Literature Review

There are several journal articles, conference papers, research project reports and bachelor as well as master theses written on the topic of Asset-Securitisation and Real Estate Asset-Securitisation in Singapore. The Department of Real Estate within the School of Design and Environment at the National University of Singapore (NUS) has been very active in the field of Real Estate Securitisation research – especially regarding the Singapore experience. So nearly all of the academic sources on Asset-Securitisation and Real Estate Securitisation in Singapore origin out of the NUS Real Estate Department.

236 It is difficult to gather data, because there are no official institutions in Singapore gathering information on private transactions. The first deals were all private transactions and there are no compulsory publications for those deals. Cf. Sing (2003), Interview 5, p. 554; Ooi (2003), Interview 4, p. 554.

The first study done on this topic was a master thesis case study evaluating the feasibility and advantageousness of Securitisation for commercial real estate companies. This was followed by publications on three different equity and debt Securitisation vehicles utilised in Singapore: Real Estate Investment Trusts (REITs), Mortgage-Backed Bonds (MBB) and Asset-Backed Securitisations. In these publications the importance of a secondary real estate market for Singapore as well as the feasibility and utilisation of the different ways of raising funds were analysed.²³⁷

Moreover, two other bachelor and master theses were written that go into the governance of Securitisation transactions as well as the benefits of using Real Estate Securitisation as a source of funding.²³⁸

In addition to that, several studies evaluated the first Real Estate Securitisation transactions including the embedded option structures utilised by Singapore Corporates and Developers. Most of the research at that stage covered the unique structural aspects of those transactions. Especially the valuation of embedded options and the adequate pricing of the issued bonds were in the focus of Singapore researchers. Using bonds in Securitisation transactions was not new,²³⁹ but the way they were utilized in combination with the underlying asset in accordance with the motives followed by the originators and borrowers was new and unique to Singapore. So, this led to an immense academic interest and a big amount of application-oriented research.²⁴⁰

This was accompanied by different research projects carried out by the Centre for Real Estate Studies at the National University of Singapore. The studies included an analysis of equity and debt Securitisation,²⁴¹ a compilation of the feasibility of different real estate financing alternatives in Singapore (including debt financing, equity financing, sale-leaseback financing, Real Estate

237 Cf. Ong, et al. (2001), p. 1; Ong, et al. (2000), p. 54.

238 Cf. Heng (2002), p. 1; Tay (2002), p. 1.

239 Cf. Bhattacharya (2001), p. 1127; Dialynas, et al. (2001), p. 1103; Fabozzi, et al. (2001), p.

773; Johnston (2001), p. 759.

240 Cf. Lim (2000); Sing, et al. (2003), p. 173; Tan (2000); Yong (2002).

241 Cf. Ong, et al. (2001), p. 1.

Securitisation and REITs)²⁴² and a comprehensive final report on Asset-Backed Securitisation in Singapore. This report summarizes all the research done up to that point concerning Real Estate Securitisation in Singapore, including its potential, risks, governance, credit enhancements, values, options and pricing.²⁴³

The latest research on Asset-Securitisation in Singapore goes away from Real Estate Securitisation into the field of Mortgage-Backed Loan Securitisation.

Here, the feasibility of Residential and Commercial Mortgage-Backed Securitisation as well as the potential interest from the bank originator and investor side are analysed.²⁴⁴

Even though there has been quite a bit of research on Asset-Securitisation in Singapore, what has been missing, however, is a framework for analyzing this market. There is no comprehensive study putting together the evolution of the market into a model that shows how the different environments have influenced the originators/borrowers, assets and motives (i.e. the core determinants).

Moreover, no complete study has been made identifying the drivers fuelling the evolution of the market and the development of the different environments.

Apart from that a comprehensive compilation of all Real Estate Securitisation transactions analyzing the structural features as well as the parties involved, their assets and motives is missing.

4.2.2 Market Overview

4.2.2.1 Evolution and State of the Market

The analysis of Asset-Backed Securitisation, as Real Estate Securitisation transactions were first called in Singapore, shows the typical evolution of such a market. Thereby the structures in Singapore come the closest of all other analyzed structures to the concept of Real Estate Securitisation introduced in Chapter 3. This is the reason why this chapter will be overweight compared to the other chapters on the USA and Europe.

