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Property Asset Management. Lesson 2. Property Asset Management. Purpose of Property. Property is being held (in any type of property right) for one of two purposes: as an investment asset as an operational asset
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Property Asset Management Lesson 2
Purpose of Property • Property is being held (in any type of property right) for one of two purposes: • as an investment asset • as an operational asset • Property held as an investment asset, like any other investment asset, is expected to earn a rate of return on capital employed for the holder and appreciate in capital value • Property held as an operational asset serves to support the activities of the business occupying the property. This type of property is sometimes referred to as `corporate property'
What is Property Asset Management? • Asset management enables an organization to realize value from assets in the achievement of its organizational objectives • Asset management supports the realization of value while balancing financial, environmental and social costs, risk, quality of service and performance related to assets • Property asset management is the process of guiding the planning, acquisition, operation & maintenance and disposal of assets to make the most of their service delivery potential including managing the related risks and costs over their entire life, i.e. a continuous process covering the whole life of the asset • Key Activities include: • Planning • Acquisition • Operation & Maintenance Management • Disposal
Functions of Real Estate Management • Real estate management functions are interrelated and inter-depended which is hierarchical in nature too • As the general management hierarchy of a business firm like top management, middle management and lower level management, overall real estate management functions also can be ordered as higher level, middle level and lower level according to the property related managerial functions • The functional distinction between asset management and property management ensures the operational implementation of the various duties on the one hand and the monitoring and controlling implementation (strategic) for safeguarding the owners’ interests on the other hand
Functions of Real Estate Management Managerial Levels VS Real Estate Managers
Functions of Real Estate Management • Portfolio Management • Properties combined • Linked owner / stakeholder goals with organisational goals • Asset Management • Acquisition, redevelopment or disposition • Achieve owner / stakeholder goals • Property Management • Day-to-day, one at a time • Achieve owner / stakeholder goals
Functions of Real Estate Management • Core Tasks in Asset Management • Yield / risk management and yield responsibility • Operational purchasing and sales as well as transaction management in line with the portfolio strategy • Ongoing portfolio evaluation in the form of market and location analyses • Designing and safeguarding documentation, reporting and process management • Selection and management of the property manager as well as external service providers • Co-ordination/monitoring of tenancy and property accounting as well as the dunning function and service charge statements • Risk management at the property and process level • Development and management of the letting strategy • Acquisition of new tenants and sales-oriented tenant contact management for each specific mandate • Optimisation and value enhancement of the individual property (in line with portfolio strategy) • Modernisation and revitalisation measures with major volume (Capex)
Analytical Framework For Asset Management Strategy Formulation 14
4 Keys Stages of Asset Management Lifecycle 1) Planning • Establishes and verifies asset requirements based on evaluation of the existing assets and their potential to meet service delivery needs • Identification of management strategies is required in order to include and analyze the need for an asset • If the company uses effectively planning in all asset management cycle stages, it will help in: • assessing the practical sufficiency of existing assets • ensuring resources are available when necessary • recognizing excess or under-performing assets • estimating options for asset provision and funding asset acquisition • ensuring assets are maintained and liable
4 Keys Stages of Asset Management Lifecycle 2) Acquisition • The acquisition planning includes activities involved in purchasing an asset with the aim of ensuring cost effective acquisition and covers activities such as designing and procuring an asset • Appropriate application of these activities guarantees that the asset is fit for use • Initially, organization should decide whether the asset will be perpetually bought or built before establish a budgeting for asset acquisition along with a time frame for its acquisition and a purchasing requirement • A project team should run the process to make sure all acquisition process activities will be completed to meet service delivery and other organization objectives
PURCHASE OF 9 GUL LANE, SINGAPORE 629408 BY TAI SIN ELECTRIC LIMITED “Tai Sin Electric Limited has on 4 September 2018 entered into a Sale and Purchase Agreement to purchase the property known as 9 Gul Lane, Singapore 629408 for S$7,000,000 from Aplast System Co. Pte Ltd. Tenure for the Property is Leasehold 26 years commencing 1 January 2011, with an unexpired lease term of less than 19 years. The purchase consideration payable by Tai Sin to the Vendor is S$7,000,000 in aggregate exclusive of goods and services tax. Tai Sin intends to use the Property to alleviate space constraints at the cable and wire factory, leading to higher productivity, increased production capacity and growth...”
