S-Reits on acquisition binge amid low interest rates

Singapore

AMID a lower-for-longer interest rate environment, Singapore real estate investment trusts (S-Reits) are ramping up their acquisitions worth billions of dollars, according to market observers.

Just this week alone, three S-Reits have announced equity financing to partially fund their acquisitions - Keppel DC Reit raised S$478.2 million to fund its proposed acquisition of two data centres worth about S$587 million, Mapletree Industrial Trust (MIT) secured S$400 million to acquire a US$1.4 billion data centre portfolio together with Mapletree Investments, and Manulife US Reit on Thursday said it plans to raise US$142.1 million to finance its US$198.8 million acquisition of a Class A office building in Sacramento, California.

Similarly in July, Frasers Logistics & Industrial Trust garnered S$258.1 million via a placement to fund its proposed acquisition of 12 prime logistics properties in Germany and Australia worth A$644.7 million (S$612.5 million), and CapitaLand Commercial Trust carried out a S$220 million placement to pay for its acquisition of a German office building at a purchase consideration of 133.4 million euros (S$205.3 million).

Vijay Natarajan, property analyst at RHB Securities Singapore, said S-Reits have been on an acquisition trend this year due to conducive market conditions, with a "prolonged low interest rate environment" benefiting Reits in terms of greater investor appetite for yield instruments and access to cheap funding costs.

"As many of the Reits are trading at a premium to book value, they are also able to do accretive deals both to their DPU (distribution per unit) and NAV (net asset value), which benefits stakeholders," added Mr Natarajan.

Maybank Kim Eng analyst Chua Su Tye said he sees "acquisition growth levers arising" for the sector as the Monetary Authority of Singapore (MAS) seeks feedback on its proposal to increase the leverage limits for S-Reits. In a move to enable S-Reits to better compete against private capital and foreign Reits when making real estate acquisitions, the MAS in July announced that it is considering raising S-Reits' current leverage limit of 45 per cent.

"S-Reits have acquired overseas for diversification and growth, yet maintain strong balance sheets. An increase in leverage from 45 per cent to 50 per cent raises debt headroom by 10-14 per cent for AUMs (assets under management), and opportunities for DPU-accretive deals," Mr Chua said.

In addition, analysts from Maybank Kim Eng also see industrial S-Reits as likely beneficiaries, especially as they push further into Europe and the US. The brokerage cited MIT, Ascendas Reit, Frasers Centrepoint Trust, CDL Hospitality Trusts and Far East Hospitality Trusts as their top picks within the industry.

Singapore Exchange market strategist Geoff Howie noted that much of the world has seen a rotation into Reits on the outlook for lower interest rates, while slower growth outlooks have had much more impact on trade-related sectors.

As Mr Howie explains, lower interest rates have benefited S-Reits on two key fronts. The first is that lower interest rates mean lower costs of capital on debt used to acquire properties; the second is that the premium of the Reit yields to interest rates has increased. "From a global perspective, the median yield of the global Reit market is 4.8 per cent. At the same time, the 10-year US Treasuries are currently yielding 1.8 per cent," he said.

"There have also been reports this year that institutional investors have been turning away from private equity real estate and infrastructure investments in favour of liquid funds that put their money to work faster," Mr Howie added. These suggest healthy investor demand for Reits, he noted, citing the fact that over the first eight months this year, S-Reits have raised close to S$2 billion in placements on the secondary market combined.

The flurry of activity in the S-Reits space also comes as Mapletree Commercial Trust (MCT) is set to replace Hutchison Port Holdings Trust on the Straits Times Index (STI) with effect from Sept 23. According to Mr Howie, the three current Reits on the benchmark index have a weightage of about 6.5 per cent, and MCT's inclusion would bring the combined weightage of the four Reits in the STI to about 8 per cent.