242 Cf. Ooi, et al. (2002), p. 1.

243 Cf. Sing, et al. (2003), p. 1.

244 Cf. Sing and Ong (2004), p. 159; Sing, et al. (2004), p. 1; Tan (2001), p. 1.

Singapore:

Singapore is a city-state located at the southern end of the Malaysian peninsula that covers a total area of 647 square kilometres and has a population of 4.2 million. Singapore is Southeast Asia’s educational and financial capital. Its

‘AAA’ rating is supported by its high per capita GDP and persistent current account surpluses of 20% of GDP or more. Besides flexible monetary and exchange rate policies, the robust public finances – with recurrent fiscal surpluses of over 5% of GDP and large public sector net assets – have helped Singapore contain the fall-out from the Asia crisis. Since then, Singapore has started to implement a wide range of reforms and economic restructuring in the financial sector. However, the government still retains a pervasive involvement in the economy, especially through its control over Government-Linked Corporations (GLC).²⁴⁵

History of Asset-Securitisation:

The evolution of Real Estate Securitisation is the result of Singapore’s unique institutional structure. The secondary investment market was dominated by equities while the debt market was on the whole under-developed. Real estate was traditionally regarded as a direct investment. So, on the one hand the potential for a secondary real estate market in Singapore was immense, especially regarding the asset rich balance sheets of Singapore’s government-linked developers at the time. And on the other hand the traditional source of funding for property companies in Singapore was the banking market that led into a credit crunch following the Asian Financial Crisis. Moreover, the problem with bank lending was that lenders were reluctant to provide medium or long-term fixed rate interest funding.²⁴⁶

Therefore, the development of a secondary real estate market was linked to that of the debt market. In this respect, the concept of property-backed debt Securitisation was not exactly new to Singapore. The very first

245 Cf. Tan and McCarthy (2004), p. 6.

246 Cf. Ong, et al. (2001), p. 9.

Backed Bond (MBB)²⁴⁷ was issued in 1986. It was a time of recession and restrictive loan commitment policies. Hence, government officials were very receptive for new ideas to keep the real estate market growing: “They said let us try it!”²⁴⁸ The first company to issue such a security had to go through a lot of trouble and negotiations. Company acts and regulations had to be changed.

Once the new rules and changes were instituted the issuance of Mortgage-Backed Bonds became easier and made this market grow. This opened an investor market, which from the beginning had been very narrow – coined by insurance companies and some corporates. Private investors and foreign investors were not to keen on investing in Singaporean securities at the time, because of tax issues that were not resolved until 1998.²⁴⁹

In fact, the first Mortgage-Backed Bond was issued in 1986 by Hong Leong Holdings Ltd, which pledged a first legal mortgage on the Hong Leong Building to investors in a MBB transaction. Then in the 1990s, the Far East Organization stood out as one of the most active issuers of Mortgage-Backed Bonds in Singapore.²⁵⁰ However, the regulatory instance of Singapore – Monetary Authority of Singapore (MAS) – had been stringent on its approval of the sale of such mortgage-backed bonds, restricting its approvals to sophisticated investors; retail investors were not allowed to invest at all. Bonds in denominations of S$250,000 were commonly issued. Due to the small circulation and lack of an active secondary market, these bonds were usually held to maturity. A secondary market for those bonds did not exist. Even though the bond market was still strongly underdeveloped, MBB issues provided a

247 Traditional Mortgage-Backed Bonds differ from Real Estate Securitisation/Commercial Mortgage-Backed Securities in the sense that the asset pools are not separated from the originating company's balance sheets, whereas in the case of the later the assets are sold to a special purpose vehicle (SPV) that finances the acquisition by issuing bonds.

248 Cf. Yeo (2003), Interview 2, p. 554.

249 It was until 1998 that changes were made to promote the bond market – this was when the Approved Bond Intermediaries (ABI) came into being and an exemption from income tax for foreign investors and a 10% income tax for domestic investors was instituted, which promoted the evolution of the bond market. Cf. Yeo (2003), Interview 2, p. 554.

250 Cf. Anonymous (1998c), p. 11.

platform for Real Estate Securitisation, as investors became more familiar with fixed-income instruments and real estate-backed bonds.²⁵¹

In addition to the history of real estate debt Securitisation, regulations had been ambivalent towards the establishment of Equity Securitisation in the form of property funds. Hence, Asset-Securitisation as a form of Debt Securitisation appeared to be the most successful vehicle at the time. This was spurred in part by the unique accounting rules of the Singapore Accounting Standards, but also by the realignment strategies of all major real estate developers. ²⁵²

In order to understand the general background of what fuelled the evolution of Real Estate Securitisation in Singapore, it is important to look at the general environment in Singapore at the time, when the first Real Estate Securitisation took place in Singapore in 1999. There were two main drivers: ²⁵³

1. The Asian financial crisis.

2. A stronger orientation of real estate developers and property companies towards an asset-light approach - companies wanted to lighten their balance sheet. They rather wanted to get away from holding real estate in order to channel their capital to development properties. In general, the primary motive for the first companies to do Real Estate Securitisations was that they wanted to sell their real estate. Asset-Securitisation was just another way to disinvest their real estate holdings, i.e. another divestment vehicle. Instead of an outright sale the companies looked at securitising the real estate. Thereby the first transactions took advantage of unique accounting rules in Singapore.

