SINGAPORE (Dec 11): On a chilly November morning, Manulife US Real Estate Investment Trust took a small group of analysts and journalists on a property tour through mid-town and lower mid-town Manhattan and across the Hudson River to Jersey City. One key stop was 10 Exchange Place, a property that could benefit from the economic recovery and shifting demographic trend in the US.
The property is particularly important to Manulife US REIT investors. It was acquired in October for US$313.2 million ($422.8 million). To fund the purchase, the REIT raised US$208 million from unitholders, through an issue of 299.29 million new units based on a 41-for-100 rights issue at 69.5 US cents per new unit. Manulife US REIT has four other office buildings in the US, but 10 Exchange Place is now its second-most-valuable asset, after Michelson in Orange County, which is valued at US$342 million.
10 Exchange Place is a 30-storey Class A building next to a train station on the Hudson Waterfront. It has an unobstructed view of Manhattan’s skyline. The building has minimal supporting columns and its floor plates range from about 24,000 sq ft on the top floors to about 39,000 sq ft on the lower floors. The property has a net lettable area (NLA) of 730,598 sq ft and a weighted average lease to expiry of 5.8 years, boosting the REIT’s WALE to 5.9 years. It has a total of 25 tenants and the top five tenants (by cash rental income) are Amazon Corporate, ACE American Insurance Co, Rabo Support Services, Kuehne & Nagel and Opera Solutions.
Rents at Exchange Place, at around US$40 psf per annum, are notably one-third cheaper than in Hudson Yards, an urban revival and redevelopment project on the west side of lower mid-town Manhattan. Hudson Yards rents can range from US$65 to US$80 psf per annum.
With a labour shortage looming, companies in the US want to be where the young and educated live, and the young are attracted by facilities. Various facilities are available at 10 Exchange Place, including a newsstand, coffee house and on-site food service options, as well as in-building parking located on the second to sixth floors, with a total of 467 parking lots.
As at Sept 30, 10 Exchange Place had a committed occupancy of 97%, which is much higher than the rest of the market. The overall vacancy rate on the Hudson Waterfront stood at 14.4% in 2Q2017. “This is a building you give directions from, not to,” says Ken McCarthy, principal economist at Cushman & Wakefield, during a presentation last month in Jersey City. The property is about an hour’s drive from the Newark Liberty International and JFK Airports, depending on the traffic.
McCarthy attributes the high vacancy rate on the Hudson Waterfront to the size of the office market. “The market is relatively small in New Jersey, with 21 million sq ft and it tends to be volatile because of that. A large tenant moving in or out has a large impact on the market.” In 3Q2017, seven large blocks of space turned vacant. These seven spaces account for almost half of the available square footage on the market.
Yet, overall rents remained firm. “You’ve seen a spike in rents and also an increase in vacancy rates. That’s because Mack-Cali Realty Corp, a REIT and the largest landlord in Exchange Place, is bullish on the market and raised their rents,” McCarthy says. Also, the property market is recovering and some parts of Manhattan are experiencing rents that are above pre-global financial crisis levels.
“The office market has experienced a resurgence. Rents in Manhattan have gone up. I always look at Jersey City as an extension of Manhattan,” McCarthy notes. Moreover, no new construction of office buildings is taking place or planned on the Hudson Waterfront.
Urban revival, positive demographics
According to McCarthy, a couple of trends are taking place within the state of New Jersey that are beneficial to the office sector in Jersey City. These are a change in demographics and a residential boom. Unlike developed Asia, where population growth is miniscule and falling, the US population continues to grow and demographics are positive.
“One of the phenomena we’re seeing is the arrival of the millennial generation, people born between 1980 and 2000. The modal age with the most people in the US is 27, followed by 26 and 25,” McCarthy says. Millennials prefer to live in cities. “Across the country, every major city has seen an influx of young professionals taking advantage of the urban environment. Cities across the US are a lot more attractive,” McCarthy points out.
Companies are moving to where young professionals like to live. For instance, IBM moved its Watson artificial intelligence division to New York City (NYC) although its head office is in Armonk in upstate New York. “The city has become a lot safer and you’ve seen an influx of young professionals, and companies that want to hire them are following them there,” McCarthy says.
Jersey City is the administrative capital of Hudson County, and the latter has benefited from the demographic trend. Growth in the county’s population has been much stronger than in the rest of New Jersey. The millennial population accounts for 33.48% of the county’s population compared with 31.1% for NYC, 25.75% for New Jersey and 27.25% in the US. “It’s convenient enough for them to travel to Manhattan to work, and it’s less expensive to live here,” says McCarthy.
All this has led to an influx of businesses and companies from other suburban areas as well as those looking for cheaper options to NYC. Previously, suburban campus locations were popular with companies, but businesses are moving to where the population growth is. “For example, the tenant at top of this building [10 Exchange Place] was from suburban New Jersey and didn’t want to go all the way into Manhattan,” says McCarthy.
