3.05% by end-2017, share prices of S-REITs in general
                     may be volatile. However, we believe S-REITs with clear visible growth drivers have the potential
                     to experience a compression in yield spread, with absolute yields stable or even compressing.
                     This would be similar to the last period when interest rates rose. Using Capital Mall Trust (CMT)
                     as an example, from 2004-2007, CMT’s yield spread fell from over 4% to 0.4% in mid-2007,
                     as the Fed raised the Fed Funds Rate from 1% to a peak of 5.25%, and CMT generated annual
                     DPU growth in excess of 7%.
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                     Diagram 33: Case study: CMT’s experience as interest rates rose

                                                                  Source: Bloomberg Finance L.P., Thomson Reuters, DBS Bank

                     Diagram 34: Forward S-REIT yield spread

                                                                                   Source: Bloomberg Finance L.P., DBS Bank
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Diagram 35. Historical S-REIT yield and S-REIT yield spread (2005-current)

Period                 Years            10-Year       S-REIT          S-REIT                         Comments
                                       bond (%)     Yields (%)        Yield
                                                                     Spreads
                                                                       (%)

“High Growth”           2005             2.9%           4.8%           2.1%       2005-2007 was a period of high
                                                                                  growth for the S-REITs when average
                        2006             3.4%           5.0%           1.6%
                                                                                  distribution growth was about 13%. Key
                        2007             2.9%           4.1%           1.2%       catalysts were acquisitions

“Aberration in          2008             2.8%           7.3%           4.5%       Yield spread expanded to >5.1% due to
valuations due                                                                    the financial crisis
                        2009             2.3%           9.6%           7.3%
to the GFC”

“Liquidity              2010             2.4%           6.3%           3.9%       After the global financial crisis , the
driven                                                                            sector saw yield compression in 2012-
                        2011             2.2%           6.4%           4.2%
recovery”                                                                         2013 before the Fed hinted of rate hikes
                        2012             1.5%           6.5%           5.0%       in mid-2013
                        2013             2.0%           5.8%           3.8%
                        2014             2.4%           6.2%           3.8%
                        2015             2.4%           6.3%           3.9%

                      Periods
                    2005-current         2.5%           6.2%           3.8%
                     2006-2008           3.0%           5.4%           2.4%
                    2010-current         2.1%           6.3%           4.1%
                     Forward
                  Current (FY17F)        2.3%          7.0 %           4.7%
                  Normalised (FY17F)     3.0%           7.0%           4.0%

                                                                                      Source: Bloomberg Finance L.P. Finance L.P, DBS Bank

                                 Impact of interest rates on distribution
         Breathing room          While interest rates are anticipated to rise in 2017, the majority of S-REITs have hedged 75-
                                 85% of their borrowings – with a weighted average debt maturity of 2-3 years. For FY17,
                                 about 9% of debt on average is due to be refinanced, thus the full impact of higher costs
                                 of borrowings will not be felt in 2017 but over the subsequent few years. In addition, the
                                 impact of a rise in interest rates is likely to be felt by the REITs which predominantly borrow
                                 in Singapore dollars. In contrast, REITs with exposure to European, Japanese, and Australia
                                 assets with commensurate debt in euros, Japanese yen, and Australian dollars, may even report
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                     declining – or a slower increase – in borrowing costs as they refinance their debt. This is because
                     interest rates in Europe, Japan, and Australia are now lower than when the REITS first borrowed
                     in the respective local currencies.

                     Assuming a 1% lift in the cost of borrowing above our current estimates (we have already
                     assumed up to a 25-basis-point increase in the cost of debt compared to FY16) and that the
                     impact only occurs when the various S-REITs refinance 9% and 21% of all loans outstanding
                     in 2017 and 2018, respectively, - we estimate impact of 2.9% and 4.9% on FY17F and FY18F
                     overall S-REITs’ DPU, respectively. (We have also assumed that the new rates would only be
                     applicable to outstanding debt with floating rates.)

                     S-REITs’ Debt-Maturity Profile
                     Diagram 36. Debt-expiry profile                                                    Percentage of
                                                                                                       total debt due

                                                                                       Source: Bloomberg Finance LLP, DBS Bank

                     Diagram 37. S-REIT debt by sector

                     Source: Bloomberg Finance LLP, DBS Bank
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Diagram 38. Debt-maturity profile for individual S-REITs (%)

REIT                                         Total Debt    2016      2017   2018    2019          2020          >2020
                                               (S$bn)
AIMS AMP Capital Industrial REIT                0.61           0%    0%     31%      40%          13%             16%
Ascendas Hospitality Trust                      0.54           4%    31%    37%      0%           28%              0%
Ascendas India Trust                            0.40           0%    11%    12%      21%          20%             36%
Ascendas REIT                                   3.37           10%   6%     22%      15%          16%             31%
Ascott Residence Trust                          1.98           0%    13%    11%      8%           15%             53%
Cache Logistics Trust                           0.53           0%    14%    43%      34%          10%              0%
Cambridge Industrial Trust                      0.53           0%    0%     29%      19%          30%             21%
CapitaLand Commercial Trust*                    3.28           0%    5%     16%      21%          37%             20%
CapitaLand Mall Trust*                          3.84           0%    7%     16%      13%          12%             53%
CapitaLand Retail China Trust                   1.00           4%    43%    10%      18%          10%             15%
CDL Hospitality Trust                           0.93           0%    0%     35%      24%          20%             22%
Croesus Retail Trust                            0.78           0%    14%    41%      14%          17%             14%
Far East Hospitality Trust                      0.82           5%    30%    28%      12%           0%             24%
First REIT                                      0.46           0%    31%    34%      26%           9%              0%
Frasers Centrepoint Trust                       0.73           0%    30%     8%      16%          10%             36%
Frasers Commercial Trust                        0.75           0%    24%    24%      28%          10%             13%
Frasers Hospitality Trust                       0.80           0%    14%    15%      70%           0%              0%
Frasers Logistics Trust                         0.52           0%    0%      0%      34%          32%             34%
IREIT Global                                    0.30           0%    12%     0%      49%          39%              0%
Keppel REIT*                                    3.32           0%    0%     14%      28%          23%             36%
Keppel DC REIT                                  0.34           9%    1%     44%      38%           8%              0%
Manulife US REIT                                0.30           0%    0%      0%      36%          23%             41%
Mapletree Commercial Trust                      2.34           0%    2%      2%      12%          19%             65%
Mapletree Greater China Commercial Trust        2.42           0%    9%     29%      16%          16%             30%
Mapletree Industrial Trust                      2.11           0%    1%      9%      26%          30%             34%
Mapletree Logistics Trust                       2.05           0%    1%     15%      16%          14%             54%
OUE Commercial REIT                             1.28           0%    27%    49%      22%           0%              2%
OUE Hospitality Trust                           0.86           0%    0%     34%      31%          34%              0%
Parkway Life REIT                               0.68           2%    0%     14%      31%          27%             27%
Religare Health Trust                           0.18           0%    5%     54%      35%           7%              0%
Soilbuild Business Space REIT                   0.47           0%    0%     33%      6%           39%             21%
SPH REIT                                        0.85           0%    0%     38%      15%          33%             15%
Suntec REIT*                                    2.99           0%    3%     37%      27%          10%             22%
YTL Starhill Global REIT                        1.14           1%    35%    28%      9%           15%             12%
Total S-REIT Debt                               44.37      1.1%      8.8%   21.3%   20.4%        18.6%          29.7%
                                                                                            Source: Various REITs, DBS Bank
                                                                                            *includes debt at associate level
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