FNCE231 REIF Week 5 Building RE Companies 20230101

SMU Classification: Restricted
REAL ESTATE INVESTMENTS

& FINANCE
Lee Kong Chian School of Business
Dr Song Changcheng
1 1
FNCE231 Week
Real Estate Investments and Finance 5
2
Outline
• RE company: Ownership and financing

structure
• Growing a RE company:
REIT/REOC
• Real estate investment trust (REIT)
• Listed companies who own and operate income-
producing real estate.
• Distribute at least 90% of taxable income
• Real estate operating company (REOC)

• Listed companies who engage in real
estate investments
• Reinvest the money back into their business
• Higher corporate taxes than REITs.
4
Ownership Structure
REIT or REOC (Developer)

Equity/debt Returns
Overseas Tax-efficient Holdco
Local Holdco Why this structure?
Equity/debt
Asset What happens at this level?
5
Ownership Structure
Ownership Structure
Shareholders
Corporate Costs
Listed Developer Taxes
Financing – equity, debt, private, public
Conglomerate
Corporate Costs
Holdco A Income Tax Holdco B
→ Holding Company
owning many SingCos
Corporate Costs
Property Financing
Singco A Depreciation Singco B
Income Tax
→ Compliance & Legal Costs
Asset Level Certificate Development Pre-Sales Cashflow

Core Asset Property Tax Construction cashflow
Asset Property Tax
7
Financing Structure
THINK 4 QUADRANTS,
Each Country depending on the WHERE CAN I RAISE
local corporate rules has diff CAPITAL FROM? WHY AND
requirements, which then
WHY NOT?
impact returns
8
Source: Chapter 2, The Basics of Real Estate Finance, Finance for Real Estate Development, Charles Long
Financing Structure
• Lenders input funds in the form of • Owners and Investors provide funds in
debt/loans to finance the purchase of the form of capital to finance the land
buildings or the purchase of land and and buildings
construction of property • The real estate will generate returns for
• The real estate will then generate the owners and investors which are
income to pay for the loan received in the form of dividends and
capital gains
9
Financing Structure
Public
Participation,
Taxes and Fees
Public Sector (Government) grants Developer and Operator project their

permission for the construction of visions and use their skills on the Real
Real Estate and in return, they get Estate and get profits in return
taxes and fees from the real estate
Users occupy, sell, rent the real

estate and in return, they get to use
the premises
10
Summary:
Ownership and Financing Structure
• A good Structure can make an investment more attractive.
• The increased returns from creating a good investment structure
outweighs the efforts and costs
• Ownership structure:
• Tax benefit
• Some country pairs have low withhold tax for dividend. For example,
dividends from China to Barbados is subject to 5% withhold tax
• Ring-fencing risk and liabilities
• Easy to sell overseas holdco to international investors with tax
benefit
• Financing structure (Capital structure) :
• Tax shield with debt
• Benefit and risk of leverage
11
Outline
• RE company: Ownership and financing

structure
• Growing a RE company:
Growing a RE company
• Assuming you are the Chairman of the RE Company,

where do you begin?
1. Income, cashflow, balance sheet
2. Development of land
3. Long term investments
4. Land supply pipeline (or land bank)
5. Financial strength, ability to borrow
6. Fee based businesses?
7. Tech disruptions?
In the beginning…
In the beginning…
• Take stock of current situation:

• Where are you in the industry landscape: current
portfolio, asset types, geographical spread…?
• What are you good at doing?
• What do you love doing?
• What resources do you have: finance, brand,
human, skills, network, assets…?
• What do you dislike doing?
Real Estate: Business Model

• Asset heavy business model
• Property Development
• Buy land/enbloc→ Build→Lease→Sell (investor/REITS)
• Property Investment
• Buy building→AEI→Lease→Sell (investor/REITS)
• Asset light business model
• Asset management fee
• Property management fee
• Franchising fee, platform commission fee
Taking stock
Source: UOL 1H21 Presentation slides, https://www.uol.com.sg/investors-and-media/financial-results/

Taking stock

Taking stock

CapitaLand
Capitaland
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
%Revenue from Property development %Revenue from Property investment %Fee-based revenue
What is the business model?