Diversification of the Hudson Waterfront tenants has been led by the fintech, garment, media and publishing industries. “As the younger generation moved into Jersey City, the tenants are coming after them. That points to a diversification of the local tenant base. It’s not just Manhattan overflow anymore, the tenant base comprises companies coming in from the suburbs,” says McCarthy.
The second major trend is a residential boom, the largest in Jersey City’s history. It has gained 15,000 new residents since 2010. New residential projects will add 12,000 units to the city’s current inventory of 7,000 units. A further 18,000 units have been approved for development. One of Jersey City’s largest investors is China State Construction Engineering Corp. It is developing Park and Shore, a high-end 37-storey residential tower with 358 residences.
Competition from Hudson Yards
The Hudson Yards redevelopment project in the western part of lower mid-town Manhattan is the largest private real estate development in the history of the US, and is attracting capital from global investors. Hudson Yards is so called because the buildings are being constructed on 28 acres over a working rail yard, 30 active train tracks and three rail tunnels, using novel construction techniques.
Of the 18 million sq ft of commercial and residential space being built, 10 million sq ft is commercial. It will include more than 100 shops, including New York’s first Neiman Marcus, a collection of restaurants, 4,000 residences, The Shed (a new centre for the arts), 14 acres of public open space and a 750-seat public school. Buildings will be completed in stages, with the entire project scheduled for completion in 2024.
Companies such as Time Warner, HBO, CNN, Warner Bros, BlackRock and Wells Fargo are planning to move to Hudson Yards, while Coach, L’Oréal, BCG Digital Ventures, Intersection, SAP and Sidewalk Labs have already relocated.
McCarthy is sanguine about the 10 million sq ft of commercial space coming on stream and the competition it will pose to 10 Exchange Place as the two areas are complementary. “What causes me comfort is we’re constrained. There is not a lot of speculative building here and you don’t have that oversupply problem.” What concerns him are equity valuations. “The stock market is getting a little frothy, PE ratios are not up to 1999 levels, but are getting there. I feel like we’ve seen this movie before, but those are the things we’re keeping an eye on.”
Acquisitions to boost DPU
In July, Manulife US REIT acquired Plaza at 500 Plaza Drive, a Class A suburban building with 461,525 sq ft of NLA in Meadowlands, Secaucus, also in New Jersey. The building is surrounded by one million sq ft of retail property, including outlet and discount stores and supermarkets. Meadowlands also has sports facilities, hotels, a cinema, restaurants and residential units under construction. Consultants at JLL say tenants are interested in access to the labour pool and public transport as well highway accessibility with free parking.
As at Sept 30, Plaza had a WALE of 8.6 years and a committed occupancy rate of 98.9%, with 99.9% of leases by NLA having built-in rental escalations. This will provide organic growth to the rental revenues.
While some 750,000 sq ft of space is being built at Meadowlands, some old buildings have been demolished and repurposed for retail space. From 2000 to 2017, the net growth inventory was just 170,000 sq ft. The vacancy rate in Meadowlands is low, at 5% to 8%.
When Manulife US REIT acquired Plaza, it said its pro forma net property income for FY2016 would increase by 17.7%, from US$30 million to US$35.3 million. It also announced that 10 Exchange Place would add 2.2% to the 2016 pro forma distribution per unit yield, raising pro forma DPU yield to 6.3% from 6.1%.
The majority of the leases at 10 Exchange Place have built-in rental escalations, providing organic growth to the rental revenues.
For the first nine months of the year, Manulife US REIT announced DPU of 4.83 cents, up 8.5% from projections when it listed in May last year. DBS Group Research forecasts DPU of 5.98 cents for FY2018, representing a 12% y-o-y growth. “Our US site visit reaffirms our confidence in Manulife US REIT’s ability to capture the upside from a sustained US office upcycle. Its recent acquisition of 10 Exchange Place further expands exposure to the growing New Jersey market,” DBS says in its report. “We believe the REIT deserves to trade at a higher price to book of 1.2 to 1.25 [times], given its ability to execute on DPU-accretive acquisitions.” It reaffirmed its “buy” rating on Nov 29.
Foreign REITs returning to Singapore
Some investors will recall that at the height of the market in 2006 and 2007, three Australian sponsors listed their mainly Singapore assets in real estate ainvestment trusts on the Singapore Exchange, and two others listed funds. In the wake of the global financial crisis, the REITs and funds came under new management and have changed their names. Macquarie MEAG Prime REIT has become Starhill Global REIT, Allco Commercial REIT is now Frasers Commercial Trust and MacarthurCook Industrial REIT is AIMS AMP Capital Industrial REIT.
