This story appeared in the first issue of APAC Real Estate magazine.
Singapore real estate investment trusts (REITs) have flourished since the early 2000s, however players in the crowded market are now looking to consolidation to stand out from the pack.
“Singapore’s success as a hub for REIT listings has been double-edged,” Shern Ling Koh, portfolio manager for Principal Global Investors in Singapore, told APAC Real Estate.
“Whilst the number of REITs listed here has grown to 42 today from just 1 back in 2002, the market has become more fragmented in recent years.”
Things started to change last year though when ESR REIT and Viva Industrial Trust announced they would merge to become the city-state’s fourth-largest industrial property trust.
After the merger was completed in October last year, the enlarged ESR REIT had roughly S$3bn in assets made up of 56 properties with a total gross floor area of more than 1.26m sq.m.
Then in April this year, OUE Commercial REIT and OUE Hospitality Trust announced plans to merge and become one of the largest diversified REITs in Singapore, with assets totalling S$6.8bn.
The deal would grow its portfolio to seven assets, including the $1.8bn One Raffles Place office and retail complex, the S$1.2bn OUE Bayfront office and retail complex and the S$1.2bn Mandarin Orchard Singapore hotel, boosting OUE C-REIT’s market capitalisation to about S$2.9bn.
“The proposed combination of OUE Commercial Trust (OUECT) and OUE Hospitality Trust (OUEHT) is a bold step but potentially a necessary one in an era where ‘big is beautiful’ amongst the Singapore-listed real estate investment trusts (S-REITs),” analysts led by Mervin Song at DBS Group Holdings said in a note at the time.
The case for consolidation
The move to merge will not only lift the company profile for some smaller S-REITs, but should also improve portfolio diversification and the cost of capital.
More than a quarter of the REITs listed on the Singapore exchange have free float market cap of less than S$500m and almost 40% of them trade less than S$1m by value a day, according to Principal.
Additionally, most REITs need to grow by acquisition because of limited internal growth in Singapore.
“A low cost of capital is critical for acquisitions to be accretive but this is harder to achieve for the smaller listed SREITs with low trading liquidity,” Koh said.
“Mergers help to boost scale and trading liquidity thereby improving the cost of capital. With scale also comes diversification – tenant departures tend to disproportionately impact smaller REITs.”
Looking more broadly, boosting the number of larger and more liquid REITs should attract more institutional capital to the market.
Koh said local/regional private banking and retail money had dominated the small cap REIT space so far, however a broader investor base would likely boost overall trading liquidity in the sector.
It would also improve the chances of S-REITs gaining inclusion into global equity indices and attract even more international attention.
In the case of the OUE merger, the DBS Group analysts argued “a larger and more liquid OUECT-HT will likely place it on the radar of a wider pool of institutional investors and potentially result in greater broker coverage.”
Principal’s Koh added that there is an “arbitrage opportunity” between public and private valuations, with public valuations, especially among smaller S-REITs, looking relatively cheaper than private valuations, where cap rates have compressed significantly.
More to come?
Vijay Natarajan, an analyst at RHB Research Institute Singapore, said in a note that there had been increasing M&A interest among S-REITs, driven by limited acquisition options in the local market, favourable REIT market conditions and aspirations to grow larger to better compete.
“The trend is likely to continue, with more smaller REITs feeling the pressure,” he said. “We see merger opportunities in the industrial and hospitality REITs space, which has a larger proportion of smaller REITs [below US$1bn in market cap].”
Principal’s Koh also expected more consolidation to come, particularly in the more fragmented industrial REIT space.
Take Hong Kong-headquartered logistics property platform ESR, which owns the ESR REIT and took control of logistics-focused Sabana REIT in May after acquiring a 9.9% interest in the trust and a 51% stake in its manager.
“The investment in Sabana REIT and its manager is in line with ESR’s long-term strategy of investing in a broad range of real estate investment vehicles that would provide us with access to a portfolio of industrial properties in various stages of the property life cycle,” noted ESR co-founders and co-CEOs Jeffrey Shen and Stuart Gibson.
Then there is the S$11bn merger of Singapore’s government-linked companies CapitaLand and Ascendas-Singbridge that may also prompt M&A activity.
“There may also be scope for Capitaland and Ascendas-Singbridge related REITs that are in overlapping sectors to merge given that they now all fall under the same parent,” Koh said.
Ascendas-Singbridge owns the Ascendas REIT, Ascendas Hospitality Trust and Ascendas India Trust, while CapitaLand owns the CapitaLand Mall Trust, CapitaLand Commercial Trust, Ascott Residence Trust, CapitaLand Retail China Trust and CapitaLand Malaysia Mall Trust.