Sabana Reit getting basics right before going abroad

DONALD Han could have chosen to retire comfortably at a top real estate consultancy agency and make his mark as an industry veteran. Instead, the intrepid Singaporean permanent resident left his cushy position and headed "straight into a battlefield".

Come Jan 25, it will be exactly one year since Mr Han, a Malaysian, became the chief executive officer of Sabana Real Estate Investment Management Pte Ltd - the manager of Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit), which survived an attempt by minority unit holders to boot it out at an extraordinary general meeting for underperforming before Mr Han was roped in to help transform it.

"It has been quite a fruitful experience for me. As you know, I came from a background of real estate consultancy after almost 30 years," Mr Han told The Business Times.

Mr Han, 54 at the time of the interview, started his career at Richard Ellis, where he built experience in industrial property and investment sales. He set up Cushman & Wakefield Singapore (C&W) with a team of five members. By the time he left, he was vice-chairman, with a team of over 100 staff under him. He then acquired a stake in UK-owned Chesterton's Singapore operations in 2013, leading a team of over 100 personnel.

"That would have been it. That's it. But if I can make my mark in a company like Sabana and help turn it around, it will be a start of a new chapter," he shared on why he made the surprise move from consulting to client side.

Equipped with 30 years of market knowledge and expertise in research, valuation and marketing, he was confident about taking the new challenge head on by focusing on basic fundamentals - grow organically, don't grow too fast, keep an eye on costs and at the same time have a stringent growth plan to turn Sabana Reit into a big company ultimately.

Even departures of certain members from the previous management team did not faze him as "we work closer as a team now and is more decentralised without too much heavy weight decision makers up there", he insisted.

Also, when a close contact suggested the idea of joining Sabana, he believed the market had hit rock bottom and was beginning to stabilise.

"If you asked me to join two-three years ago, it would be tough because the market was decelerating, depreciating at high single-digit rate per annum. That was tough. You would have valuations that would erode every year," he said.

The first task when he joined Sabana was to devise a strategy.

Phase one of that strategy was to ramp up the occupancy rate at the buildings in its portfolio from around 85 per cent to market rate of 88-89 per cent. Within the first month, he called a meeting with top-tier agents from different agencies like Knight Frank, CBRE, Savills and Colliers which are the prime movers of the real estate sectors.

"We had good traction with the agents. More importantly, we are beginning to see results, not only for New Tech Park, but some of our other properties over the last 12 months. Work is still in progress," he said.

The second task was to identify non-performing and mature assets. This led to the divestment of 6 Woodlands Loop for S$13.8 million. Two more assets - 9 Tai Seng Drive and 1 Tuas Ave 4 - are awaiting the final completion.

"In total for 2018, we sold three properties for a total consideration of S$124.58 million compared to our book value of S$75.8 million. That's 64 per cent above book value, which is quite credible given the fact that we are selling leasehold real estate," he reckoned.

Elaborating, he explained that these properties are land leased from JTC and are typically of 30-year leases, which meant over time, valuations would decline as leases get shorter.

Divesting non-performing assets is an ongoing process. Identifying such assets can be tricky. It goes beyond mere locations and exiting areas that are over-supplied like Tuas, Woodlands and Tampines where recent government land sales have concentrated.

For example, the property at 23 Serangoon Ave North only had a 20 per cent occupancy rate when Mr Han joined Sabana. But by mid-2018, occupancy grew to 60 per cent, and showed potential to perform with the entry of certain anchor tenants.

"We hope this year, as we continue to ramp up tenant engagement, it will cross the 80 per cent mark and become performing," he said.

Another example is a property at Tuas, an area where the Reit is looking to pare down. But with an anchor tenant, the property has become a performing asset and hence, there is no urgency to sell.

Key growth sectors identified are namely, insurance; financial services which is benefiting from spillover effects of the office sector which grew 10 per cent last year; manufacturing and electronics (though these two could face headwinds this year); as well as more resilient ones like education, healthcare, and transport warehousing because of e-commerce.

The business park sector where financial services companies can move backend operations into buildings like New Tech Park - which houses Sabana HQ and accounts for a third of the Reit's net lettable are (NLA) and assets under management - is also deemed attractive.

"What I have done is to keep portfolios within the central part of Singapore where I want to keep as much as I can. (A building) like New Tech Park is located in prime central area, and will be a long-term asset to keep," he said.

"So, where to keep, which segments of properties, how to reconfigure portfolio, do asset enhancement initiatives (AEIs) to attract right tenants for growth trajectory. That's what we have been doing," he said.

The proceeds from the divestments will be used to pay off debts (which amounted to S$361 million evenly staggered over 2019-2021 as at Q3), recycled back into long-term properties like New Tech Park to create sustainable growth. Gearing, which stood close to 38 per cent in Q3, is expected to fall to below 30 per cent on a proforma 2017 basis.

"That would put us in very good position to have enough debt headroom, to be able to fund yield-accretive investments in phase 3, or potentially to get some upsize on loans from current lenders and hopefully, competitive cost of funding," he said.

The next phase will be to venture overseas.

"When we can see growth in our distribution per unit (DPU), occupancy leading nearer to 88-89 per cent in the portfolio, then obviously the next stage is to go overseas to broaden our base," he said. For Q3 ended Sept 30, 2018, Sabana Reit's DPU slipped to 0.77 Singapore cent from 0.79 cent a year earlier. Overall, occupancy levels for the Reit stood at 81.4 per cent.

Explaining the eventual need to venture overseas, Mr Han said: "Most of our properties are all 30-year leases. They are at some point depreciating assets. To hope that there will be an escalation in property valuations, that is not going to happen! The thing that can help us is the premium properties we can acquire from abroad. That helps to increase our average land tenure. The proposition for going abroad is the yields can be quite attractive."

With a refreshed board boasting of new members with good experience including in Europe, going overseas is a matter of time. Potential interest will be in business park properties in Europe or the UK, "where there are no mass building by authorities, but private sector versus private sector ultimately".

"That's going up the value chain. That's exactly what we want to target as we want to bring in attractive tenants, who are facing huge pressures in first-tier cities like Frankfurt and Munich and looking to move their backroom. That's where I want to be part of - attracting expansionary tenants," he said.

However, Mr Han stressed it is still early days and any overseas venture is unlikely to take place in the first half of this year. The priority will be getting New Tech Park right, securing the necessary approvals and transforming it.

"What I hope to do at Sabana is not an overnight job. It will take a while. This oil tanker needs time to turn," he stressed.