Reits May Well Have To Go Down Development Path

Source : The Business Times, December 17, 2007

REAL estate investment trusts listed in Singapore (S-Reits) must look at developing their own assets going forward, instead of just buying from sponsors or third-party vendors.

Right now, most of them are suffering from a double whammy - potential assets are lacking and capital is getting more expensive.

Too many Reits are competing for a fixed number of assets in Singapore. Since the first S-Reit was listed in 2002, the market has grown by leaps and bounds. Currently, there are 20 Reits listed on the Singapore Exchange.

In addition, foreign funds are also snapping up commercial properties, making assets even scarcer. These funds are also eyeing assets identified by developer-sponsored Reits as being in their asset pipelines.

For example, CapitaCommercial Trust (CCT) did not buy CapitaLand’s Temasek Tower and Chevron House. Market watchers said that a third-party buyer’s offered price must have been at a level that was not accretive to CCT. This means that a sponsor’s portfolio is a guaranteed asset pipeline for a Reit only if no third party is willing to offer a higher price - an unlikely scenario in a hot property market.
Compounding the problem is the jittery market, which makes raising funds for acquisitions difficult.

For example, K-Reit Asia recently decided not to proceed with a convertible bond and unit issue to finance its one-third purchase of One Raffles Quay, citing weak equity and credit markets. Parent company Keppel Corp instead provided a revolving loan facility of up to $960 million.

This pushed up the Reit’s gearing to a relatively high 55 per cent - not far from the regulatory cap of 60 per cent - giving K-Reit little room to fund future acquisitions with debt.

Citigroup recently downgraded K-Reit Asia to a ’sell’ from a ‘buy’, citing stalling acquisition growth. The bank also cut the stock’s target price to $2.17, from $2.87 previously.

‘Acquisitions will be constrained by limited debt headroom of about $100 million,’ the bank said in a research note.

Analysts have identified four other S-Reits - Allco Reit, Mapletree Logistics Trust, Cambridge Industrial Trust and Saizen Reit - as also having relatively high gearing.

Faced with these constraints, many Reits here will sooner or later have to go down the development route.

‘So far, A-Reit is the only Reit that has pursued this route with some success,’ notes OCBC Investment Research. ‘Going forward, with less opportunity for growth, we anticipate to see more S-Reits take on development projects.’

In particular, developers looking to list Reits in 2008 should look at setting up stapled trusts. Right now, there is just one such Reit listed here - CDL Hospitality Trusts, which consists of a hospitality Reit and a business trust, although the business trust is dormant at present.

In a stapled trust in which both parts are functional, investors will get stable returns from the Reit, which could be solely used as a vehicle for holding assets.
The stapled business trust, on the other hand, can take on development jobs and guarantee a pipeline of assets for the Reit. Such a product should prove to be popular with investors, and will also be a fresh and differentiated offering in Singapore’s Reit market.