US-based global institutional property investment manager is buyer of 55 Market Street; analysts say it may be planning strata sales, refurbishment • Last week, Frasers Commercial Trust (FCOT) announced the S$216.8 million sale of the 16-storey building but did not name the buyer • This is the second Singapore office asset AEW clinched in less than two weeks • In late June, it entered into a deal to buy Twenty Anson from CapitaLand Commercial Trust (CCT) for S$516 million. CCT in its announcement of the sale also did not name the buyer • Market watchers say the acquisition prices seem to be on the high side, translating to low entry yields “AEW boosts Singapore office exposure” - The Business Times 21 July 2018
4 Keys Stages of Asset Management Lifecycle 3) Operation and Maintenance • The operation and maintenance stage indicates the application and management of an asset, including maintenance, with the aim of delivering services • The plan of asset management should have a high focus on asset maintenance issues • Throughout this time, the asset should be focus to appropriate maintenance, monitoring and potential improvement to overpass any adjustment in operational requirement
Categories of Maintenance Planned Maintenance • Systematic inspection of buildings, equipment and all assets to maximise economic life • Anticipate failure and establish procedures to prevent • Comprise scheduled or condition based maintenance • Proactive
Maintenance Performance Maintenance Standard • Technical characteristic of building • Intended use of buildings • Financial factors • Organisational factors • External factors Performance Standard • Required response time • Down time of essential facilities • Required quality of repair • Required cost of repair • Proportion of planned to unplanned maintenance
Asset Performance Evaluation Operating Budget – Variance Review • Evaluate performance against benchmarks • Revenues • Expenses • Make recommendations in major revenue and cost drivers
Asset Performance Evaluation Balance Sheet Review • Changes / size of • Cash balances • Account receivables • Account payable • Reserve balances • Ratios • Working capital • Current ratio • Owner’s equity • Debt to equity
Asset Performance Evaluation Portfolio Review • Ways to analyse e.g. By type, location, size, etc. • Monitor for compliance • Analyse trends • Link mission, obligations and opportunities
Asset Performance Evaluation Property Manager Review • Evaluate based on annual management plan and budget • Meet formally, monthly or quarterly • Specific areas: • Financial • Compliance • Physical
4 Keys Stages of Asset Management Lifecycle 4) Disposal • When an asset reaches its end of a useful life, it can be treated as an underperforming asset • Disposal should be treated in the perspective of the effects of the decision on service delivery and any departmental responsibilities • Recognizing asset’s value, future value and costs are essential, therefore developing a strategic asset management plan is highly preferred and required • Such a strategic asset management plan would enable an effective and well organized asset and deliver services
Secured Borrowings / Securitization Transactions • The simplest form of monetization is merely to borrow money against the asset • These transactions can take the form of a simple commercial mortgage, from a bank, or a more complicated transaction, such as Commercial Mortgage Backed Securities • Can be on individual properties or as a pool • Increasingly done in local currencies to take advantage of lower borrowing rates in international markets.
Secured Borrowings / Securitization Transactions • Pros • Simple, well understood • Relatively short time to complete transactions • Relatively low transaction costs (e.g. no transfer taxes) • Limited corporate-level tax consequences • Cons • Limitation on borrowing amounts (e.g. 50-75 percent loan-to-value) • Possible limitation on interest deductibility for tax purposes • Increases company's leverage for debt covenant purposes • Company still exposed to real estate risks
Individual or Portfolio Sale-Leaseback Transactions • Property is sold to a third party and leased back to the company • Can be on individual properties or under a master lease for multiple properties • Can have potentially significant tax costs to sellers and may discourage potential, and otherwise qualified, candidates from engaging in these transactions • Financial accounting for these transactions can be complex, especially in the United States, which has specialized rules in this area
Individual or Portfolio Sale-Leaseback Transactions • Pros • Moderate transaction costs potentially including transfer taxes • Increasing number of buyers led to improved pricing • Possible tax deduction for rental payments • Many buyers exist and they can close transaction in reasonably short periods • Full realization of monetization value • Company no longer exposed to real estate risks • Cons • Tax consequences can be significant • Operating charge to P&L where there previously was no rent expense or need to pay market-based rents • Buyer generally looking for longer lease durations • Accounting can be complex unless normal leaseback is attained
“MLT enters into sale-and-leaseback agreement for 5 local logistics properties worth $778.3 mil” - The Edge 05 May 2018 • Mapletree Logistics Trust (MLT) is acquiring five logistics properties in Singapore for $778.3 million in a sale-and-leaseback deal. • The vendor is CWT, a Hong Kong-listed subsidiary of HNA • Upon completion of the deal, the properties will be 100% leased back to CWT for five to 10 years. • The five properties are all located in the western region of Singapore and comprise three chemical & ambient warehouses, one ambient warehouse and one temperature-controlled & food warehouse. • The five properties have a combined total gross floor area (GFA) of 3.21 million sf.
