K-REIT Asia - has signed two leases at Prudential Tower

Volume of enquiries has increased with renewed optimism and a positive swing in sentiment. Potential tenants have become more confident to commit to leasing agreements and are less fearful of further drop in rentals. However, it is too early to judge if market has bottomed.

According to management, office REITs has rebounded more significantly as they corrected more during the down cycle. Most investors were also too pessimistic about retrenchment and consolidation in the financial services industry. There is positive impact from government's Jobs Credit Scheme.

K-REIT has signed two leases at Prudential Tower, thus there is slight improvement in occupancy compared to 87.7% at Mar 09. Company is also talking to potential tenants for new leases at Bugis Junction Towers.

Government's measures have cushioned the negative impact from economic downturn. The Confirmed List for 1H09 Government Land Sales Programme has been suspended. The ban on conversion of office space in the Central Area to other uses has also been lifted. Development cycle for office buildings is three to five years. Thus, supply of new office space is unlikely to further increase.

Availability of funding via bank loans has improved significantly. There is a slight improvement in credit spread that banks charges, although the quantum is not obvious in management's opinion.

Management sees advantage in longer tenure of five to seven years provided by CMBS. Cost of borrowings for long-dated CMBS is not as prohibitive, compared to bank loans, as yield curve is not as steep. K-REIT has a S$190m CMBS, which matures in May 2011.

Management continues to focus on active asset management by improving tenant mix and lease expiry profile to maximise earnings. Management plans to obtain BCA Green Mark for all its buildings, which could result in up to 2% increase in available floor area.

K-REIT revalues its investment properties once per year. The next revaluation will be conducted in Dec 09. K-REIT has been conservative in valuing its assets and usually marks prices to the lower end of market range. It currently value Prudential Tower at S$2,066psf, Keppel & GE Towers at S$1,347psf, Bugis Junction Towers at S$1,265psf and One Raffles Quay at S$2,213psf. In our opinion, risk of severe markdown in asset values is quite low, especially given recent rebound in transaction prices for strata office space.

Potential pipeline from sponsor Keppel Land includes Ocean Financial Centre and one-third interest in Marina Bay Financial Centre in Singapore, Saigon Centre and International Centre in Vietnam and Wisma BCA in Indonesia. Potential overseas markets for acquistions include: developed countries with stable currencies such as Japan, South Korea and Hong Kong. Management also attracted to key gateway cities in emerging economies, such as China, Vietnam and Indonesia, especially in places where there is limited stock of prime office space.

We suggested restructuring by having associated company One Raffles Quay Pte Ltd borrows on a secured basis. This could reduce gearing at K-REIT. Management plans to explore feasibility if it results in lower cost of borrowings. Any changes will require agreement with consortium partners Suntec REIT and Hong Kong Land.

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