FOREIGN WORKER DORMITORIES

This article aims to provide an overview on foreign worker dormitories (FWD) in Singapore, identify the stakeholders involved and examine what is at stake for the various players.

Introduction

What is a foreign worker dormitory (FWD)? For most people in Singapore, it is a place where transient workers are housed in the time they are here working on our infrastructure/manufacturing projects. There exists an uneasy relationship, where people think they ought to be housed in humanitarian conditions, yet nobody wants a FWD in their backyard. For government planners, it is space specially zoned and set aside for the said use, which must be in compliance with the technical requirements of the various competent agencies. Given land scarcity in Singapore and competing land uses, it is difficult to identify such sites fast enough to meet the burgeoning demand. For savvy investors, it is an investment asset. When well-managed, FWD provides high-yields in a climate of low yields as a result of ongoing yield compression across asset classes.

Types of Foreign Worker Dormitories

There are purpose-built dormitories which are solely used to house foreign workers.

Of these, there are the permanent ones, usually built on land with longer leases of more than 20 years, and the accommodation is typically of brick-and-mortar. Such facilities cost more to build and are characterised by 24-hour security management, on-site amenities like provision shop, canteen, clinic, barber and gymnasium.

Example of a Permanent Dormitory: Westlite Dormitory at Toh Guan Road East

Source: Screengrab from Googlemaps

There are also the temporary ones, usually tendered out on short-term leases of 3 years with further options for extensions, and the accommodation is typically of steel/aluminium/zinc frames.  Such extensions to the use may or may not be extended, depending on what plans the competent authorities have for the site. Such facilities typically cost less to build and do not enjoy the full suite of services as permanent dormitories.

Example of a Temporary Dormitory: SCAL Hougang along Hougang Avenue 3

Source: Screengrab from Googlemaps

There are converted industrial premises which are designated by the Urban Redevelopment Authority (URA) as ancillary workers’ dormitories and secondary workers’ dormitories. The former can only house workers employed by the owner or lessee of the factory, and workers who work on-site at the subject factory. The latter can house workers who are not employed by the owner or lessee of the factory, as well as both on-site and off-site workers. Owners have to apply for change of use from the Urban Redevelopment Authority, which are typically granted for a term of 3 years, before they can do the conversion.

There are housing quarters on construction sites or Temporary Occupation License (TOL) sites. For the former, construction workers can be housed in quarters (typically containers) within the construction sites. For the latter, these quarters must be linked to a project and are not meant to be operated as commercial dormitories. As with all other dormitories, they have to comply with the technical requirements of relevant government agencies.

In addition to the above-mentioned types of dormitories, foreign workers can also be housed in Housing Development Board (HDB) flats, private residential premises, workers’ quarters on farms and on harbourcraft.

Economic Dimension

Prior to 2005, this sector was mainly the domain of the Jurong Town Corporation (JTC). Such facilities were mostly designed, built and administered by them. They started to liberalise the sector to allow the private sector to participate, exiting the business in parts. Drawn by a niche market without much competition, rapidly growing room rates and high net yields, investors entered the market.

It was reported that between 2007 and 2008, rents rose more than 30 percent to about $130 to $180 per worker per month on the back of strong economic growth and a shortage of such facilities. In 2007, JTC Corporation offered for sale three dormitories – Kian Teck Dormitory, Woodlands Dormitory and Tampines Dormitory – with a total of about 13,500 beds. A Morgan-Stanley backed fund snapped it up for $153 million. In the same year, Morgan Stanley also won a land tender for a site (the current Avery Lodge) for about $40 million, and subsequently developed it into a series of 6-storey blocks accommodating about 8,000 beds.

Other investors were attracted by this asset class too. David Loh and Han Seng Juan of UOB Kay Hian stockbroking fame reportedly put up $60 million for a 4,500 bed dormitory in Toh Guan Road East, citing attractive yields. It was becoming clear that savvy market players were moving in a big way into what was previously an unknown and misunderstood asset class.

In today’s market, some of the key players are Avery Strategic Investments, Mini Environment Services, Vobis and Centurion, amongst others. It is a fragmented market with many small players and a few big players. The small players typically convert industrial premises into makeshift facilities and let them out on a short term basis. The bigger players have the financial might to bid for greenfield sites and erect purpose-built dormitories. The dormitories are also generally better managed in terms of having a management structure and system in place.

