Reit consolidation not likely: analysts

They say requisite factors for consolidation such as valuation disparity, market disruption and little room for growth are not present

By

Lee Meixian

JUN 15, 20155:50 AM

Singapore

THE erratic outlook for the Reit sector has rekindled market talk of possible consolidation - be it smaller players grouping together, or larger players taking smaller ones out - should market conditions worsen.

This is given the "saturated" Reit market in Singapore, particularly in the industrial space which is fragmented with several small players which do not appear to be very different from one another to the layman.

But analysts The Business Times spoke to thought it unlikely, citing a list of factors that need to be in place before consolidation can occur.

First, Reits need to be trading at deep discounts, which is not the case now. Most are trading at or above book value, said Vikrant Pandey from UOB Kay Hian. Another condition is that Reits need to have exhausted growth opportunities, and competition has to be so intense and affect profit margins so badly that they turn to consolidation as a way out.

While the pool of assets in land-scarce Singapore is limited, Reits have overcome that by acquiring overseas assets, thus making consolidation unnecessary, he said.

DBS Group Research analyst Derek Tan cited other preconditions before consolidation can occur, namely: financial market dislocations, given how reliant Reits are on capital markets, and - related to Mr Pandey's point - a valuation disparity, where a Reit is trading above book value and another below, so that it is cheaper for the former to buy the latter through a share swap.

"At this point, we see neither," he said.

Consolidation also tends to happen during times of crisis, not when the market is flush with liquidity like now, said Ong Kian Lin, who recently became the head of research at RHB Research in Singapore.

The last time Reit consolidation happened here was during the 2008 global financial crisis when Frasers Centrepoint acquired 17.7 per cent of the Singapore-listed Allco Commercial Reit and 100 per cent of its manager, and rebranded the Reit as Frasers Commercial Trust.

The stakes were acquired from the then financially troubled Allco Finance Group, which needed the proceeds to repay debt.

Later that year, Malaysian developer YTL Corp also bought 26 per cent of the Singapore-listed Macquarie Prime Reit and 50 per cent of the manager from Macquarie. Macquarie had spent months seeking a buyout offer for the Reit, but could not find takers in the difficult capital market environment. It thus relented to sell just its own stake to another sponsor.

Fast forward to present day, the financial health of Reits still looks good, Mr Ong said. "The balance sheets are strong. No one looks in distress."

Meanwhile, the jitters have not shaken several offshore, cross-border Reits looking to list here. At least three Reit listings are expected to revive the quiet IPO market this year.

One of them is Canadian insurer Manulife Financial Corp's asset management arm, which is planning an up to US$450 million Singapore listing of its US office properties in Q3. DBS Bank and JPMorgan are advising on the deal.

Another Reit in the pipeline comes from Shanghai property investor Kailong Real Estate Investment, which might spin off its Shanghai business parks in a S$200 million listing in July, said Reuters. The Reit will be denominated in both renminbi and Singapore dollars and will be the first dual currency Reit in Singapore. It will also be the first mainland Chinese company to issue a Reit IPO here.

The third comes from fund manager CIMB-TrustCapital Advisors, which is planning to list a Reit with possibly up to A$1 billion (S$1.04 billion) worth of Australian office assets on the Singapore bourse, according to The Australian.

The Reits are likely drawn by Singapore's pro-business tax incentives and large investor base well-versed with the Reit instrument.

Analysts say these listings will add diversity to the offerings here and boost the options for investors. The chances of them cannibalising interest in the existing Reits are low because their exposures are quite different.

In fact, some analysts expect offshore, cross-border listings to form the trend going forward, given the vast numbers of property portfolios available outside Singapore, and the already well-represented domestic sectors for office, retail, hospitality and even industrial real estate here.

Unclear timing of rate hike causing Reit jitters

Interest rate increase may or may not be priced in already; selldown still expected when rates rise

By

Lee Meixian

JUN 15, 20155:50 AM

Singapore

THE unclear timing of the interest rate increase is causing some volatility in the share prices of Singapore real estate investment trusts (Reits), which have rallied and corrected with each reading of the Federal Open Market Committee's (FOMC) meeting minutes.

