FNCE231 REIF Week 3 Lecture Slides 19aug2020

REAL ESTATE INVESTMENTS & FINANCE
School of Economics
Lee Kong Chian School of Business
Professor Francis Koh

Professor of Finance (Practice)
Ku Swee Yong
Adjunct Faculty
1
SMU Classification: Restricted
FNCE231 Week
Real Estate Investments and Finance
3
Hospitality / Hotel
3
Hotels
General Physical Design Considerations
• Window views – long and flat, or circular buildings
• Common areas – reception, waiting area, luggage
• Fire safety – sprinklers, corridor width, staircases
• Service areas: cleaners’ rooms, staff canteen
• Security
• Public access
• Back office
• Staff access
• F&B, Banquet
• Business centre
4
Hotels
• First floor – laundry, staff room, lockers, back office, gym, meeting rooms
• Ground floor – lobby, front desk, concierge, luggage store, drop-off point
5
Hotels
• Single loading, less efficient
• Service lift is not hidden from guests
6
Hotels
Hotel Design
• Can you renovate an office

building with this floor plan
into a hotel?
• What are the considerations?
• Fire escape?
• Windows?
• Ceiling height?
• See The Wolo Hotel, KL
https://www.google.com.sg/maps/place/Wolo+Bukit+Bi
ntang/@3.1469389,101.7114009,3a,60y,332.2h,137.31t
/data=!3m6!1e1!3m4!1sDomTuEilFRVwKJY-J-LoPg!2e0!
7i13312!8i6656!4m5!3m4!1s0x0:0xc636b5202ffdb9a6!8
m2!3d3.147026!4d101.711401
https://www.tripadvisor.com.sg/Hotel_Review-g298570-d5541
565-Reviews-Wolo_Hotel_Bukit_Bintang-Kuala_Lumpur_Wilaya
h_Persekutuan.html 7
Source: https://www.edrawsoft.com/office-emergency-plan.php
Hotels
Hotel Design
• Rooms of about 250sqft

• Several without windows
• Compensated through clever
interior design
https://www.google.com.sg/maps/place/Wolo+Bukit+Bi
ntang/@3.1469389,101.7114009,3a,60y,332.2h,137.31t
/data=!3m6!1e1!3m4!1sDomTuEilFRVwKJY-J-LoPg!2e0!
7i13312!8i6656!4m5!3m4!1s0x0:0xc636b5202ffdb9a6!8
m2!3d3.147026!4d101.711401
https://www.tripadvisor.com.sg/Hotel_Review-g298570-d5541
565-Reviews-Wolo_Hotel_Bukit_Bintang-Kuala_Lumpur_Wilaya
h_Persekutuan.html
Source: WOLO Hotel Fire Escape Map
8
Hotels
Wolo Hotel, KL
Source: https://www.google.com.sg/url?
sa=i&rct=j&q=&esrc=s&source=images&cd=&ved=0ahUKEwiHz4K5labTAhWHLo8KHQRD
Source: https://www.google.com.sg/url?
A8kQjRwIBw&url=https%3A%2F%2Fwww.tripadvisor.com%2FLocationPhotoDirectLink-
sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi
g298570-d5541565-i120061413-Wolo_Hotel_Bukit_Bintang-
F9YH6labTAhXMN48KHRMBCqkQjRwIBw&url=http%3A%2F
Kuala_Lumpur_Wilayah_Persekutuan.html&psig=AFQjCNH5geH2m5Xl49fjEpeGpsy0nZPXs
%2Fwww.priceline.com%2Fwolo-bukit-bintang-hotel-kuala-lumpur-wilayah-
g&ust=1492335542222193
persekutuan-kuala-lumpur-5847409-hd.hotel-reviews-hotel-
guides&psig=AFQjCNH5geH2m5Xl49fjEpeGpsy0nZPXsg&ust=149233554222219 9
3
Hotels
URA Quarterly Reports
10
Source: URA
Hotels
URA Quarterly Reports
11
Source: URA SMU Classification: Restricted
Hotels
Visitor Arrivals
Source: https://www.stb.gov.sg/statistics-and-market-insights/documents/ivastat_aug_2017%20(updated%2017oct2017).xlsx 12
Hotels
Visitor Arrivals vs Hotel Stay
• International visitors' numbers do not directly imply that hotel rooms / serviced
apartments are needed
• Look at the categories of visitors
• VFR (Visiting Friends & Relatives), students without passes, Fly-Cruise, etc
• Many hotels also promote stay-cations to locals, especially during low seasons
• The fraction of local room-guests in Singapore is very small as we do not have a
domestic visitor market
• However, hotels’ non-room revenue from locals can be high
13
Visitor Arrivals
14
Hotels
Other Sources of Data
• For analyzing Singapore’s market, STB’s data is sufficiently comprehensive

