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Real estate investment trusts holding foreign assets have traditionally struggled to develop a following in the local market, partly because their assets and sponsors are unfamiliar. As US interest rates rise, however, the relatively high yields and global oriented growth prospects offered by this segment of the REIT market could become interesting to local investors. That is especially so amid growing concerns about declining shopper traffic at local malls, and turmoil at several REITs that hold industrial properties in Singapore.
There are currently 10 REITs holding only foreign assets listed on the Singapore Exchange — excluding First REIT, which was listed with an initial portfolio of only foreign assets before buying and then selling some nursing homes in Singapore. Of these 10 REITs, six have foreign sponsors: First REIT, IREIT Global, BHG Retail REIT, Lippo Malls Indonesia Retail Trust, EC World REIT and Manulife US REIT. The four with local sponsors are CapitaLand Retail China Trust, Fortune REIT, Frasers Logistics & Industrial Trust (FLT) and Mapletree Greater China Commercial Trust.
Why do REITs with foreign assets choose to list in Singapore? One reason is that SGX-listed REITs and property trusts are generally externally managed, which is advantageous for the sponsor. Some REIT industry watchers say, however, that Singapore might eventually go the way of more developed markets, such as Australia and the US, where most REITs have internalised managers.
Whether Singapore moves towards internally managed REITs as the sector matures remains to be seen. Market observers suggest that moving towards an internally managed structure would deter foreign sponsors who want to list their REITs here.
“As REITs got listed and were publicly traded, they were heavily scrutinised by the investment community, and the investment community would consistently much rather see them internally managed than externally managed,” says Collin Bell, managing director of Goldman Sachs Asset Management. “The concern that some investors have with the externally managed structure is there can be egregious fees that are applied in different ways.”
Bell adds that the interest of a REIT manager might not be completely aligned with those of investors in an externally managed structure. “The concern about having them externally managed is that the interest is in the direction of the sponsor rather than in the direction of the unitholders.”
To be clear, the rules in Singapore do allow for internally managed REITs and property trusts. In fact, last year, Croesus Retail Trust acquired its external manager for $50 million. CRT is actually a business trust; it owns 11 malls in Japan. Since the internalisation of the manager was proposed in June last year, units in CRT have climbed 28%. On April 26, CRT announced it had been approached in connection with a potential transaction that could lead to an acquisition of all the issued units in the trust.
It remains to be seen whether investors in Singapore increasingly demand that property trusts and REITs that choose to list here adopt an internalised manager model, and whether that affects the willingness of foreign sponsors to list their REITs here. In the meantime, some of the ones already here say they were attracted by the fact that Singapore is a well-known international asset management centre, and there already is a fairly large and varied universe of REITs in the local market.
Chan Iz-Lynn, CEO of the manager of BHG REIT, which owns five shopping malls in China, says: “In Asia, Singapore is a very good choice because it has the most number of REITS as well as REITs with foreign properties and foreign sponsors. Investors here are REIT-savvy, be they institutional or retail.”
Ideed, some REITs with foreign assets that have delivered decent performance over the past year have seen their yields compress on positive investor sentiment. For instance, Manulife US REIT saw its unit price dive below its IPO price of 83 US cents shortly after listing in June last year. But its unit price gradually crept higher. And, after the trust paid out a distribution per unit of 3.55 US cents on March 31, its units climbed to hit a high of 90 US cents.
Manulife US REIT owns three office buildings in the US — in Atlanta, downtown Los Angeles and Orange County. This week, the REIT announced its first acquisition – an office building at New Jersey – for US$115 million, along with a private placement to partially fund it. The REIT is structured such that all its distributable income is tax-free, and unitholders do not pay US withholding tax on their DPU as long as no single entity owns more than 9.9% of its units.
Now, while higher interest rates are a headwind for yield-oriented investment instruments, Manulife US REIT is seen as a direct beneficiary of the recovering US economy. For 1QFY2017, Manulife US REIT reported net property income (NPI) of US$12.76 million ($17.63 million), outperforming its forecast by 2.7%. Its DPU of 1.65 US cents for the quarter was 8.6% higher than forecast. DBS Group Research forecasts DPU of 6.42 US cents for this year, and 6.48 US cents for next year, translating into forward yields of 7.2% and 7.28% for 2017 and 2018, respectively.
“Manulife US REIT’s strong recent results as well as double-digit rental reversions achieved since its listing indicate that its properties in the Midtown Atlanta and Downtown Los Angeles submarkets continue to see steadily increasing rents, continued expansionary tenant demand, increased employment opportunities and a lack of competitive new supply,” the DBS Group Research report states.
