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.