Political Dimension

With the unchecked influx of foreign worker numbers, the social tensions wrought by the increasing numbers finally reached a flashpoint in 2008. Residents in Serangoon Gardens vehemently objected to plans to build a FWD there. Authorities were finding it difficult to identify suitable sites to house such workers and came up with preliminary plans for a FWD off the Central Expressway (CTE), at the back of Serangoon Gardens.

When plans for the facility were leaked, it caused a huge uproar. This was despite reassurance from the authorities that the compound will be fenced up and away from public view with a separate ingress/egress directly into the expressway. Over 1,600 residents signed a petition in protest. Their chief concerns? That property prices may be negatively affected and crime rates will soar. This ‘not-in-my-backyard’ mentality became the subject of debate for months to come.

In December 2013, riots erupted at Little India. In a freak accident, a foreign worker died under the wheels of a private bus and this sparked a riot. Police were caught unprepared and subsequently took several hours to quell the riots. At the end of it, many first-responders were hurt and vehicles were damaged and torched. A Committee of Inquiry (COI) was launched to identify the factors which led to Singapore’s first riot in more than 40 years. One of the reasons that surfaced was the poor living conditions for some of these foreign workers.

 

Little India Riots in December 2013

Source: EPA European Pressphoto Agency

Existing Supply and Demand

Supply

The Ministry of Manpower (MOM) provides a list of commercially run dormitories. As at March 2015, the list includes 44 of such facilities, of which 1 is currently under development and expected to obtain Temporary Occupation Permit (TOP) in September 2015. Based on the list, there are approximately 215,000 beds provided by commercially run dormitories.

We are not able to ascertain the number of beds provided by converted industrial premises, or temporary quarters housed on construction sites or TOL sites as these statistics are not publicly available. In addition, there is no way to account for the shadow supply of beds in HDB flats (typically found in the living quarters of HDB shophouses) or private residential housing. It was reported recently that an apartment in Geylang originally intended for 8 workers was filled with over 30 workers, resulting in electrical overload which caused a fire.

Because of the complex and spontaneous nature of such supply, trying to determine the exact numbers may be an exercise in futility. In any case, it is also the authorities’ long term goals to accommodate the workers in proper facilities, instead of these temporary or makeshift set-ups.

Demand

It is also difficult to arrive at the numbers for the demand side. Due to the opaque nature of information surrounding this, we can at best a hazard a guess at the total number of foreign workers who require such a facility.  These facilities are more so used by Work Permit (WP) holders and less so by Employment Pass (EP) and S Pass (SP) holders. This is because EP and SP holders earn at least $3,300 and $2,200 respectively and such workers are more likely to rent accommodation from the open market.

As seen from Chart 1, the inflow of foreign workers in the manufacturing and construction sectors increased rapidly between 2010 and 2012. It became a hot-button issue during the General Election in 2011, when voters voiced their frustration at losing jobs to foreigners. The downtrend in employment from 2012 reflects the government’s moves to stem the inflow and moderate the growth in their numbers. At the same time, they pushed out campaigns to raise productivity in these traditional industries in a bid to attract locals to fill up these positions.

Chart 1: Employment Change in Foreign Workers for Manufacturing and Construction Sectors

Source: Manpower Research and Statistics Department, Labour Market 2014

Chart 2: Primary Demand for Foreign Worker Dormitories

According to government statistics, there are 322,700 WP holders in construction, representing 87.5% of the foreign workforce in construction.

The number of WP holders in manufacturing is not reported. To arrive at an estimate for the numbers, we applied a ratio of 80% to the 276,400 foreign workers in the manufacturing sector, leading to an estimate 220,000 WP holders in the manufacturing sector.

This gives rise to a primary demand of approximately 500,000 to 550,000 workers who will need to live in FWD.

Based off the commercially run facilities providing some 215,000 beds and the primary demand of 540,000 WP workers, there appears to be a shortage of proper facilities of 2.5 times. This could be a plausible explanation for how room rates are continuing to climb to $250-350 per bunk per month currently.

GDP Growth Rates and Construction Demand

As a developed economy, Singapore no longer enjoys the double digit Gross Domestic Product (GDP) growth rates of the 1970s. Nevertheless, there is still positive GDP growth year-on-year, as seen from Chart 3. Efforts are made to innovate and seek out new areas of growth to propel the economy forward.

