Business Times: Mon, Dec 20
REAL estate investment trusts (Reits) in Singapore have returned to the acquisition trail, snapping up around $7 billion worth of properties in Singapore and abroad so far this year.
Analysts note that the shopping spree is likely to continue into 2011 but they also point out potential pitfalls - not all purchases may be yield-accretive, and overseas deals could expose Reits to more risks.
According to data compiled by DBS Vickers, Reits have completed acquisitions of around $7 billion in the year to date. Buying activity improved as the economy recovered and financial markets thawed. Last year, most Reits were busy refinancing debts and avoided straining their balance sheets with purchases.
Some of the biggest buyers this year include K-Reit Asia, which spent around $1.75 billion on a stake in Phase One of Marina Bay Financial Centre (MBFC) and offices in Australia; Suntec Reit, which paid some $1.5 billion also on a stake in properties in MBFC Phase One; and Starhill Global Reit, which bought retail assets in Australia and Malaysia for about $599 million.
Industrial Reits such as Mapletree Logistics Trust and Ascendas Reit (A-Reit) also acquired several properties this year but their deals were 'more bite-sized' and did not match up to others in value, said analysts Derek Tan and Lock Mun Yee in a report last Friday.
Office reits owe much of their growth this year - a 19 per cent increase in distributable income year-on-year - to acquisitions.
The industrial reit sector is also bound for acquisition-driven growth next year.
'Industrial Reits are likely to continue to enjoy better acquisition growth potential given the relatively higher yields of industrial assets (versus current implied yields of industrial Reits) and each transaction tends to be of lower values compared to other asset classes,' the DBS Vickers report said.
'We expect demand for industrial space to remain relatively stable - fuelled by continued expansion and more firms setting up their operations in Singapore. Occupancy levels should continue to firm in coming quarters with landlords likely to seek higher average rents during renewals in their bid to maximise portfolio yields.'
Reits could embark on more acquisitions next year, looking at what their sponsors alone can already offer.
DBS Vickers raised a few possibilities - CDL Hospitality Trusts may buy Studio M Hotel from Millennium & Copthorne, while Frasers Centrepoint Trust may purchase Bedok Mall from Frasers Centrepoint.
OCBC Investment Research has a similar outlook on asset purchases next year. 'Many Reit managers are capitalising on the recovery cycle for further asset enhancement initiatives and acquisitions,' said its Dec 10 report.
The trend of looking beyond local shores appears set to carry into the new year, as well.
A-Reit, which currently owns industrial properties only in Singapore, has recently set up a Shanghai representative office, the OCBC report noted.
'We believe that more Reits will be looking at acquiring assets beyond Singapore,' the report said.
'We anticipate more S-Reits may consider switching to a more internationally diversified portfolio next year, given the inflated property prices in their native land, and more appealing rental yields in other markets.'
DBS Vickers noted that property yields abroad tend to be higher, 'more accretive to earnings' and enabled the trusts to diversify their market exposure.
However, Reits have to consider potential tax leakages and foreign exchange volatilities against yield accretion, its analysts cautioned.
Reits considering office purchases also have to keep negative yield spreads in the sector in mind, they added. Office property yields are in the range of 4-4.5 per cent, while the implied yield of the office Reit sector is 5 per cent.
This points to 'continued need for income support arrangements so that assets will have time to stabilise, and for earnings to catch up in the coming years, in order to make acquisitions yield accretive,' they said.
The Reit sector's average gearing ratio stands at around 34 per cent, according to DBS Vickers. This is 'relatively low' as most Reit managers are comfortable with a ratio of up to 40-45 per cent, and signifies that Reits have further flexibility to borrow for asset purchases.
Reits are also likely to winch up leverage in 2011, because of the low interest rate environment, the OCBC report said.
'Departing from the previous conservatism seen during the financial crisis, it seems that more S-Reits are now comfortable reverting to the pre-crisis target gearing levels of 40-45 per cent,' the report said.
Current overall debt profiles, with an average gearing of 29.6 per cent, were deemed 'healthy' by the OCBC report.
'Notably, at least four Reits have average debt tenures (Starhill Global, Parkway Life, A-Reit, Cache Logistics Trust) exceeding three years,' the report said.
' There is also debt headroom of $5.7 billion for further debt-financed acquisitions, assuming a long-term aggregate leverage ratio of 40 per cent.'