Reits with more offshore assets set to be listed here

Ong Chor Hao
18/3/2013

LISTINGS of real estate investment trusts (Reits) here are likely to comprise more offshore assets and be of a fairly large size, says the head of Asian real estate at Goldman Sachs (Singapore).

Both are signs and the result of a mature Reit market that is set to remain a dominant hub in Asia, said Michael Smith, a managing director at the bank.

In an interview with The Business Times, after Goldman helped to build the books for Mapletree Greater China Commercial Trust's (MGCCT) listing, Mr Smith said Singapore's strong regulatory framework sets it apart from many other countries.

Particularly, he pointed to the tax transparency enjoyed by Reits in Singapore, which differentiates between investing in the Reit and the developer.

In Hong Kong, where no such tax transparency exists, Reits have not gained the same traction as they have in Singapore, he added. And the trend for S-Reits to list foreign assets is set to be more norm than novelty. "As a consequence of running out of real estate, many of these Reits have to go offshore," Mr Smith said.

He was explaining why MGCCT was able to list a Hong Kong asset in Singapore - which may have seemed counterintuitive. There again, Singapore set itself apart with its pipeline of strong sponsors and the framework to support Reit listings.

"When you've got a sponsor . . . who's prepared to put that much capital to work, take real risk, compete in competitive processes to win assets with a tactical strategy to then list those assets in Singapore, that's a pretty unique thing that really advantages Singapore," Mr Smith said.

This is especially appealing to owners in countries without proper Reit frameworks, such as India, Indonesia or China, where properties may have been trading at below asset value. In contrast, MGCCT with its two foreign properties is trading at a 17 per cent premium.

"So because of the way that it's worked so well, I suspect others will look at this more closely and ask, 'look, can I do this as well? Am I going to get more value for my assets, are people going to value my assets better in the Singapore Reit framework than they currently do?' And with the Mapletree precedent, I think the answer is yes," Mr Smith said.

MGCCT's success also reflects strong interest in Reit listings in Singapore.

There are at least 10-20 parties "looking at doing something", although he believes that investors will be disciplined in what to invest in, given the mature and varied S-Reit market.

"It's famine or feast. Either it works really, really well because it's got the right assets, the right sponsor, the right structure, the right pricing. Or it works really, really bad."

While the Reit market has seen the addition of big names such as MGCCT, Ascendas Hospitality Trust and Far East Hospitality Trust over the past year, there were notable pullouts such as Dynasty Reit and M&L Hospitality Trusts.

Mr Smith sees big Reit listings as being here to stay; he expects a need to raise at least $500 million with assets worth $1-2 billion to draw investor support.

"I think the days when you can list a $100 million Reit IPO or $200 million are probably over."

MGCCT's subscription demand shows that investors have no lack of liquidity and want larger sizes and market capitalisation.

"Otherwise they will just keep staying in the big guys and not come to you."

A side effect of that is potential mergers on the horizon. As smaller players struggle to make accretive acquisitions with their higher yields, they may start trading worse as more big plays come to market and attract interest.

"And when you've got the big Reits trading at 10-20 per cent premiums and the small Reits trading at 20 per cent discounts, as it's happened in other markets, the big will take out the small."

While the Reit market now seems to be riding a high, Mr Smith also warned of potential dangers.

The first is the quality of real estate. The second is that currently low interest rates will eventually go up.

"At that point, Reit prices will fall as yields go up and there's nothing anyone can do about it because they're very interest rate-sensitive," he said.

The third is capital flows. Reits are currently popular with investors who want exposure to real estate but are staying defensive over risk concerns.

For example, if China or Singapore should decide to ease property controls, "there is a lot of momentum money sitting in Reits now which may go into buying China developers or Singapore developers".

For the S-Reit market to retain its leading status, Mr Smith's advice is simple: do more of what has worked to keep barriers to entry high enough so that other markets don't compete.

"And those barriers are really the best regulatory framework and the most sophisticated sponsors going out and buying the right assets, and listing the right Reits."