Staying attractive to sponsors as a REIT hub

“These factors interplay with and complement one another to create a conducive environment for S-REITs to flourish and achieve prominence at the regional level,” Yap says.

“Singapore’s conducive regulatory and tax environment provides an early-stage set-up platform for sponsors and asset managers, and a listing on the stock exchange is just the beginning of a REIT’s growth journey. Being listed allow S-REITs to tap a vibrant secondary market for fundraising and merger and acquisition opportunities. Sponsors can also continue to inject assets into the S-REIT’s portfolio,” the Deloitte-REITAS report states.

The ability for REITs listed in Singapore to raise capital and grow via accretive acquisitions is demonstrated by statistics on an annual basis. In 2021, around 20 S-REITs and business trusts made around 51 acquisitions valued at around $12.6 billion, according to Singapore Exchange data in the report.

Data compiled by The Edge Singapore showed that S-REITs raised around $5.5 billion last year, including perpetual securities that were issued and excluding perpetual securities that were called.

See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM

Eng-Kwok Seat Moey, managing director and head, capital markets, DBS Bank, says once sponsors have listed their REITs here, they must also continue to support the growth of the REITs, including DPU growth, otherwise the REIT would be no better than a bond.

Tax transparency

Tax transparency was a tailwind that helped to create investor interest in REITs including for local institutions such as insurance funds, income funds and REIT funds. REITs are primarily yield instruments, with growth added in.

See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM

Every five years, the government renews REITs’ tax incentives and the next renewal is in 2023. First and foremost, for investors, tax transparency is where the REIT does not pay taxes if it distributes at least 90% distributable income, and its investors by and large do not have to pay witholding tax. Secondly, foreign-sourced income is not taxed.

“This is one of the items on my wish list,” Eng-Kwok says, referring to the tax benefits of investing in REITs. The other item on her wish list is to have an S-REIT make it to the ranks of the top 10 largest REITs on a global basis.

Robust regulations

S-REITs are regulated by the Monetary Authority of Singapore. REIT regulations are perhaps more robust than those for companies. And this is an attraction for investors. In the past 20 years, despite some nefarious sponsors selling over-rented properties into their REITs, or capitalising the cash flow from an 80-year-old rusty ship, into the REIT, S-REITs have by and large escaped the type of issues that corporates have faced.

For instance, in the past 20 years, only one REIT has faced bankruptcy proceedings, Eagle Hospitality Trust. Of course, at different times of the cycle, some REITs have faced challenges, even distress but most of the time, they have survived.

Troubled REITs such as Lippo Mall Indonesian Retail Trust and First REIT have managed to raise capital. First REIT, in particular, is in a healing phase.

Two property trusts continue to face problems. ARA US Hospitality Trust has had a difficult pandemic but stays listed. Dasin Retail Trust faces challenges with refinancing. However, with a Chinese state-owned enterprise taking control of the manager and eventually the trust, refinancing should be resolved.

Growth and fee income

There is a seventh factor to add to the six factors by Deloitte and REITAS: the external manager model. Sponsors are incentivised to list here because of the way REITs are structured. Their ability to raise fee income, and the ability to grow DPU for investors, coupled with fee income growth for sponsors, give Singapore added advantage.

In addition, as a developed economy, Singapore’s risk-free rates are low, so accretive acquisitions are possible with a combination of debt and equity. This may not always be the case for emerging markets where risk-free rates are higher.

Growth requires fundraising, and acquisition growth also raises fee income for the sponsors. Data compiled by The Edge Singapore showed that based on fees for a 12-month period for S-REITs which had their financial years ending in September 2020, December 2020 and March 2021, managers and sponsors of S-REITs were paid roughly $1.07 billion including acquisition and divestment fees. Excluding acquisition and divestment fees, S-REITs managers and sponsors were paid around $565 million. This excludes Soilbuild Business Space REIT, which was privatised last year, and EHT.

Interestingly, for the biggest transaction among the S-REITs in the past 20 years, acquisition fees were waived. CapitaLand, the sponsor and owner of the managers of CapitaLand Mall Trust which acquired CapitaLand Commercial Trust, waived the acquisition fee which would have amounted to more than $100 million. Similarly, Mapletree Investments has proposed to waive the acquisition fee for the merger of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust.

Taking on the world?

To narrow the gap between itself and Link REIT, its next largest peer in Asia (including Japan), CapitaLand Integrated Commercial Trust (CICT) would need to add another 75% in market capitalisation. That would be a tall order. Nonetheless, as Yap says, since its inception to Dec 31, 2021, CICT has delivered on total returns of just short of 20%. This includes around 5% or so in yield, and unit price appreciation.

CICT does not really have global ambitions. As Yap puts it, CICT is one of CLI’s “asset class-focused“ REITs, primarily in developed markets. At present (and including the Australian acquisitions), more than 90% its AUM and NPI are (and will be) Singapore-based.

To keep investors onside, CICT would need to grow judiciously. In December last year, CICT expanded into Australia with the acquisition of three properties valued at A$1.1 billion ($1.05 billion). During a results briefing on Jan 28, Tony Tan, CEO of CICT’s manager, said the REIT’s next acquisition is likely to be in Singapore.

Sponsor CLI owns 79 Robinson Road, which is across the road from Capital Tower, one of CICT’s properties. Separately, CICT has a call option to acquire a 55% stake in the recently opened CapitaSpring which has committed occupancy of 93%.

On the retail front, the CapitaLand Group owns a 50% stake in ION Orchard, and 49% in Jewel at Changi Airport. CLI’s parent is part of a consortium that has the most likely winning bid for Singapore Press Holdings. This could result in Clementi Mall, Seletar Mall and 50% of Woodleigh Mall being a new pipeline for CICT. The pipeline assets will not get CICT to a market cap of $24 billion from its current market cap of $14 billion. But they could help to narrow the gap.

On the DPU front, CICT’s 2HFY2022 could experience cash inflows from Twenty-One Collyer Quay, Six Battery Road (following AEIs), Asia Square Tower 2 and the Australian acquisitions. Higher levels of cash flow are likely to boost valuations, NAV and DPU.

For CICT, when the sponsor benefits, so do unitholders, and that is the secret of a successful REIT hub.