REIT Conversions • The term REIT conversion is used broadly to describe a very wide range of transactions in which the original entity transforms-either partially or entirely-into an REIT, including spin-off transactions • Such a transaction may be considered either “traditional,” if the property involved is similar to those normally seen in an REIT (e.g., retail or office buildings), or "non-traditional," if the property is more unique to the REIT market (e.g., billboard, timber, wires/infrastructure, etc.) • In a simple REIT conversion, the majority of the company's assets and operations qualify under the REIT tax requirements and are either owned directly by the REIT or its subsidiaries • While their potential for tax savings clearly benefits an organization, the decision to undergo a REIT conversion or spin-off is often made for additional reasons
REIT Conversions • There are other, potential benefits, including the perceived impact on financing costs, monetization of non-core assets, and the company's share price • Over the last few years, investors have been searching for yield and have been willing to pay more for higher dividend stocks, including REITs • Investor interest may see a slight decline in the face of potential interest rate hikes and other factors impacting the market, but all indications are that these investment types are here to stay • Many common REIT structures provide a company with a tax advantaged currency to acquire properties in fragmented industries
REIT Conversions • Finally, some companies are taking advantage of these transactions to reorganize themselves and recapitalize their balance sheets • A REIT conversion is certainly not without challenges. A company may need to substantially change the way it does business with its customers to bring its business in line with the technical REIT requirements • In other cases, a company may need to sell or spin-off portions of its business so that the remainder can elect REIT status. There will likely be many challenges in both completing the REIT conversion transaction itself and in maintaining REIT status post-conversion • There are also REIT-specific tax, operational, accounting, and financial and investor reporting issues that will need to be addressed considered from a costs/ benefit standpoint
REIT Conversions • Pros • Significant reduction in ongoing, combined taxes at entity level due to REIT status • Cons • Complex transaction or reorganization may be required, generating significant transaction costs, need for management attention, and time to consummate • Operating as a REIT may require the reorganization of or modification to business operations, contracts, and processes • Company still exposed to real estate risks
Spin-off • This transaction involves separating out the real estate from an existing company and moving it into a new company • In some cases, the existing company continues to own the operating business and leases the real property from the new entity at current market rates • Depending on tax law, it may be difficult to achieve a tax-free spin-off of real estate • Assessing the amount of the tax due on getting the real estate out of a corporation will be critical to the economic analysis of possible alternatives
Spin-off • Pros • Reduction in combined taxes for recurring operations • Potential to structure as a tax free spin-off (may now be limited, see above), but requires an additional, unrelated business that meets size limitations • Cons • Tax “toll charge” can be significant if • Costs were recently reduced with the reduction of the corporate federal tax rate in the U.S. from 35% to 21%. • Complex, significant transaction costs and time to consummate • Tax-free spin-off requirements can add complexity to the transaction from a business, tax, and regulatory filing perspective • May need to make a significant distribution to purge pre-REIT tax earnings and profits
“S$560m redevelopment of Funan mall to begin in Q3” The Business Times 22 July 2016
Asset Redevelopment “Funan mall trail-blazes into omni-channel retailing” EdgeProp 04 June 2018
Redevelopment of Funan DigitaLife Mall • Funan DigitaLife Mall has utilised 3.861 of its allowable Gross Plot Ratio of 7.0. As such, the mall currently has an untapped Gross Floor Area (GFA) of about 388,000 square feet. The redevelopment of Funan DigitaLife Mall will maximise the full potential of its site and excellent location. • Funan will close on 1 July 2016 for redevelopment works spanning three years. About 388,000 square feet (sq ft) will be added to the mall’s current Gross Floor Area of 482,000 sq ft, creating a sizeable integrated development measuring 870,000 sq ft – about the size of ION Orchard.
Redevelopment of Funan DigitaLife Mall • The proposed development and related costs including financing, technology and professional fees amounted to approximately S$560.0 million and will span over three years. It is targeted for completion in the fourth quarter of 2019. • After observing the revitalisation of Singapore’s Civic District in recent years, we saw the possibilities of incorporating more social and community elements into Funan DigitaLife Mall that will maximise the potential of its prime location in a vibrant lifestyle district.
Redevelopment of Funan DigitaLife Mall • In its place, we are creating Funan, an integrated development comprising six-storey retail mall, two office towers and one block of serviced residences. • Building on the legacy of its predecessor, the reimagined Funan will incorporate the tech experience throughout the entire integrated development, such as multi-dimensional cinema screens, the Central Business District’s first drive-through click-and-collect service and a smart car parking system. • By catering to new lifestyle needs, Funan is geared to serve this and future generations, just like how the old Funan has served the generations before.
