Pressure Building Up In Crowded S-Reit Sector

Source : The Business Times, December 17, 2007

Mergers seen as one response to slowing growth as assets, funding get scarce.

THE Singapore real estate investment trust (S-Reit) market is expected to face waning investor appetite and a short supply of potential acquisitions next year.
The S-Reit sector could also enter a consolidation phase, triggered by the implementation of a takeover code for Reits, analysts say.

‘Reits are under pressure at the moment,’ said Mark Ebbinghaus, the head of Asian real estate at investment bank UBS. ‘Many Reits have been sold off because of money leaving Asia.’

S-Reits have taken a beating over the past few months as large chunks of capital fled Asia on the back of the US sub-prime crisis. Many Reits are now trading at about 20 per cent below their June or July peaks.

Despite this, the sector will grow, with analysts predicting that at least three to five Reits will be listed in Singapore next year. This compares to five Reits in 2007 and seven in 2006.

Mr Ebbinghaus, for one, expects at least five Reits to go public here next year. The Reits are more likely to come to the market in the second half of 2008 as global financial markets recover, he said.

Others see a smaller number. ‘Going into 2008, we can expect at least a further two to three Reits to come into the market,’ said OCBC Investment Research analyst Wilson Liew.

However, he cautioned that the success of these new Reits is not assured. To do well, the Reits have to offer ’something new’ to differentiate themselves from the others in a now fairly crowded market space, Mr Liew said.

The S-Reit sector has grown substantially since the first trust - CapitaMall Trust (CMT) - was listed back in 2002. Right now, there are 20 Reits listed on the Singapore Exchange. Their combined market capitalisation is about $27.2 billion.
This compares to 15 S-Reits with a total market capitalisation of $24.4 billion at end-2006.

Right now, most S-Reits are based on properties in Singapore. A few are based on properties in China, India, Indonesia and Japan.

More diversity is needed, market watchers said. ‘A Reit based on properties in Thailand or Vietnam could do well,’ said Mr Ebbinghaus.

The S-Reit sector has to some extent become a victim of its own success, said OCBC’s Mr Liew.

‘The success of early Reits encouraged more players into the market, all hoping to replicate the same growth strategy,’ he said.

This quickly led to an asset squeeze, made worse as other new players - such as private equity and property funds - entered the market. The buying spree mopped up all the quality properties, pushing up valuations while bringing down yields, Mr Liew said.

BT understands that some Reit managers are putting off buying assets from the sponsor companies due to the high capital values of properties, which reduces the yields.

Acquisitions are slowing down as some S-Reits are also having trouble raising funds to buy the properties they want amid poor market conditions.

One theme for 2008 could be merger and acquisition activity in the S-Reit market.
Singapore’s Securities Industry Council (SIC) announced in June this year that it will extend the Singapore Code on Takeovers & Mergers to Reits. Now, anyone who acquires 30 per cent or more of any Reit must make a general offer for the remaining units.

Underperforming Reit managers could also be removed under the code. Guidelines allow for the removal of a Reit manager if at least 50 per cent of unit-holders are present and the majority votes for it.

OCBC Investment Research said that the industrial sector is most likely to see some consolidation. ‘The candidates could be either Mapletree Logistics Trust (MLT) or A-Reit buying and/or merging with Cambridge,’ Mr Liew said.

How well the S-Reit market will do going forward will depend on how quickly global financial markets can recover next year, observers said.

CIMB economist Song Seng Wun noted that Singapore is heading into a turbulent patch in 2008, although the country’s economic engine has never been in a better shape. ‘While we have faith in the domestic drivers, we note that external threats to growth are real and visible,’ he said.

Reits listed here have raised some $4.0 billion this year, compared to $3.2 billion in 2006, according to data compiled by UBS.

With more Reit listings on the table, the amount of capital raised next year could well be higher - provided the S-Reit market comes out of the current turbulence intact.