The primary reason for choosing Real Estate Securitisation as a divestment vehicle for their investment properties over an outright sale was that the transactions resulted in a higher price for the sellers. It was difficult at the time

251 Cf. Ooi, et al. (2000).

252 Cf. Ooi (2003), Interview 4, p. 554.

253 Cf. Anonymous (2003), Interview 1, p. 554.

to find buyers who were able to bring up huge sums of money required to by

‘trophy’ properties.²⁵⁴ Specificity of the Market:

The specificity of Real Estate Securitisation in Singapore resulted out of the first structures that were used at the dawn of the market. The way that the first Real Estate Securitisations worked in Singapore was as follows:²⁵⁵

An investment property was sold to a Special Purpose Vehicle – a company incorporated in Singapore – which issued bonds that were backed by the cash flows and the value of the underlying property to finance the purchase. The bonds were additionally collateralized by a mortgage over the property and were usually enhanced with preference shares attached to them. The coupon for the bond was financed out of the property’s rental income stream and the principal amount was to be paid out of the sales value of the property at maturity or before. In the first transactions the sellers usually subscribed to the junior tranche of the bonds and were granted an option to buy back the property at a later stage.²⁵⁶

Real Estate Securitisation transactions opened up property owners an alternative way of raising money in tough times, while structuring it as off-balance sheet financing.²⁵⁷

However, the investors at first were not keen on buying bonds under those transactions, since they were looking at achieving high returns.²⁵⁸ This is why originators in the first stage of Real Estate Securitisation transactions had to improve the coupon for the senior bondholders. To do that they either had to raise the rents significantly, or they had to accept a haircut on capital values (i.e. a reduced sales price), or they to accept a very low yield on the junior

254 Cf. Rashiwala (1999c).

255 Cf. Chow (2003).

256 Cf. Rashiwala (1999a).

257 Cf. Rashiwala (2001).

tranche to the benefit of the senior tranche holders. Hence, the seller typically subscribed for the higher-risk junior bonds, which received least priority in the event of a default and that often received a relatively low interest.²⁵⁹

There were three features that made the early Real Estate Securitisation transactions unique to Singapore are described below:²⁶⁰

1. Firstly, there was an explicit option in the Securitisation agreement that entitled the originator to lease back the property wholly or partially from the SPV for a period not longer than the bond maturity. In return, the originator guaranteed to pay the SPV rentals and other income, which were equivalent to or exceeded its interest obligations to the bondholders.

2. Secondly, the Securitisation agreements incorporated explicit call options that allowed the bond originator to claim the capital appreciation in the property. The call option was an American-type option exercisable anytime within a pre-specified period before the expiration of the bond.

The call option gave the bond originator the right to buy back the building at a discount to the prevailing market valuation but at no less than the original purchase price of the SPV. In the early cases 65 to 75% of property appreciation was granted to the originator. The remaining 25 to 35% capital gains retained by the SPV was redistributed to the participating bondholders by way of preference shares attached to the bonds. If the option were not exercised at the date of maturity, the special purpose vehicle would then sell it to other parties or issue new bonds to fund the redemption of the expiring tranches.

3. Thirdly, a put option was added into some of the early deals in order to provide a downside risk protection for the bondholders. In the 268 Orchard Road deal, for example, a put option clause was included into the transaction requiring the originator (DBS Land) to buy back the

258 In 1999, the yields – especially of office properties – were low, due to high asset values.

Office yields ranged around 4.5-4.7%, which was lower than yields required by institutional investors. Cf. Ooi, et al., Business Times Singapore (27 April 2000).

259 Cf. Sing (2003), Interview 5, p. 554; Rashiwala (2001).

building at its ‘face value’ plus a premium. The premium of the put option was usually measured at a certain percentage of the capital appreciation realised when the option is exercised. In the case of 268 Orchard Road this was 35%.