From Chart 4 we note that while the value of private construction contracts are trending downwards as the property market is going through a rough patch, the value of public construction contracts has moved up. This is because the government is unfurling infrastructure projects, e.g. North-South Expressway, Thomson Downtown Line, etc to smooth out work for the sector.

Chart 3: GDP at 2010 Market Prices

Source: Department of Statistics Singapore

Chart 4: Construction Contracts Awarded

Source: Building and Construction Authority

Conclusion

Overall, on the demand end, whilst the influx of foreigners is slowing, their numbers are still increasing, albeit at a decreasing rate. The reality of the matter is that the country’s growth is tied to their presence. So long as the locals continue to shun such jobs, foreign workers will be required to fill the positions. The government has embarked on a productivity drive to raise wages and efficiency, but there will be short-term pains stemming from the restructuring.

On the supply front, the government has rolled out a few new sites to address the bed crunch. Companies have remarked that rising labour costs have resulted in a challenging operating environment for them. While new supply is under way, it remains to be seen whether it is sufficient and can slow down or reverse the upward climb in monthly bunk rates.

To improve the living conditions for these foreign workers, the government is stepping up on enforcement and clamping down on illegal dormitories that flout regulations or guidelines. This creates a temporary spike in demand.

Retail investors wishing to seek exposure to this sector could consider some listed entities on the Singapore stock exchange, such as Centurion Corporation Limited or Lian Beng. However, it is important to note that none of the listed entities are pure-play FWD players in Singapore. For example, Centurion has diversified in the worker dormitory business in Malaysia and the student accommodation business in Australia and UK. Lian Beng, besides their construction and property development business, recently ventured into a 55:45 joint venture with Centurion to develop Westlite Mandai Dormitory. It is crucial to understand their other businesses as well and the revenue contribution of the FWD portfolio in relation to their entire business.

Regardless of how the demand and supply moves, so long such FWD continue to deliver good yields, investors will continue to be attracted to this asset class.

Which is a better buy now? - Chip Eng Seng or Capitaland? - 17th May 2015

Warren Buffet states, ""It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Putting those words into practice, I have recently taken to reading some investment books to get a better sense of how to better time my market entry into certain stocks i'm looking at. Of course, I must caveat that nothing is 100%, so do take this post as nothing more than an opinion.

So with that, here are my findings on Chip Eng Seng  vs CapitaLand as at 17 May 2015,

Stock Name	Capitaland	Chip Eng Seng
Current Share Price	$3.50	$0.84
3 year eps growth average	5.64%	82.40%
5 year eps growth average	-2.26%	54.46%
PE	15.02	3.89
PEG Ratio	8.89	0.06
Yield	0.03	0.07
Price to Book Ratio	0.91	0.72
Dividend Adjusted PEG Ratio ((Price ÷ Earnings Per Share) ÷ (Annual Earnings Per Share Growth + Dividend Yield))	3.52	0.05
Debt to Equity Ratio	0.57	1.73
Interest Coverage Ratio (Net Profit Before Interest & Income tax / Interest Expense)	7.20	73.69
Recommendation	Underweight (Sell)	Overweight (Buy)

From the ratios above, it does seem to say that Chip Eng Seng does have the upper hand at this point. However, Chip Eng Seng loses out to CapitaLand from a debt perspective, with its Debt to Equity Ratio above 1. Nonetheless, interest coverage does seem healthy, suggesting that its debt should not be of major concern as long as its net profit grows at a faster pace than interest expense.

As this is purely analysis from a ratios perspective, i am looking to hear your thoughts on the qualitative side of things as well.

Next up: Jansen's insights on the workers' SG dormitories landscape, stay tuned for more interesting stuff ;)

Shedding light on Hospitality REITs

An introduction to Hospitality REITs

Unlike Commercial REITs, Hospitality REITs including CDL H-Trust, OUE-H Trust and FEHT offer higher distribution yields in the range of 6%-7%+. This can be attributed to the volatile nature of the tourism industry, where investors would typically expect a higher return due to the shorter lease terms.

Source: reitdata.com

The types of accommodation can be broken down into two categories, namely the hotels for shorter-term stays while serviced apartments cater to longer-term corporate clientele. For the latter, a minimum stay of 7-days is enforced to ensure non-competition with hotels.

Does income support exist for Hospitality REITs?

