S-Reit acquisitions up in September, but smaller deals signal weakening appetite amid uncertainty

DESPITE concerns over rising interest rates and a global economic slowdown, September has emerged as the most active month this year for acquisitions by Singapore-listed real estate investment trusts (S-Reits).

Seven proposed acquisitions were announced in September, adding to the 19 announced in the first eight months of the year.

This brings the total number of proposed acquisitions in the year to date to 26 – or around half the 50-odd asset acquisitions announced in 2021.

The recent acquisitions are smaller, reflecting perhaps a more cautious stance among managers.

The manager of Frasers Centrepoint Trust (FCT) announced on Sep 12 it would acquire a further 10 per cent stake in Waterway Point for S$132.3 million. This will bring FCT’s interest in the Punggol shopping mall to 50 per cent.

Hot on the heels of this announcement, the manager of Parkway Life Real Estate Investment Trust (PLife Reit) said it is acquiring three nursing homes in Japan’s Hokkaido region for 2.56 billion yen (S$26.1 million).

PLife Reit later in the month announced the proposed acquisition of another two nursing homes in Japan – this time in the Greater Tokyo region – for 2.88 billion yen.

Another healthcare S-Reit, First Real Estate Investment Trust (First Reit) , also announced the acquisition of two nursing homes in Japan for 2.6 billion yen.

Meanwhile, the manager of industrial real estate investment trust (Reit) CapitaLand Ascendas Reit (Clar) , formerly known as Ascendas Reit, proposed the acquisition of a cold storage logistics facility in Singapore for S$191.9 million.

September also saw the pair of newest S-Reit listings – Daiwa House Logistics Trust (DHLT) and Digital Core Reit , both of which started trading on the Singapore Exchange late last year – make their maiden acquisitions.

The manager of DHLT announced the proposed acquisition of two freehold logistics facilities and a piece of freehold land in Japan from its sponsor for 4.68 billion yen.

Digital Core Reit entered into an agreement with its sponsor to acquire a 25 per cent interest in a data centre in Frankfurt, Germany.

The manager of the pure-play data centre Reit said it also has the option to acquire up to an 89.9 per cent interest in the Frankfurt facility, as well as a 90 per cent interest in a data centre in Dallas, Texas.

While the large number of proposed asset acquisitions in September is an encouraging sign for the S-Reit market, it is clear that appetites are changing due to the uncertain economic climate.

For one, the deals are markedly smaller. Over half the acquisitions proposed last month came in at under S$50 million.

RHB analyst Vijay Natarajan said market acquisitions are likely to be “more piecemeal in nature” due to the current volatility.

“(The acquisition of a larger portfolio) involves an extended time frame and premium valuations, which are unfavourable in current market conditions,” Natarajan said.

A few of the deals proposed in September, such as those by the managers of FCT and Clar, were valued at above S$100 million. But these amounts remain small relative to the size of the Reits.

The smaller acquisitions, though, should not come as a surprise.

William Tay, chief executive officer of Clar’s manager, guided at a briefing in August accompanying the industrial Reit’s first-half results release that it was “unlikely” to hit S$1 billion worth of acquisitions this year.

“We are still in the market looking for inorganic growth, but it is likely to be in smaller chunks,” Tay said.

Notably, the unsavoury conditions for larger acquisitions have also driven Clar to other avenues in search of growth.

Clar on Sep 30 announced it has signed a lease agreement that will see it convert an existing office asset into a life sciences property at an estimated cost of US$40 million.

Following the completion of the convert-to-suit exercise in the fourth quarter of 2023, the manager said Clar is expected to receive a higher base rent with an annual escalation of 3 per cent. . The net property income yield of the asset will also be raised to 9 per cent.

Meanwhile, the other deal that was valued at over S$100 million in September – that involving Digital Core Reit – comes with options.

Digital Core Reit will only take up the option to buy the enlarged stake in the Frankfurt facility as well as the 90 per cent stake in the Dallas facility if it is able to raise money by issuing new units.

The manager of Digital Core Reit said it preferred the larger-sized deal, which would be 3.1 per cent accretive to distribution per unit (DPU) on a pro forma basis.

Amid the uncertain climate, however, management is aware that unitholders will be wary of stumping up more cash. The counter is also down nearly 40 per cent this year, which makes a new issue less attractive.

“If we’re able to raise equity at an attractive valuation, then I think the bigger deal does a lot for us,” said John Stewart, chief executive of Digital Core Reit’s manager. “Quite frankly, our preference would be the bigger deal… (But only) if we can do it in a manner that doesn’t dilute unitholders by forcing us to issue equity at a discount.”

Should the Reit manager decide not to proceed with the equity fundraising option at this time, Digital Core Reit will settle for the smaller deal in a fully debt-funded transaction. This will be 2 per cent accretive to pro forma DPU. In this debt-funded scenario, the purchase consideration will be US$140 million and the total acquisition cost US$146 million.

While acquisition sizes are already limited by rising interest rates and wavering investor sentiment, Reit managers are also keeping an eye out for the effects of foreign exchange risks.

For example, PLife Reit said both its acquisitions will be fully funded by yen-denominated debts to help insulate the Reit from “potential currency volatility”.

“The deployment of Japanese yen (JPY) funding provides a natural hedge for the foreign exchange risks arising from JPY denominated assets,” the manager said.