• Many countries in SEAsia do not provide good quality data
• For analyzing overseas Hotel markets, say Bali, Lombok, Kyoto, Boracay, Phnom Penh,
etc we may need to supplement analysis with:
1. Airport traffic and potential growth of new flights
2. Land transport – rail, toll roads
3. Cruise and passenger ships
4. Large scale events
5. Growth of business visitors – manufacturing, trade, GDP
15
Hotels
• Real estate consultants’ reports: HVS, JLL, CBRE

• Financial analyst reports, Hospitality REITs reports
Source: JLL Asia Pacific Hotel Investment Highlights 1H 2016

Source: PwC
16
Hotels

• Listed hotel companies
• Listed hospitality REITs
• It is a little complicated for REITs
due to the expectation of stable
dividend distribution every
quarter
17
Source: http://www.fareasthospitalitytrust.com/trust-structure.html
Sidetrack
• Think of an aircraft as a horizontal building
• Take the example of Airbus 380-800
• About US$400million, or S$557million
• One of the most expensive real estate in the world
http://www.airbus.com/aircraftfamilies/passengeraircraft/a380family/specifications/
18
Sidetrack
• Cabin: main deck 6.5m * 49.9m = 324.35sqm;
upper deck 5.8m * 44.9m = 260.42sqm
• Total floor area = 584.77sqm or 6,294sqft
https://sky4all.wordpress.com/2011/11/12/airbus-a380-cabin-configuration/
19
Sidetrack
• Aircraft seats: How many sqft per seat?

• How many $psf?
• Once flight has departed, the revenue opportunity is gone
Aircraft seats Hotel rooms
Source: http://www.dailymail.co.uk/news/article-3502161/United-Airlines-plans-retrofit-Boeing-777-fleet-accommodate-10-seats-row.html
http://www.forbes.com/sites/airchive/2015/01/14/actually-airlines-are-giving-customers-exactly-what-they-want/
http://jeugiya.jp/room
20
Free upgrade of space thanks to
Covid…?
Source: CNN, The Herald, The Caterer, Los Angeles Times 21

Sidetrack
Self-owned family car Car rental Taxi
http://www.carfab.com/driving-to-europe-top-tips-for-an- http://www.qantas.com/us/en/book-a-trip/cars/hertz.html
economical-family-break/
Owner occupied Serviced Hotel

apartment apartment
22
Hotels
Managing a Hotel Asset
• Owner manages the asset
• Hotel operator leases the asset on a fixed annual rental, i.e. the asset owner gets
a fixed income regardless of seasonality or unusual events
• Hotel operator takes a share of the revenue and profits, i.e. the asset owner
shares the ups and downs of the travel market with the operator
23
Hotels
Income
• Room Revenue: room service, massage, telephone calls, VOD, laundry, etc
• Non-room Revenue: F&B, banquet, meetings, events, carpark, rental, etc
• Room revenue generally make up more than 70% of total revenue
How will hotels’

revenue streams
change after
COVID-19?
24
Hotels
Hotel Income & Expenses
GOP margin
54%
25
Hotels
Other Expenses
• Other non-operating expenses such as financing costs can be rather
expensive
26
Hotels
Terminologies to Understand
• Hotel management fees, charged by a Hotel Management Company or hotel
operator, are based on % Gross Revenue (GR) and % Gross Operating Profit
(GOP)
• % GOP is an incentive paid, like a profit sharing scheme, to encourage the Hotel
Management Company to control costs and improve revenue
• Charges are usually 2-4% of GR and 5-9% of GOP
• Monthly and seasonal fluctuations of income for asset owner
• Unless the hotel is leased on a fixed monthly rental by a Hotel Management
Company, in which case 10-year rental contracts are common, some with step-
up rentals
27
Hotels
Terminologies to Understand
• Comparisons of hotel prices are done in Dollars per Key and Cap Rates
• “Dollars per Key” does not take into account the potential of the non-room
rental income and valuation of the non-room GFA such as Convention Centre,
retail mall, etc.
• We need to supplement price comparables using other indicators such as gross
and net yield, GOP margins, etc
• REVPAR – revenue per available room (because hotels close out rooms
progressively for maintenance and repairs)
• ADR – Average Daily Rate
• ARR – Average Room Rate
28
Hotels
Hotels vs Serviced Apartments
• Serviced apartments generally differ in terms of the following:

1. Larger sized units with multiple bedrooms and kitchens (closer to a normal
apartment that is fully furnished, except the yard area)
2. Concierge and meal services may not be as comprehensive
3. Occupiers are less transient than hotels
4. Design, layout and services are catered to longer staying Occupiers
5. Better suited for families, e.g. large families, special dietary requirements
6. “Feels” more like “home”
7. Unwritten rule: Minimum 7-nights
29
Can hospitality emerge stronger…?
Source: MarketWatch, Forbes 30