Unlike office REITs, which mostly offer full disclosure of income support,  it appears that most of the Hospitality REITs have worked around it via master tenancy arrangements between the Landlord (S-REIT) and Sponsors. Under the agreement which usually lasts on a very long term of 15+15 or 20+20 years, the Sponsor will pay a fixed rent + variable rent component to the REIT. When reviewing the various IPO prospectuses, these two components contributed fairly equally (50/50 split) towards the rental income to the REIT.

Most of the operating expense is borne on the master lessee's end, which means that the income to the REIT is already net of operating expenses. This begs the question of the properties actual performance.

The fixed rent component varies across the REITs, and guarantees a 1.6%-3.8% of the purchase price. This is to say that if gross operating profit were to be zero, the REIT would still be able to get the minimum of the fixed rent, indicating some form of income guarantee from the Sponsor. 

After accounting for variable rent, these REITs clocked a net property yield of between 2.7%- 6.5%. A further review of current net income to REITs also showed that performance was pretty similar to forecast, where the same 50/50 split between fixed and variable income contribution was observed.

Why some REITs have both serviced apartments and hotels?

Serviced apartments and Hotels are essentially different assets that generate different yields. The former is usually valued on a cap rate of 3%-4% while the latter typically commands a 5%-6% cap rate. This can be explained by the less volatile/ more stable nature of serviced apartments which tie down travellers on extended stays rather than hotels which target high turnover customers which subjects their income to higher volatility.

As such, you will find that for Singapore property dominated Hospitality REITs, none would have serviced apartments as a standalone basket due to the lower yield, which could result in a need for income support to bump up DPU yield. This is exemplified by FEHT and Frasers Hospitality Trust, which have a mix of both serviced apartments and hotels.

While Ascott Residence Trust is a pure serviced apartment REIT, it is important to note that they have diversified their portfolio into other countries in Europe and SEA which offer higher yielding assets.

Putting aside the impending hike in interest rates, are Hospitality REITs a buy?

Yield hunting investors will definitely find favour in Hospitality REITs, which only lose out to Industrial REITs, That aside, it is also important to study historically how these REITs have managed to grow their earnings per unit vis-a-vis the other property sector REITs. 

I personally find the hospitality sector an interesting sector to invest in, given that income support may not be required given the ability to generate a higher yield in contrast to office assets. That being said, Frasers Hospitality Trust listed their REIT with 2 of their developments on income support, albeit a small amount to help tide over refurbishment and stabilisation of the assets.

Buy into REITs that are able to keep up with changing trends

Given the dynamics of the tourism and corporate occupier landscape, it is important that REITs are able to adapt their developments to tap the greatest earning potential. This would be possible via asset enhancements or inorganic growth through acquisition of prime assets to grow their yield.

Such initiatives could include changing the unit layout to capture demand for a different product (1 bedrooms instead of 2 or 3-bedrooms), particularly in the current business climate where corporations continue to cut back on expat spending and will see more lone travellers instead of families to oversee projects in the region. 

I'd be happy to hear your thoughts, so just leave me a comment and i will try to get back to you as soon as i can.

Benchmarking Your Real Estate Asset Returns

Benchmarking your asset return

As the saying goes “No pain, no gain,” likewise for property investments, the riskier the asset, the higher the yield one can expect to receive. In Singapore’s context, the attractiveness of each asset classes can be viewed in the following hierarchy:

The net yields presented above are based on broad level trends in each market and will differ across specific assets from time to time. Nonetheless, it offers us an idea as to how risky these assets are viewed in the local property scene (Lower Risk = Lower Return, vice versa).  Across the sectors, these yields have been shaped over time by factors including asset volatility and investor sentiments.

These yields also represent the typical net yield expectations of institutional investors such as REITs and private equity funds, where information on the cap rates being applied for property valuations are publicly available for the former. For reference, I have provided an excerpt below (boxed in red) from the CapitaMall Trust’s quarterly presentation slides.

As seen in the example above, the initial yield/cap rate attached to individual properties vary depending on a combination of factors comprising location (I.e. economic attractiveness and proximity to population catchment and transport nodes)  and nature of the development (mixed or single use).

Lastly, it is important to note that these are valuation based yields and it will certainly not represent the dividend you will get when buying into a REIT, which is determined by the REIT’s Distribution per Unit (DPU) and transacted Share Price.  Nonetheless, the cap rates applied by the different REIT types (i.e. Starhill Global – Office/Retail, Cambridge Industrial – Industrial etc) will offer investors a benchmark on net income to expect when making a property purchase.