Just a note on the next write up - Need to find time to do indepth research.

It will be my first sector write up on Construction Industry and I will zoom in on a particular area and then counters. Should be released in a few posts.

Just saying.

This is the start of the trilogy of the Singapore Construction Sector.

Part 1:
http://tubinvesting.blogspot.sg/2017/04/re...

Part 2:
http://tubinvesting.blogspot.sg/2017/04/re...

Part 3:
http://tubinvesting.blogspot.sg/2017/05/re...

Read more
49 likes
94 comments
SSJ4

is this something to worry about?

cheaharthur

Reply to @TUBInvesting : Yeah.PPVC is one of the strategy =)

  View More Replies
TUBInvesting

Do note that actually most will have passed if their balance sheet is managed better. Another factor is I did not take investment properties as a factor in my calculation of FCF. This may have help in some counters heavy in Investment counters.

TUBInvesting

Reply to @soonhongtan : Hopefully it goes bad. and KH price goes down. haha

  View More Replies
TUBInvesting

Reply to @ThumbTackInvestor : Its pulled directly from SGX Stockfacts. Hahah... but arranging does take some time.

I think the break down of the segments in the construction industry is rather interesting. That should give people some bird eye view of the segments.

  View More Replies
Simpleinvestorsg

Awesome, looking forward to the next part. Looking at how the industry is picking up, there should be undervalued gems.

TUBInvesting

Reply to @Simpleinvestorsg : Yup. by just looking at the surface, there seem to be interesting counters.

huatyj

Thanksss for sharing :)

TUBInvesting

Reply to @tyjiun84 : no problem!

ThumbTackInvestor

So the way to think of industrial properties is not simply to look at the whole sector and consider whether it's good or bad.
IMO, such a top down method is rarely effective.
You eliminate the good with the bad. Cos you don't even know which is good or bad.
The way to think of it, is not the tenancy rates.
The way to think of it is, which industrial property developer, has the know how, or the reputation, such that if you are a major end client looking for a specific requirement, you will always go to this developer.
In short, RELIABILITY and REPUTATION is the key.

As referenced in the paper that I linked below, such specialized properties are rarely of any value to anyone else, except the client. So if the client is going to lock into long leases of more than 20 years, you can be sure that they're not going for the cheapest. They're going for reliability. And THAT is a competitive edge.

All this that I'm talking about is NOT for strata titled industrial properties where the developer builds many units of similar industrial units within the premises, and sells each unit off to others.

That, is a different ball game altogether and has different characteristics to consider.

TUBInvesting

Reply to @ThumbTackInvestor : Oh... and always thanks for the support.

  View More Replies
ThumbTackInvestor

For industrial:
"For companies in this group, I don't have a good feeling about them. They tend to evolve into industrial/Commercial owners eventually. These companies will then need to be responsible for occupancy rate. If the occupancy rate is low, it will be money wasted on the development. Furthermore, their competitors are the REITs which are so much better at achieving higher occupancy rate."

That's assuming it's a DBL model (Design-Build-Lease) model
Which is what REITs are doing.
But many industrial developers don't just do DBL. In fact, many started out doing DB. (Design-Build)
In the DB model, they are not "responsible for the occupancy rate"
The developer engages the client BEFORE the property is even built. The client tells the developer what are their specific requirements, the developer sources the site and builds it according to the clients' wishes, and upon completion, transfers it to the client.
So basically the developer takes care of everything, but are not the owners at the end. So they don't have occupancy risks.

In the DBL model, It is true that the developer would then be "responsible for the occupancy rate". But again, it is simplistic to just think of it that way, and it makes it seem like the developer is taking on all the market risks. That's not true in reality.

Many clients requiring industrial properties, have specific requirements. Like for example, certain companies may need vehicle lifts that goes up many levels in the building. Some companies may need a certain ceiling height for each level if they are transporting bulky/tall items and so on. Some need "clean rooms" which require special ventilation systems blah blah.

In the DBL model, the developer builds the industrial property according to the requirements of the client. So before the property even gets built, the developer gets feedback and designs the place with the end client in mind. In turn, the client gets locked into very long leases at a predetermined rate, that's subject to fluctuations. So in such a model, the developer has high capital outlay, but in return, they get confirmed, long term CFs from the long lease.
At the end of the lease, the total rent that the client pays, would cover all the developmental costs, the cost of debt and so on.
and of course, a bit extra for profit.
Essentially the client pays for the property over a long period of time.

So in this model, the developer is NOT so concerned about tenancy rates.
Obviously, the major problem with DBL is counterparty risks. Which is why this only happens when the client is a long established company, OR if the client is the government.

https://www.google.com.sg/url?sa=t&rct...

This link describes in detail this DBL model. I'll quote from page 2:
"Typical Characteristics of Build-to-Suit Leases
Although the length of the term of a build-to-suit lease varies from project to project, for the most part these leases have very long terms, often 10 to 20 years or longer. The more specialized the project, the more important it is to the landlord that the lease term be long enough to fully amortize the landlord’s investment in the property. Very specialized properties may have little value to any party other than the original tenant."

Boustead Projects for example, something that I'm familiar with, has i think, 13 such properties that they own and would be responsible for finding tenants. All their other projects are DB.
But they have 0 occupancy risks and 0 defaults since they started DBL in 2001. And increasingly, over the past few years, they've been focusing on DBL rather than DB. And it's obvious why. Another investor described this to me very nicely in our conversations.
DBL is like farming.
DB is like hunting.
In hunting, you shoot and you get a meal for the day. In farming, you get regular harvests, you just have to put in the major effort at the start to plant your crops.

A poor market may affect the CFs they get from the DBL segment, but they do not worry about occupancy rates. Many of these leases are for 20 years! So thinking of this sector in terms of occupancy rates is incorrect.

To cite another example, (not industrial property), guess who owns Camden Medical Centre (At Tanglin), Regent hotel (near Camden), Ardmore residences, Capella group of hotels and Ritz Carlton?

Pontiac Land.

If you havent heard of them, it's because they are not listed. They're privately held, and the family that owns Pontiac Land follows this model. They are not interested in selling anything and as far as I know, have not sold anything ever.
Camden Medical Centre will always be catered for Drs because the founding Patriach of the family, wrote that in her will. They could open it to other commercial purposes and earn much more rent but because of such a clause in the will, they can't (or dont want to)
Their business model is to hold such properties for rent continuously, and channel the cashflow to acquire/build more assets.

OK i'm digressing here.

ThumbTackInvestor

Reply to @evelow : well, we all need a hobby besides the usual work...

I'm not active on stockcafe.

  View More Replies
TUBInvesting

Reply to @theSage : Thanks!

zobo123

I think everyone also can help chip in some ideas

View More Comments (20)
About Contact Privacy Terms Widgets Store

There are more for you ...

View more and participate in our discussion now. It's FREE.

Creating an account means you’re okay with InvestingNote's Terms and Conditions