PropTech & Funds
1. RE fund management businesses?
2. Tokenization and digital prop management?
RE Segments
1. Industrial? Geography
2. Retirement Which 1. New countries?
homes? way to 2. Or same
3. Data centres? countries and
4. Cloud kitchens? grow? new segments?
5. Student
hostels?
M&A
1. Acquire RE companies?
2. Divest and streamline portfolio?
3. Spin off a REIT?
RE segment: Risks spectrum
Source: Mercer
22
RE segment: Risks spectrum
Source: Mercer
23
Management style
Management heavy Management light
Retail Office
Hotel Industrial: logistics
Senior living Data center
Student
accommodation
24
Geography Consideration
• Demand factors for different RE segment:
• GDP growth, employment growth, logistics growth
• Policy environment
• Political uncertainty: Myanmar coup 2021
• Interest rate policy
• Taxation policy
• Liquidity risk: investment cycle
City Developments Limited
26
Far East Orchard Ltd

Liquidity
● Degree to which an asset or security can be Most Liquid

bought or sold in the market without Money/FX
affecting the asset’s price
● Investors value liquidity over yields because Stocks and Bonds
they are somewhat inversely proportional Precious Metals

● High liquidity implies a lower risk as the
Real Estate
investment may be converted to cash quickly,
Art
and therefore investors accept lower yields
● Illiquid assets may also attract higher costs of Antiques
transaction: stamp duties, tax, commissions,
insurance, handling charges, etc
Least Liquid
28
Source: https://www.investopedia.com/terms/l/liquidity.asp
Illiquidity
Long transaction process →

High Initial matching of buyer and
capital outlay seller, structuring the
ownership, transfer of titles
Affected by
local markets Locality of property
Source: https://www.investopedia.com/terms/l/liquidity.asp 29
Why liquidity premium?

• Suppose the following two houses have the same
characteristics. The estimated price is 1.1 million in
one year. You can invest in one house, which house
do you choose?
• House 1: The price is 1 million now, and you can sell the
house in 7 days
• House 2: The price is 1 million now ,you can sell the
house in 30 days
Why liquidity premium?

• Currently: both houses have 10% expected return
• Investors prefer house 1 with liquidity: they can sell
house 1 in a shorter time
• The price of liquid house 1 increases, the return of
liquid house 1 decreases.
• The price of illiquid house 2 decreases, the return of
illiquid stock 2 increases.
• In equilibrium:
• return liquid house 1<return liquid house 2
• Investor require higher returns to compensate low
liquidity
• Assuming you are the Chairman of the RE Company,

where do you begin?
1. Income, cashflow, balance sheet
Do you have
2. Development of land
the Human
3. Long term investments
Resources to
4. Land supply pipeline (or land bank)
5. Financial strength, ability to borrow
execute the
6. Fee based businesses?
plans?
7. Tech disruptions?
Discussion
• How do you grow a RE from investment

side?
Growing a RE company:
Investment side
• Geography:
• Regional vs Global
• Segment
• Traditional sectors
• Trend: data center, medical office building (BOM)
• PropTech
• Business model
• Build, buy and asset enhancement
• Asset heavy vs Asset light
• Merge and Acquisition
Growing a RE company: Geography

CapitaLand Commercial Trust-Acquisition of
Main Airport Center
Source: https://cct.listedcompany.com/newsroom/CCT-3Q-2019-results-presentation_23Oct2019.pdf 35

Demand trend--Medical Center
Demand trend--Data Center
Demand trend--Life science labs
• Life sciences employment has been steadily growing
• Industry innovation depends on quick and efficient access to Good
Manufacturing Practices (GMP)–compliant real estate space.
• GMP: US FDA regulations governing the safety, sanitation and quality-control
procedures involved in the production of pharmaceuticals and medical devices.
Demand trend--Life science labs
•COVID-19 produced unprecedented
demand for vaccines, test kits and
related equipment
•Hive of activity in pharmaceuticals/
biomedical sector
•Demand for high-tech and cold-chain
facilities
FNCE 231 Song Changcheng 40

