Sunday, March 15, 2009

Mapletree: No 15% rent cut

March 14, 2009

Modest cuts possible for ex-JTC tenants if economy worsens

By Joyce Teo

MAPLETREE Investments said yesterday it might consider modest rental cuts for aggrieved industrial tenants at its ex-JTC properties - if economic conditions deteriorate further.

Many tenants have petitioned Mapletree, a Temasek Holdings unit, for hefty rent cuts to help them cope with tough market conditions.

They are also upset to have missed out on a 15per cent rental rebate granted by JTC Corp as part of the Government's Resilience Package.

This is because the rebate was granted after JTC sold $1.7billion worth of its flatted factories, stack-up buildings and ready-built assets to Mapletree last July.

These properties are now held by Mapletree Industrial Trust (MIT), a private Reit that is 30.5per cent owned by Mapletree and the rest held by other investors such as Arcapita.

One MIT tenant who has rented his ex-JTC factory space in Lorong Bakar Batu for 22 years, Mr Foong Khai Leong, told The Straits Times: 'The rents keep going up, business is going down...and now the Government is giving a rental rebate to tenants of JTC...I not only cannot enjoy the rebate, I may now have to cough up more when I renew my lease.

'If we don't fight for lower rents, we will have little choice but to fold up the business. Who's going to pity us?' said the managing director of May Tat Plastics.

MIT said it will not be cutting rents for now, even as the downturn hits small and medium-sized enterprises (SMEs). 'We are also similarly impacted,' said Mapletree Investments chief executive Hiew Yoon Khong. He said a 15per cent rental cut was definitely out as it could trigger a loan default for MIT. 'In this environment, we can't take that kind of risk.'

However, a smaller rent cut could happen. 'If the environment continues to deteriorate, we will consider it,' said Mr Hiew.

Some observers are sympathetic to the tenants' plight. 'It's quite unfortunate. The timing is bad as just several months ago, they were JTC tenants,' said Colliers International director of industrial sales Tan Boon Leong.

Many of MIT's tenants will likely be affected as they are SMEs occupying the cheapest of the ex-JTC factories. JTC rents are generally below market rates, said Mr Tan.

But, they need to change their mindsets. 'They cannot expect the landlord to give them the full rebate because this landlord also has to account to shareholders,' said Mr Tan.

MIT's financing burden has risen as it requires an additional capital top-up of $140million. Its interest costs have almost doubled; it faces stricter loan convenants and it has had to defer cash distributions.

Mapletree Investments' CEO (Industrial) Phua Kok Kim said: 'If we have difficulty filling the space at the new rents, then naturally rents will come down.' The new rents are the rates MIT is charging for 70 new non-business park space tenants so far and they are all above the renewed rates of ex-JTC tenants.

Mapletree said the 1,448 tenants of MIT's flatted and stack-up factories, as well as warehouses, all benefit from a 5per cent rental cap - of JTC's rent on July 2007 - when they renew their leases before July next year.

There is no cap for the remaining 108 - or 7per cent of - tenants in its business park buildings. Mapletree said it is doing what it can on a case-by-case basis. It has arranged instalment plans for 18 firms to help them settle arrears, for instance.

Additional reporting by Francis Chan

[One criticism of REITs was that it dehumanised that relationship between the landlord and the tenant. And this is clearly seen here. REITS in an sense is also leveraging on the value of the property, and the comment on the risk of a load default clearly shows that company may have over leveraged on the property (if I'm using the terms correctly). If so, they were obviously expecting ever increasing rentals and had leveraged on that to take out their loans. Would a loan default trigger a cascade of other loan defaults or business failures? That would depend on how over extended they are. But without the excesses of US banks, our banks should be able to prevent a contagion of loan defaults. And if REITs fail in this circumstance, perhaps it is time to scrutinise their set up to see if they lend themselves to over-leveraging and if they need more regulation.]

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