As CEO, fund management, at CapitaLand Investment (CLI), Jonathan Yap oversees CLI’s REITs and funds portfolio. Some 21 years ago, he was at Lendlease. In those days, CapitaLand, fresh from a merger between Pidemco Land and DBS Land, was attempting to list its retail mall portfolio as Singapore Property Trust (SPT) to lighten its debt-laden balance sheet.
As it happened, the IPO of SPT was shelved due to its relatively modest yield of 5-plus-%, and a lack of understanding of REITs among retail investors. SPT was repackaged and listed as CapitaLand Mall Trust in 2002. Now, as CICT, it has returned $1.16 per unit since 2011 (see chart), including the pandemic years of 2020 and 2021.
In a recent interview, Yap gamely answered questions on REITs, funds, internalisation and M&A.
What has changed in the last 20 years that has made S-REITs a successful REIT hub?
In the last 20 years, things have changed quite a lot. Now, investors understand REITs, they form a major part of Singapore Exchange (SGX) and are constituents of the Straits Times Index. A joint report by Deloitte Singapore and the REIT Association of Singapore in November 2021 identified six main factors why Singapore is the preferred destination for REITs. They are: strong governance and regulatory framework; efficient tax regime; international investor base and activity; diverse offerings; political stability; and a vibrant secondary market.
Are mergers good for investors?
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
As the S-REIT market evolves, M&A activity has increased in line with other mature REIT markets. Within each market, sponsors/REIT managers may execute M&A differently that best leverages on their strengths. Regardless of the differences, sponsors would take careful consideration of the interests of both sets of unitholders to ensure that the M&A terms are fair and the transaction makes sense to both sides. (Yap declined to discuss specific mergers.)
What is your view on new REITs listing with an internalised structure?
The structure of new REIT listings will depend on the peculiarity of each REIT market. In the S-REIT markets, investors have largely accepted the externally managed structure because they recognise the value of having a strong and supportive sponsor that can provide managerial capability (e.g. real estate expertise, treasury, legal and compliance) and a robust pipeline for growth which small internally managed REITs find challenging to replicate. Sponsors of S-REITs also tend to hold significant stakes in the REITs, thereby ensuring a strong alignment of interests. The readiness to take significant stakes stems of the fact that the sponsors embrace and plan REITs as part of their business models.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
How do you think Singapore can grow the REIT sector? What could be the type of sponsors or assets that could list here?
As countries like India and China ramp up their capital markets, Singapore will continue to face competition from other listing venues vying to be a REIT hub. The S-REIT industry has a headstart and a strong foundation. Singapore is also attracting pools of capital including that of high-networth individuals and family offices, and institutional investors from more countries. These existing pools of capital would augur well for the demand of S-REITs as an investment product. I am optimistic that S-REITs will continue to grow with new listings of overseas assets, new fund managers/entrants, and potentially new sectors.
In your view, what is the best balance between listed REITs, and private funds for a REIM?
The different types of funds appeal to different groups of investors. There is a place for each of these investment vehicles. Certain investors may prefer to invest in listed REITs, given the liquidity and transparency of the listed market. Others may prefer private fund structures to have more discretion over individual deals and more tailored services from their managers while avoiding daily mark-to-market prices experienced by listed REITs as a result of share price movements. We will structure our funds as products to investors in a way that best meets the needs of our investors while taking into consideration the nature of the target investments.
How will rising rates and inflation affect the IRR for your funds? Will capital investors require higher hurdle rates?
Rising global interest rates is a concern among investors. CLI REITs are well poised to handle this challenge as they have already locked in a high proportion of fixed rate debt in anticipation of a rising interest rate environment (e.g. for Ascendas REIT, a 20 basis-point increase in interest rates is expected only to have a pro forma impact of 0.06 cents in DPU). Additionally, the high-quality asset portfolios of CLI REITs have provided them with good interest rate coverage ratios and are expected to remain at a comfortable range above the 2.5x MAS guideline. While there are some concerns that the rising rates may lead to expanding capitalisation rates, we believe that this will be balanced by tailwinds experienced by certain sectors such as retail and hospitality as the economy moves towards greater normalisation, providing support for rental growth and asset valuation.
What is the differentiation between your listed funds division and the private funds?
Our listed funds consist of five REITs and business trusts listed on SGX and one REIT listed on Bursa. Our private funds business comprises two divisions, private equity real estate (PERE) and private equity alternative assets (PEAA). PERE covers traditional real estate asset classes such as office, retail and logistics. PEAA seeks to expand our private funds business in alternative assets such as digital infrastructure, renewable energy, transition and sustainability investments, private credit and other investment strategies.