Demand trend—Student Accommodation
Diversify to PropTech
COQOONS coworking, located in Harbourfront
tower 2, is a subsidiary of MapleTree
Asset enhancement
Funan Mall Redevelopment
Average monthly shopper traffic was more than 70% higher than
before its redevelopment.
Market valuation increase: 367 million (2015) to 775 million (2019)

Asset Light business model
CapitaLand Restructuring 2021
Indirect fully owned unit
of Temesek Holdings
Ecosystem within CapitaLand Group
Merger and Acquisition
49
CMT merge with CCT

Discussion
• What is the key purpose of M&A?

• What are the benefits of M&A?
• What are the risks of M&A?
53
Merger and Acquisition
• CapitaLand Mall Trust and

CapitaLand Commercial Trust
• Leveraging economies of scale
• S$11.4 billion combined market
capitalisation
• S$22.4 billion total portfolio
property value
• Enhanced resilience and
stability through market cycles
54
Summary: Merger and Acquisition

• Key purpose: create more value for shareholders
• Increase cashflow/DPU rather than aiming at bigger
• Benefits:
• Economics of scale:
• Less manger cost, lawyers cost,
• Less disruption on DPU of AEI/divestment
• Synergy: mixed use trend, such office plus retail
• Diversification : geography, asset class
• Risks:
• Valuation: overpay
• Synergy: overestimate
• Organizational change
55
Discussion
• Can we transform one RE segment to

another segment, completely or partially?
• What would you suggest during the

pandemics?
Conversion between RE segment
• Types of asset enhancement/redevelopment
• Office → retail
• Retail → mixed, co-working, co-living
• Retail → storage/logistics
• Hotel → residential
• Hotel → co-working
Office → Retail
• Junction 8 (Bishan) expansion in 2004
• Office tower space → Retail mall
Retail → co-working, co-living

• Mixed development: synergy among retail, office,
residential
• Convert underutilized retail space to co-working/co-living
• A good shopping experience is proximity to work/home
• Office/home guarantee recurring foot traffic
59
What data tell us?

• Scottsdale Fashion Square (Arizona) launched a co-
working space l in January 2019
60
Retail → Storage/Logistics
• E-commerce reduce the demand for retail and increase
the demand for warehouse/distribution space
• Empty mall→ Last mile delivery and fulfillment center
61
Retail → Storage/Logistics
• Amazon has already converted 25 mall spaces into
distribution centers since 2016
• WSJ Video: Why Amazon Is Gobbling Up Failed Malls
62
Source: https://www.youtube.com/watch?v=k53IDbtP-58
Hotel → Residential
Hotel → Co-working
Source: https://www.hospitalitynet.org/news/4100694.html
Why don’t we see much

conversion across RE segment?
Make investment decisions

• Understand the pain point in the
industry/region
• Business insight/Entrepreneurship
spirit/investment thesis:
• Is the investment a good product or service?
• How large is the market size of particular product
or service?
• With large market size, even 1% of the big pie is good
enough
• Numbers: Financial calculation
66
• Is the investment profitable?
Make investment decisions

• For those deals to be viable, prices will have to fall further
to make NPV positive
Office
• What are the future trends in real estate industry?

• Which RE segment?
• Which region?
• Which technology?
• Environmental, social and corporate governance (ESG)?
• Video: 2020 Emerging Real Estate Trends
https://www.msci.com/real-estate-trends
Discussion: Sustainability
• UN Environment Global Status Report of 2021 shows
that buildings and construction account for
• 36 percent of global final energy consumption
• 37 percent of energy-related carbon emissions.
• How to reduce energy consumption and carbon

emission for real estate industry?
69
Government policy
Tax Subsidy
Singapore:
Green Mark Gross Floor Area
Incentive Scheme (GM-GFA)
Source: https://www1.bca.gov.sg/buildsg/sustainability/green-mark-
incentive-schemes/green-mark-gross-floor-area-incentive-scheme-gm-gfa
70
Green mortgage/loan
71
Green mortgage/loan
• Green mortgage/loan: loan interest rate based on
sustainability performance
• However, the revenue will be low since standard
deposit rate/interbank rate remain unchanged.
• Is the risk of green building lower?