Can hospitality emerge stronger…?
Source: Bloomberg, Entrepreneur India 31

Industrial / Logistics
32
Industrial
Sub-sets of Industrial segment
• Industrial space includes Factory (production of goods) and Warehouses (storage
of goods)
• Logistics is more than just warehousing, it involves re-packing, final stage
assembly, off-balance sheet financing, supply chain management
• Physical characteristics of logistics assets similar to factory space
• Financial considerations are similar to factory spaces, with less machinery
• Logistics, coupled with technology and advanced supply chain management
practices, cannot be viewed as purely as a real estate asset
• Adoption of E-Commerce has driven logistics assets to record high valuations
33
Industrial
• One of the most complex property segments to learn and to research
• Specialized uses: food factories, car maintenance, bonded warehouses,

climate-controlled logistics facilities, chemicals, petchem plants,
pharmaceutical warehouses, waste recycling facilities, pollutive versus clean
industrials, etc.
• Technical requirements: fan coil, ventilation, power supply, back up power,

gas, floor loading, ceiling height, dock leveler, water supply, drainage, waste
management, cargo lifts, security, communications systems, etc
• Tenancy Agreement: lease term, public liability insurance, rent free and fitting
out period, maintenance, plant and machinery, foreign workers, illegal use,
signage, hazardous goods, pest control and fumigation, bulk purchase of
utilities and telecommunications, service charges, deposits and increased
deposits, step up rental, paid up capital of tenant, ACRA search, audited
accounts, etc
34
Industrial
Industrial segment – Price Index Categories
35
Industrial
Industrial segment – Rental Index Categories
36
Industrial – locations
Source: https://www.ura.gov.sg/maps/?service=MP 37
Industrial
Industrial segment – Approved Uses
38
Source: https://www.ura.gov.sg/uol/guidelines/development-control/change-use-premises/sections/Permissible-Uses.aspx
Industrial
Industrial segment – Approved Uses
39
Source: https://www.ura.gov.sg/maps/ura/planning/masterplan/MPWS_2014_for_map_legend.htm#a9
Industrial
Industrial segment
• Industrialists: what are their main considerations?

- operations (discharge, production, loading)
- costs
- logistics
- proximity to suppliers
- proximity to market, ports
- proximity to MRT?
• NOTE: Lower floor premium, upper floor discount
• Ground floor better ceiling height, higher floor loading
• Think about the industrialists’ supply chains
• What about having facilities (e.g. gym and swimming pool) in the
building?
40
Industrial
Industrial segment
41
Source: http://www.commercialguru.com.sg/listing/20286279/for-sale-oxley-bizhub
Industrial
• Good example of agglomeration – Jurong Island
42
Industrial
• Dock-leveler eases loading and unloading from containers
43
Industrial
44
Industrial
45
Industrial
Industrial segment – Characteristics
• Cargo lifts, service lifts
46
Industrial
Industrial segment – Characteristics
47
Industrial
Researching the Industrial sector
• Company transactions may not be reflected in URA Realis
• Start your research from SGX.com and listed REITs
• Include Logistics
Source: http://www.sgx.com/wps/portal/sgxweb/home/marketinfo/securities/reits 48
Industrial
• Manufacturing output
• Total imports and exports
• Indicators are backward looking
Source: https://www.edb.gov.sg/content/edb/en/news-
and-events/news/monthly-manufacturing-
performance.html
Source: http://www.iesingapore.gov.sg/~/media/IE%20Singapore/Files/Media%20Centre/Press%20Releases/2016/October/Monthly20Trade20Report2020Sep202016.pdf 49
Industrial
• Look at Purchasing Managers’ Index
• Business expectations survey
• Forward looking indicators
Source: https://www.edb.gov.sg/content/dam/edb/en/news%20and%20events/News/business-
expectations/BEM-3Q2017.pdf Source: http://www.sipmm.edu.sg/images/PMI/MB-2016-09-1P.pdf
50
Industrial
• Forward looking indicators – done by surveys
• May be inaccurate, depending on respondents’ outlook
• Imports may be a good forward indicator
Source: http://www.iesingapore.gov.sg/~/media/IE%20Singapore/Files/Media%20Centre/Press
%20Releases/2016/October/Monthly20Trade20Report2020Sep202016.pdf
Source: http://sbr.com.sg/economy/news/singapore%E2%80%99s-q3-gdp-sharply-nosedives-41 51
Other Segments: Data Centre
52
Data Centre
Wiki’s Definition
A data centre is a facility used to house computer
systems and associated components, such as
telecommunications and storage systems.
It generally includes redundant or backup power