BHG REIT has also been making headway in the local market as it delivers operating performance that is better than some leading REITs that hold local malls. For 1QFY2017, its NPI rose 7% y-o-y to RMB50.4 million ($10.2 million) and DPU was 1.5% higher at 1.39 cents. BHG REIT’s unit price is up 8.4% this year.
The REIT’s sponsor is China-based Beijing Hualian Department Store Co, which holds a 33.29% stake in the REIT. Its other major shareholders include Chanchai Ruayrungruang, China Merchants Bank Co and Bank of Communications Co. Chan says BHG REIT is now trying to widen its investor base. “We’ve been holding several non-deal roadshows in Singapore and Malaysia hoping to target smaller institutional as well as retail investors. We would like to increase and diversify our investor base. And, we’re hoping, with awareness, people see us as a good product.”
While e-commerce is taking off in a big way in China, BHG REIT does not appear to have been badly affected. “People often ask about e-commerce. It’s often not as scary as it’s made out to be,” Chan says. “What we’ve seen for the last year is that rental reversions are very healthy. We make sure our trade mix is what people really want. We keep in close touch with our tenants and shoppers and even our marketing activities are very community-based, such as rehearsals for children and singing competitions.”
According to Chan, 80% of BHG REIT’s net lettable area and 65% of gross rental income are from tenants that provide an “experiential” trade mix. These include cinemas and F&B outlets.
BHG REIT’s property manager is owned by the BHG group, which also owns a supermarket chain listed in Shanghai. “The property manager is the one that negotiates with all the leases. It has thousands of leases and is able to bring tenants in. That is the strength of the group,” Chan says. The sponsor manages 18 proper ties and is building 14 malls to which BHG REIT has right of refusal. “We want to acquire responsibly,” Chan says.
One REIT with foreign assets that seems to have won over analysts is FLT, which listed in June last year. It owns 54 Australian industrial assets, mainly in Brisbane, Melbourne and Sydney, Australia’s largest industrial markets, and a smattering in Adelaide and Perth. For 3QFY2017 benefiended March 31, the REIT achieved distributable income of A$25.1 million ($26.3 million) and DPU of 1.75 cents, exceeding forecasts by 5.9% and 6.7%, respectively.
Robert Wallace, CEO of FLT’s manager, says: “We have had a fair bit of leasing. We have leased 113,000 sq m since IPO, which is about 10% of the portfolio by area. We’ve renewed all bar one of those leases.” That was a lease surrender because the company that leased the property was sold. “We’re very focused on retaining our customers and keeping our occupancy [rate] high, and renewing our leases early.”
On June 7, FLT announced the proposed acquisition of seven industrial properties in Australia from its sponsor for A$169.3 million, or 6.4% initial NPI yield. Although the acquisition’s NPI yield is lower than its existing portfolio yield of 7%, the properties are supported by longterm weighted average lease expiry of 9.6 years. When completed, the acquisitions will raise the WALE to 6.9 years, from 6.7 years.
Wallace says, “What tends to happen in Australia is that, the longer the lease, the firmer the yield. These are modern assets and all but two of the assets were recently completed. Five are new assets and incorporate more of the [characteristics of] modern assets that our customers seek such as sustainability and located near infrastructure.”
At its IPO price of 89 cents, FLT offered investors a yield of 7.3%. Since then, its units have climbed 18%. Some analysts see further gains ahead as a result of the REIT’s expansion plans. “We believe the accretive acquisition could catalyse FLT’s unit price and narrow its valuation gap versus big-cap industrial S-REITs,” CIMB Research says in a note on the acquisition. “We maintain our estimates, pending the finalisation of the funding structure, which would be a combination of equity and debt.”
According to CIMB, assuming FLT funds 45% of the acquisition with equity and 55% with debt, its pro-forma DPU could see a gain of 0.9%. “This could raise our FY2018 DPU growth forecast to 4.4% y-o-y,” CIMB says in its report. CIMB forecasts DPU of 6.9 cents for this year, and 7.1 cents for FY2018, translating into forward yields of 6.57% and 6.76%, respectively.
At its IPO, FLT’s sponsor Frasers Centrepoint had provided it with a right of first refusal of 15 assets. Four of these properties are among the seven that FLT recently proposed to acquire. Wallace says, “We will continue to grow through ROFR or pipeline assets, which are being built or proposed to be built. The sponsor will also grow its pipeline, and we will also grow through those acquisitions. They tend to build A$200 million to A$250 million of industrial stock a year.”
This article first appeared in The Edge Singapore Market Report.