Now, it seems that the foreigners are returning. Since 2014, six REITs with foreign assets and sponsors have listed on SGX. Two of them were listed this year. Among the sponsors are an insurer, a department store and supermarket operator, an e-commerce logistics operator and a couple of asset managers.
As these REITs establish a following, some of them could come to be viewed as alternatives to one another. For instance, Manulife US REIT could find itself increasingly compared to the recently listed Keppel-KBS US REIT by investors keen on gaining exposure to US office properties.
Keppel-KBS US REIT raised US$553.1 million ($746.8 million) through an IPO of 628.56 million units at 88 US cents each and listed on Nov 10. The portfolio comprises 3.2 million sq ft of net lettable area (NLA) in 11 assets spread over seven cities: Seattle, Sacramento, Denver, Austin, Houston, Atlanta and Orlando. The initial yield at the IPO price is 6.8%. Keppel-KBS US REIT last traded at 91 US cents.
According to Keppel-KBS US REIT’s prospectus, four of the 11 properties are Class B properties and one of its campuses has Class A and B buildings. As at listing, Keppel-KBS US REIT’s gearing was 36%. The REIT’s manager has articulated a strategy of acquisitions and organic growth. Its current market cap is US$565.7 million. Units in this REIT have performed admirably, rising three cents, or 3.4%, from its IPO price.
By comparison, Manulife US REIT has a sponsor that is more familiar to local investors. Its gearing is 33% and its portfolio comprises Class A, or trophy, buildings, although two — Michelson in Orange County and Plaza in Secaucus, New Jersey — are in suburban locations. Class A buildings have large windows and floor plates, high ceilings and are column-free. Their valuations are likely to be more resilient during downturns.
European properties
There are now also more alternatives for investors who want exposure to European commercial properties. On Nov 30, Cromwell European REIT listed on the local market. It was its second attempt. At its IPO price of 55 euro cents, it had a market capitalisation of about €866 million ($1.37 billion), based on its 1.57 billion units in issue. The appraised value of the portfolio is €1.35 billion.
Its portfolio comprises 74 properties located in Denmark, France, Germany, Italy and the Netherlands with an NLA of 1.1 million sq m and a committed occupancy rate of 87.7%. These properties are a mixture of industrial, commercial and retail space. The projected distribution yield for 2018 is 7.8%, based on the IPO price, and for 2019, it is 8%. The net asset value per unit at IPO is 53 euro cents. The REIT had attempted to list in September with a portfolio that included seven retail properties in Poland.
Another REIT with European assets listed in Singapore is IREIT Global. It listed in August 2014 at 88 cents, raising $369 million. At the time, its manager was 65%-owned by Shanghai Summit, which is controlled by Tong Jinquan. A further 19% of the manager was held by Lim Chap Huat, the owner of Soilbuild Group, which is involved in construction and property development. The remaining 16% was owned by an individual named Itzhak Sella.
However, IREIT Global is now run by a different manager. In November 2016, Tikehau Capital, a French property asset manager, in which Temasek Holdings has a 3% stake, acquired an 80% stake in IREIT Global’s manager. Tong and Lim hold stakes of 15.48% and Lim 4.52% respectively in the manager. As at Dec 1, Tong held a 47.3% stake in the REIT, down from 60% at IPO, and Lim 10.98%, down from 19.9% at IPO.
IREIT Global currently owns four business campuses, one each in Berlin, Bonn, Darmstadt, and Munster; and a fifth property called Concord Park in Munich. In November last year, IREIT Global held an extraordinary general meeting to change its investment mandate from business campuses to include retail and industrial property. The REIT raised $88.7 million in a rights issue in August 2015 to part-finance the acquisition of a German business campus, supported by its two largest unitholders.
More Chinese REITs
There are also more choices now for REIT investors looking to China. In July last year, EC World REIT, which owns Chinese logistics assets, raised $368.2 million through an IPO at 81 cents a unit. It owns six assets with a total NLA of 698,478 sq m, valued at the equivalent of $1.33 billion as at Dec 31, 2016. They are Chongxian Port Investment, Chongxian Port Logistics, Fu Zhuo Industrial, Stage 1 Properties of Bei Gang Logistics, Fu Heng Warehouse and Hengde Logistics. E-commerce accounts for 30.7% of its portfolio by NLA. The REIT announced a DPU of 4.52 cents for the nine months to Sept 30, translating into an annualised yield of 7.93%.
Then, there is BHG Retail REIT, which raised $275.5 million through an IPO in December 2015 at 80 cents. It has five retail properties located in Beijing, Chengdu, Hefei, Xining and Dalian. Its DPU for the year to Sept 30 rose 3.3% to 4.15 cents, giving an annualised yield of 7.52%. -- Goola Warden