supplies, redundant data communications connections,
environmental controls (e.g. air conditioning, fire
suppression) and various security devices.
A large data centre is an industrial-scale operation

using as much electricity as a small town.
Source: https://en.wikipedia.org/wiki/Data_center
53
Data Centre
What parameters affect demand for Data Centres?
• Demand for data storage, data processing, transmission, communications are
driven by new applications, data gathering and analysis, generating new data
from current data sets
• Higher bandwidth for transmissions and communications led to more videos,
pictures, audios being transmitted and stored
• Demand for back-up/duplication of data, for disaster recovery and redundancy
purposes by large organisations
• Note: storage and back-up take up little capacity. Main use is for transactions,
applications, processing of data.
• NOTE: Capacity measured by use of electricity (mega-watts), not floor space.
HOW HAS THINGS CHANGED SINCE COVID-19 ??

54
Data Centre
55
Source: EMC2 Data Centre Efficiency Workshop https://www.slideshare.net/stexxe/data-center-efficiency-workshop-2016
Data Centre
Data Centre – Past and Present
XYZ Client has a row of servers,

Assuming 4 racks, 3 KW/rack
Traditionally
Moving forward
Office Server room
Colo-Facilities
Source: Lynus Pook, Cushman & Wakefield 56

Data Centre
How It Works
Please view SAP Data Centre:

https://www.youtube.com/watch?v=y7zQMMeeDQg 57
Data Centre
Benefits
• Risk Mitigation: eliminate risk of single event i.e. blackout, natural disaster
• Speed of Delivery: building DC takes time, should leverage on available inventory
• Discounted Power Costs: Operators buy power with bulk discount
• Operational Expense vs. Capital Expense: on average it takes US$15M to build
10,000sqft of 1MW DC (one time hit on cash flow)
• Connectivity: Connectivity and latency are two essential elements of any data
centre strategy. Tenant can leverage on variety of telco carrier of choice
• Focus: let the IT experts do their job while you focus on your business
• Regulatory Compliance/Audits, Data security and maintaining business compliance
especially on financial institutions
• Uptime: operators are required to offer Service Level Agreements
Source: Lynus Pook, Cushman & Wakefield 58

Data Centre
Source: https://data-economy.com/facebook-and-ntu-singapore-to-launch-programme-to-develop-local-data-centre-talent/ 59
Other Segments
60
61
Other Segments
What are the demand/supply/value dynamics for these?
• Mixed developments
• Co-living / shared houses / hostels /dormitories
• Co-working spaces
• Healthcare, education, townships
• Related segments – agriculture, forestry, mining
• What are the revenue/cost drivers? What does the TA (tenancy

agreements) look like?
• Cashflows and returns, rewards and risks, may be variations of the main
categories
• Fundamental principles do not differ much especially if we think in DCF
terms
• Understanding the Revenue/Cost drivers are most important
62
Thank you
Thank you
Ku Swee Yong
Adjunct Faculty
Lee Kong Chian School of Business
Singapore Management University
+65 9615 4543 | syku@smu.edu.sg
63

FNCE231 REIF Week 3 Lecture Slides 19aug2020

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REAL ESTATE INVESTMENTS & FINANCE

Professor Francis Koh

• Can you renovate an office

• Rooms of about 250sqft

URA Quarterly Reports

• For analyzing Singapore’s market, STB’s data is sufficiently comprehensive

• Real estate consultants’ reports: HVS, JLL, CBRE

Source: JLL Asia Pacific Hotel Investment Highlights 1H 2016

Other Sources of Data

• Aircraft seats: How many sqft per seat?

Source: CNN, The Herald, The Caterer, Los Angeles Times 21

Self-owned family car Car rental Taxi

Owner occupied Serviced Hotel

How will hotels’

• Serviced apartments generally differ in terms of the following:

Source: MarketWatch, Forbes 30

Source: Bloomberg, Entrepreneur India 31

• Specialized uses: food factories, car maintenance, bonded warehouses,

• Technical requirements: fan coil, ventilation, power supply, back up power,

• Industrialists: what are their main considerations?

• NOTE: Lower floor premium, upper floor discount

• Ground floor better ceiling height, higher floor loading

• Think about the industrialists’ supply chains

• Good example of agglomeration – Jurong Island

• Dock-leveler eases loading and unloading from containers

• Cargo lifts, service lifts

It generally includes redundant or backup power

A large data centre is an industrial-scale operation

HOW HAS THINGS CHANGED SINCE COVID-19 ??

XYZ Client has a row of servers,

Office Server room

Source: Lynus Pook, Cushman & Wakefield 56

Please view SAP Data Centre:

Source: Lynus Pook, Cushman & Wakefield 58

• What are the revenue/cost drivers? What does the TA (tenancy

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