• How do bank finance the green mortgage/loan?
72
Is the risk of green building

lower?
Tenants care and affect demand for green building
73
How do bank finance the green

mortgage/loan?
• Borrow from central banks green loan: green central
banking
• Nov 2021: The People’s Bank of China provide a one-year
facility for commercial banks at 1.75% to subsidize their
lending to green initiatives. (one-year prime loan rate=3.85%)
• Issue green bonds to investors:

• Nov 2021: NatWest (UK bank) issued a £600m seven- year
green bond to support the issuance of green mortgages.
74
Green bond
• CDL green bond is issued under the S$700 million secured Medium
Term Note (MTN) Programme
• The first green bond by a Singapore listed company
• The two-year senior secured green bond raised S$100 million at 1.98%
fixed rate which is due in 2019
• Investors comprised mainly financial institutions and fund managers
• The green bond mainly enhance energy and water efficiency at
Republic Plaza, CDL’s flagship Grade A office building in the heart of
Singapore’s Central Business District.
75
Green bond
76
Green bond
• Strong demand from investors with preference to invest
in sustainability,
• High net worth individuals, family office, ESG fund
• Benefit:
• Cost of debt: higher demand increases the bond price,
reduce the borrowing cost of bond
• Liquidity: higher demand increase the liquidity of green
bond
77
Green Fund
23 November 2021
Current Issues: various green building ratings, LEEDS(US), BREEM (UK), Green
Star (Australia), BCA Green Mark Scheme (Singapore)
78
Sustainability
• How to reduce energy consumption and carbon
emission for real estate industry?
• Technology:
• Construction: 3D printing
• Operation: prediction analysis in retail/office; data
center liquid cooling system
• Government policy: tax and subsidy
• Finance:
• Green mortgage/loan: private debt
• Green bond: public debt
79 • Green fund: private/public equity

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SMU Classification: Restricted

REAL ESTATE INVESTMENTS

• RE company: Ownership and financing

• Real estate operating company (REOC)

REIT or REOC (Developer)

Overseas Tax-efficient Holdco

Local Holdco Why this structure?

Asset What happens at this level?

Asset Level Certificate Development Pre-Sales Cashflow

Public Sector (Government) grants Developer and Operator project their

Users occupy, sell, rent the real

• RE company: Ownership and financing

• Assuming you are the Chairman of the RE Company,

• Take stock of current situation:

Real Estate: Business Model

Source: UOL 1H21 Presentation slides, https://www.uol.com.sg/investors-and-media/financial-results/

Source: UOL 1H21 Presentation slides, https://www.uol.com.sg/investors-and-media/financial-results/

Source: UOL 1H21 Presentation slides, https://www.uol.com.sg/investors-and-media/financial-results/

What is the business model?

RE segment: Risks spectrum

RE segment: Risks spectrum

Management heavy Management light

Hotel Industrial: logistics

Senior living Data center

City Developments Limited

Far East Orchard Ltd

● Degree to which an asset or security can be Most Liquid

they are somewhat inversely proportional Precious Metals

Long transaction process →

Why liquidity premium?

Why liquidity premium?

• Assuming you are the Chairman of the RE Company,

• How do you grow a RE from investment

Growing a RE company: Geography

SMU Classification: Restricted

FNCE 231 Song Changcheng 40

SMU Classification: Restricted

CMT merge with CCT

• What is the key purpose of M&A?

• CapitaLand Mall Trust and

Summary: Merger and Acquisition

• Can we transform one RE segment to

• What would you suggest during the

Retail → co-working, co-living

What data tell us?

Why don’t we see much

Make investment decisions

Make investment decisions

• What are the future trends in real estate industry?

• How to reduce energy consumption and carbon

• Is the risk of green building lower?

Is the risk of green building

Tenants care and affect demand for green building

How do bank finance the green

• Issue green bonds to investors:

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