Privatisation on the horizon for S-Reits with low liquidity, mostly overseas assets

[SINGAPORE] The Singapore real estate investment trust, or S-Reit, market is undergoing consolidation with the possible exit of smaller Reits and listing of bigger ones, said market observers.

Those facing low liquidity and those with a majority of overseas properties are especially vulnerable to being privatised, they added.

Interest rates have stabilised, following a series of rate cuts by the US Federal Reserve late last year. The Fed has indicated that it intends to pause rate cuts for now amid increased economic uncertainty in the US and a higher inflation outlook for the year.

Observers said that higher-for-longer interest rates might make highly under-valued Reits more attractive for privatisation.

Lee Wei Hock, deputy head of assurance at EY in Singapore, said that an acquirer may privatise a Reit, strengthen it and then re-list it when market conditions become favourable.

They may also reorganise the portfolio with other assets to introduce it as a new product in the next market cycle.

Privatisation candidates

Earlier this year, Times Properties, a wholly owned subsidiary of Cuscaden Peak Investments, proposed privatising Paragon Reit via a scheme of arrangement at S$0.98 per unit.

It cited low trading liquidity and the need to carry out major enhancement works as reasons for privatising the retail Reit.

Reits with persistently low trading liquidity, limited institutional interest and a high cost of capital relative to private market alternatives may be more inclined to consider privatisation, said Liu Miaomiao, a research analyst at Phillip Securities Research.

Property trusts that have a main investor holding a large part of the shares may also find it easier to execute a buyout, she added.

Lee of EY said those that do not have a readily available assets pipeline to tap may face lower trading activity and fewer institutional investors. Such Reits may consider privatisation too.

Tay Hwee Ling, accounting and reporting assurance leader at Deloitte Southeast Asia, said that Reits with mostly overseas properties are also more vulnerable to currency risks and foreign economic cycles. Such Reits could be more likely to privatise as they are more vulnerable to external pressures.

There are 17 S-Reits which are fully invested overseas.

Apart from Paragon Reit, Vijay Natarajan, an analyst from RHB Bank Singapore, named Frasers Hospitality Trust (FHT) and Europe-focused IReit Global as others that could possibly be privatised.

FHT, which had almost been taken private by its parent company two years ago, is a small Reit with limited opportunities for growth, while IReit Global is trading at a deep discount to its net asset value.

Looking forward

Natarajan said that the ongoing privatisation is “part and parcel” of overall market growth.

“Reits are undergoing a phase of minor consolidation and minor re-adjustment in value. That is not something I would be overly concerned about,” said Natarajan.

Liu said she does not expect a “dramatic shift” in the Singapore Reit market.

However, the listing of larger ones – alongside the exit of those that are smaller – could lead to a market consolidation and enhance the overall quality of the sector, said Liu.

As bigger and better quality Reits list, the sector could become more vibrant over the next five years, added Natarajan.