The FOMC next meets on June 16-17. With June now looking unlikely for a rate hike given still-mixed US economic data, the consensus now seems to be for a 25 basis point bump-up in interest rates in September.

And although Reits have braced themselves for it - some 80 per cent of all their borrowings have already been hedged - analysts still expect a selldown on fears.

There are divided views on whether Reits have already priced in the rate increase or not. One analyst noted jitters still when US Treasury bond yields or Singapore government bond yields spike.

For instance, when the US 10-year bond yields went from 1.89 per cent to 2.29 per cent on April 20, the FTSE ST Reit Index fell 2.1 per cent.

More recently, when the 10-year Singapore bond yields rose 24 basis points from 2.42 per cent on May 29 to hit an 18-month high of about 2.66 per cent on June 5, Reits sold down 1.1 per cent over the same period.

"So I don't think the rate increase is really reflected in their current prices, because there is always this emotional sentiment. When rates do increase, although it may be gradual, things will still get pretty volatile and we can expect a bit of a selldown," one analyst said.

He added that investors will need to be very selective about picking stocks.

"Going forward, it's not easy to pick a conviction within the sector . . . A few houses are advocating bottom-up stock picking, meaning as opposed to going for a sector, you look at company fundamentals specifically. You comb across the different Reits and look for factors like strong balance sheet, good capital management, high percentage of borrowings hedged, and DPU (distribution per unit) growth."

DBS analyst Derek Tan noted that average interest costs have been increasing moderately over the past year or so, largely due to some floating rates on loans going up, as well as on longer tenure loans which typically come with higher costs.

"But generally the DPU trend is still positive, albeit its growth has been slowing," he said.

When the interest rate increase finally kicks in - and it would have been about two years since the possibility of it first surfaced in May 2013 - there is almost guaranteed to still be a selloff in the S-Reit sector.

But Mr Tan believes "it will be a relief rather than downside, and the downside won't be a lot because the market has been waiting for it for so long that the majority has been priced in".

Asked to describe his outlook for Reits for the rest of this year, UOB Kay Hian analyst Vikrant Pandey called it "hazy".

"For the next quarter, I think Reit prices will move sideways, without any strong upward or downward movement. This year has been a see-saw in terms of the outlook for interest rate direction, be it an earlier or later than expected rise, and that has caused swings in the performance of interest rate sensitive sectors like Reits."

In the US, big utility stocks also rank among the most rate-sensitive equities because of their highly geared nature. A lot of capex is pumped into their infrastructure projects which then yield recurring income, much like how properties work in Reits. But there are no such pure plays on Singapore's bourse.

Among Singapore's Reits, the respective sub-sectors also have their own headwinds to contend with.

The office sub-sector faces a massive four million square feet of supply until end-2016, and while there appears to still be some time, this has put the bargaining power back into tenants' hands.

According to Knight Frank, office spot rents grew at a slower pace of just 0.2 per cent in Grade A+ buildings in Raffles Place and Marina Bay quarter on quarter in Q1. Office Reits have traded down about 7 per cent year to date, making them the biggest laggards compared to other sub-sectors.

The industrial property sector faces a similar oversupply situation, as well as a slew of restrictions - on strata sub-division and space occupied by anchor tenants, seller stamp duties, shorter land tenure, longer minimum occupation periods before asset sales - all of which are measures by the government to cool industrial property prices and rents.

Retail is on a structural downtrend, plagued by labour costs and online competition, while hospitality is faced with falling tourist arrivals - a 5.4 per cent drop in the first four months of this year - and weak regional currencies which make Singapore an expensive destination.

Maybank has an "underweight" recommendation on Reits, with "sell" calls on CapitaLand Mall Trust (CMT) and Ascendas Reit. UOB Kay Hian has a "sell" on CMT too, citing retail weakness, while RHB recommends "buy" for its economies of scale and low gearing. OCBC Investment Research and RHB are neutral on Reits, citing rate fears. Different houses are more pessimistic on different sub-sectors with no clear consensus.