Sabana REIT progresses to the next phase of growth

As manager, we have been executing on our refreshed strategy since 2018 to deliver value for our unitholders. The refreshed strategy includes three key pillars — proactive lease and asset management, asset enhancement initiatives (AEI) and rejuvenation of select assets — which are underpinned by prudent risk and capital management as well as ongoing cost rationalisation.

We are seeing the fruits of our labour from the disciplined execution of this strategy over the past three years. In July, we announced our progression on the next phase of growth with a strategic update along four key pillars as outlined in the charts below.

2. Can you share more about the removal of the Shari’ah compliance requirement? How does this affect the REIT?

Sabana REIT will be removing the Shari’ah compliance requirement in the group’s investment mandate effective on or around Oct 21. The Shari’ah compliance requirement has differentiated us in the past, and we are grateful for the ecosystem of support it has given us access to.

Our decision was made carefully, following feedback from unitholders, feasibility studies and analysis of growth opportunities, to accommodate the changing profile of our tenants and enhance flexibility for our next phase of growth.

Some immediate and future benefits include:

• Enhanced balance sheet resilience for us to gain access to more diversified funding sources.

• Diversification of the investor base allows us flexibility in investments beyond Shari’ah compliant industrial properties and enables us to appeal to a wider pool of investors.

• Greater flexibility in capturing growth opportunities and delivering on refreshed strategy through exposure to a larger pool of diversified and potentially higher-rental paying tenants for our properties.

• Potential cost savings in the long-run as Shari’ah-related compliance costs will no longer be incurred.

3. Can you elaborate more on the REIT’s distribution policy?

Our distribution policy is to pay out at least 90% of distributable income to unitholders on a half-yearly basis.

To enable our unitholders to participate in our long-term growth, we resumed the distribution reinvestment plan (DRP) for the distribution declared for 1H2021.

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See: Strange developments at Sabana REIT's manager

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This will strengthen our working capital reserves, conserve cash from operations and allow us more financial flexibility with more cash retained.

4. What are the key focus areas for Sabana REIT in the next two to three years? What notable developments can unitholders expect from Sabana REIT in the near future?

Our priority in the near term is to improve and future-proof our portfolio by undertaking prudent AEI and select rejuvenation to attract quality tenants from expansionary sectors while ramping up occupancy. Assets identified include 8 Commonwealth Lane, 10 Changi South Street 2 and 151 Lorong Chuan (New Tech Park).

Also noteworthy is the successful opening of our new NTP+ lifestyle mall at our flagship New Tech Park in 1Q this year, which is a positive catalyst. The occupancy of NTP+ stood at 97.4% as at June 30 after attracting a new, diverse tenant mix including from the food and beverage and retail sectors.

5. How has the pandemic changed the REIT’s strategy?

The pandemic has underlined the resilience of our refreshed strategy and we remain committed to its key pillars, including asset rejuvenations to attract tenants including those from expansionary sectors, and continued proactive lease management.

To capitalise on growth trends and navigate uncertainty, we will continue to calibrate our portfolio and tenant mix to find the optimal mix while keeping an eye on prudent liquidity and capital management.

Our recent initiative to reintroduce the DRP will not only allow Unitholders to participate in the REIT’s long-term growth but also helps to improve the Sabana REIT’s financial position.

6. What are some of the risks for the REIT and how do you manage them?

While Singapore’s economy is expected to recover, the manager believes that the landscape remains challenging with various unknowns in living with Covid-19. We have to remain nimble in adapting to still evolving situations, actively managing our portfolio and providing the right solutions for our tenants, which have underpinned our resilient performance so far.

For example, our AEI at 151 Lorong Chuan and rejuvenation works carried out at 23 Serangoon North Avenue 5, 10 Changi South Street 2 and 8 Commonwealth Lane have improved our portfolio valuation to $862.2 million as at June 30 from $840.1 million as at Dec 31 last year, by being more attractive to tenants especially those from expansionary sectors requiring upgraded main lobbies and amenities with higher specifications such as power provision.

7. What are some tailwinds and headwinds in the industrial real estate market?

Market watchers expect the likes of electronics, healthcare and logistics clusters to continue driving demand for industrial space. This is in tandem with the sustained rise in e-commerce, food logistics, and medical manufacturing which will require more modern specification facilities.

For these reasons, we are continuing with asset rejuvenations and recalibrating our tenant base to be even more resilient. On the flip side, the retail market (to which the REIT has increased exposure through our NTP+ mall) has yet to reach full recovery and we expect any resurgence of Covid-19 will potentially cloud its outlook.

8. What are some emerging trends that you foresee and plan to tap on, and how will the new trends affect the REIT’s model?

As the line between work and living spaces increasingly blurs, we saw an opportunity for industrial buildings to incorporate more commercial or community spaces — to live, work, play and entertain — all within convenient boundaries.

This was one of the reasons for our AEI at New Tech Park, where we added the new lifestyle mall (NTP+) to complement the core industrial block.

Such integrated projects are keenly sought by businesses, who in some cases are willing to pay better rents.

As Singapore continues to shift towards a new economic focus, we are strengthening our tenant base in more defensive, growth clusters, including the electronics, healthcare, data centre and telecommunication and logistics and supply chain management sectors.

In this regard, we have onboarded notable tenants such as KLA Corporation, AEM Singapore, Thermo Fisher Scientific, Qala Singapore and Kerry Logistics Centre.

9. Environmental, social and governance (ESG) has increasingly been a key focus, how is Sabana REIT committed to sustainability?

Our approach to sustainability is built upon our considerations for ethics and social responsibility in our investment and business decisions, as well as our commitment to our key stakeholders. Across the REIT, we are deploying more holistic environmental strategies as part of our continued ESG commitment. NTP+ is our first BCA Green Mark certified project with integrated environmental strategies to enhance spatial environment, improve comfort for tenants and public and at the same time save the environment.

These initiatives include the façade and roof design, energy enhancement, water conservation techniques, waste and recycling and green transportation and access. At the manager level and on the governance front, we continue to maintain a fully independent board to ensure alignment with unitholder interests.

10. What is Sabana REIT’s value proposition to its existing unitholders and potential investors?

We are focused on our commitment to growth and resilience through our refreshed strategy, which takes a longterm approach. Our focus on AEI and asset rejuvenation for our properties — which will continue — are delivering results, evident from our 1H 2021 improved performance. The removal of the Shari’ah compliance will provide us access to more diversified funding sources and enable us to appeal to a wider pool of tenants for our next phase of growth.

Candace Li is a research analyst with the Singapore Exchange