Depending on the deal structure, both the original owner (junior bondholder) and all other bondholders could gain from a capital appreciation. The participation of bondholders in the upside of the property was structured into the deals by the issuance of preference shares that were attached to the bonds.

This was a strong peculiarity of the Singapore Securitisations, because it allowed debt instruments to be issued with an equity component attached to it.

This way a 100% bond structure was established to hold the real estate.²⁶¹

The main Securitisation motive for most companies – especially for the former DBS Land²⁶² – was to get the properties off-balance sheet. Since, in the beginning, the assets were considered ‘sold’, the companies could remove them from their balance sheets and retire debt related to the properties, thus lowering the gearing ratio.²⁶³

However, the transactions in Singapore also showed that Real Estate Securitisation is not attractive to all property owners. The transactions do not necessarily lead to cheaper funding than bank loans because of the long-standing relationship that developers – especially in Singapore – have with their house banks.²⁶⁴

Apart from the bank relationship, the financing conditions in a Real Estate Securitisation depend heavily on the assets being securitised. Those have to be acceptable to bond investors. The coupon rate attached to the bonds depends on the quality of the property and the structure of the deal. Most critical is the ability of the SPV to service coupon payment, i.e. a sufficient property cash flow

260 Cf. Ooi, et al. (2000).

261 Cf. Heng (2003), Interview 7, pp. 554.

262 After the merger with Pidemco Land in 2000, DBS Land is today called CapitaLand. Cf. Yeo (2003), Interview 2, p. 554.

263 Cf. Sing (2003), Interview 5, p. 554.

264 Cf. Rashiwala (2001).

and the amount of bonds issued vis-à-vis the valuation of the asset, i.e. an adequate value of the property. Hence, the poorer the asset quality, the higher the coupon rate and the more difficult it is to place the issuance. The owner of a non-prime property would end up paying a higher interest rate for bonds or raising less money under a Real Estate Securitisation deal than he would under a bank loan. This is the reason why the securitised properties in Singapore were all ‘Trophy Properties’.²⁶⁵

Since cheap funding was not a motive in the early deals, monetization of the asset and off-balance sheet funding were the main drivers:

"If the purpose is to take the asset off the balance sheet (and lower gearing), an Asset-Securitisation may be worthwhile. But if the issuer has no problem with

keeping the assets in its books and just needs another source of funding, a bank loan may be a cheaper source of funds."²⁶⁶

In any case, with Real Estate Securitisation the Singaporean developers had the option to diversify their funding sources. This was especially important in the credit crunch of 1999, following the Asian financial crisis.²⁶⁷

Evolution of Real Estate Securitisation:

DBS Land – Singapore’s biggest government-linked developer – was the pioneer of Asset-Securitisation in Singapore. In 1999, DBS Land had raised S$1.3 bn by securitising three office buildings. By doing that the company became the first listed developer to securitise entire buildings.²⁶⁸ This helped the company to improve cash flow and gearing, and reduce money tied up in what were ‘low yielding’ properties.²⁶⁹

As mentioned before, in the beginning, the placement structure for most transactions was as follows: the senior tranche was placed out to institutional investors and the junior tranche was taken on by the originator of the

265 Cf. Yeo (2003), Interview 2, p. 554.

266 Ng Kwan Meng, Senior Vice President, Overseas Union Bank in: Rashiwala (2001).

267 Cf. Ooi (2003), Interview 4, p. 554.

268 Cf. Anonymous (2000c).

269 Cf. Anonymous (2000a).

transaction, i.e. the developer, who thus still had the control over the properties by the use of buyback options and preference shares.²⁷⁰

In fact, the companies that securitised their real estate assets in 1999 considered the assets technically and legally sold. For them Real Estate Securitisation was, therefore, not a financing exercise but a divestment exercise. The view of the market in the earliest stage of the market can be described as Jeanne Wong²⁷¹ put it in an article in early 2000:²⁷²

1. Firstly, the Securitisation of the real estate assets (as in the case of 268 Orchard Road, Robinson Point, and 6 Battery Road for DBS Land) was usually in line with the company’s strategy to divest their lower yielding investment properties. It was not embarked upon as a fund-raising

1. Firstly, the Securitisation of the real estate assets (as in the case of 268 Orchard Road, Robinson Point, and 6 Battery Road for DBS Land) was usually in line with the company’s strategy to divest their lower yielding investment properties. It was not embarked upon as a fund-raising

Im Dokument EUROPEAN BUSINESS SCHOOL (Seite 121-200)