Capital Management Strategy

The Manager plans to optimise K-REIT Asia's capital structure and cost of capital within the borrowing limits set out in the Property Funds Guidelines and intends to use a combination of debt and equity to fund future acquisitions and asset enhancement projects.

The Manager's capital management strategy involves:

• implementing an optimal aggregate leverage level; and
• implementing an active interest rate management strategy to manage the risks associated with changes in interest rates.

Debt facilities

K-REIT Asia will put in place the Facilities, which will be funded by Notes to be issued by the CMBS Issuer in respect of the term loan facility and from a financial institution in respect of the revolving credit facility.

The term loan facility will be in the amount of approximately S$190 million. It is intended to be used to part finance the acquisition of the Properties. The revolving credit facility will be in the amount of approximately S$30 million to meet the short-term working capital needs of K-REIT Asia.

In relation to the term loan facility, interest is payable at a fixed rate which is the sum of the coupon payable by the CMBS Issuer on the Notes and the attendant hedging costs of converting from floating rate to fixed rate.

As the CMBS Notes Offering may not be completed by the date of completion of the acquisition of the Properties by the Trustee, an unsecured bridging loan facility of up to nine months for an amount of up to S$200 million (the "Bridging Loan") will be provided by Kephinance Investment Pte Ltd to enable the acquisitions of the Properties to proceed and to provide initial working capital if so required. Please see "The Manager and Corporate Governance - Other Interested Party Transactions" for further details on the Bridging Loan.

The Bridging Loan will be utilised in the following manner - approximately S$190 million will be used for the acquisition of the Properties and the remaining S$10 million may be used for initial working capital. The Bridging Loan will be made available in one lump sum to the Trustee on the date of Completion of the acquisitions of the Properties. The Bridging Loan shall be repaid in full once the CMBS Notes Offering is put in place.

Debt strategy

The Manager believes that, where appropriate, high investment-grade rated term debt should be used as the core debt-funding mechanism for K-REIT Asia because of the following:

• the low refinancing risk associated with the issuance of high investment-grade debt; and
• the increased aggregate leverage flexibility afforded under the Property Funds Guidelines up to a maximum of 60% of Deposited Property only if a credit rating of K-REIT Asia from Fitch Inc., Moody's or Standard and Poor's is obtained and disclosed to the public.

Consistent with this strategy, the Manager has selected CMBS to fund the term loan facility. Subject to the CMBS Issuer having received the proceeds from the issue of the Notes as at the date of Completion of the acquisition of the Properties by the Trustee, approximately S$190 million will be drawn down on the term loan facility which corresponds to approximately 30% of the value of K-REIT Asia's Deposited Property based on the pro forma consolidated balance sheet as at 30 September 2005. By adopting this conservative initial gearing level, the Manager believes that K-REIT Asia will maintain operating flexibility when considering future acquisition opportunities and capital expenditure requirements.

K-REIT Asia may reduce its borrowings or finance its capital expenditures by utilising tenants' security deposits. Any excess operating cash flow from the operations of K-REIT Asia may also be used to reduce its level of indebtedness in order to reduce interest costs.

Active interest rate management

The Manager will adopt an active interest rate management policy to manage the risks associated with changes in interest rates on the Facilities while also seeking to ensure that K-REIT Asia's ongoing cost of debt capital remains competitive.

In order to achieve this, the CMBS Issuer is expected to enter into various hedging instruments (including but not limited to cross currency swaps and interest rate swaps) for the purpose of hedging (i) its foreign exchange risks for full amount of the outstanding principal on the Notes over the tenor of the Notes; and (ii) at least 50% of its interest rate risks in relation to the Notes. The benefits of these hedging arrangements will be passed on to K-REIT Asia as part of the term loan facility granted by the CMBS Issuer.

To accomplish this, the Manager may, from time to time, seek to modify the extent of its hedging in order to obtain the optimal capital structure. The Manager may, for instance, take advantage of favourable market conditions to further increase the level or term of its interest rate hedge from time to time.