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S-Reits ramp up acquisition binge amid low-rate environment
AMID a lower-for-longer interest rate environment, Singapore real estate investment trusts (S-Reits) are fast ramping up their acquisitions worth billions of dollars, market watchers say.
Just this week alone, three S-Reits have announced equity financing to partially fund their acquisitions - Keppel DC Reit raised S$478.2 million to fund its proposed acquisition of two data centres worth about S$587 million, Mapletree Industrial Trust (MIT) secured S$400 million to acquire a US$1.4 billion data centre portfolio together with Mapletree Investments, and Manulife US Reit on Thursday said it plans to raise US$142.1 million to finance its US$198.8 million acquisition of a Class A office building in Sacramento, California.
Similarly in July, Frasers Logistics & Industrial Trust garnered S$258.1 million via a private placement to fund its proposed acquisition of 12 prime logistics properties in Germany and Australia worth A$644.7 million (S$612.5 million), and CapitaLand Commercial Trust carried out a S$220 million placement to pay for its acquisition of a majority stake in a German office building for 133.4 million euros (S$205.3 million).
Vijay Natarajan, property analyst at RHB Securities Singapore, said S-Reits have been on an acquisition trend this year due to conducive market conditions, with a "prolonged low interest rate environment" benefiting Reits in terms of greater investor appetite for yield instruments, and access to cheap funding costs.
"As many of the Reits are trading at a premium to book value, they are also able to do accretive deals both to their DPU (distribution per unit) and NAV (net asset value), which benefits stakeholders," he added.
In a research note on Wednesday, Maybank Kim Eng analyst Chua Su Tye said he sees "acquisition growth levers arising" for the sector as the Monetary Authority of Singapore (MAS) seeks feedback on its proposal to increase the leverage limits for S-Reits.
In a move to allow S-Reits to better compete against private capital and foreign Reits when making real estate acquisitions, the MAS in July announced that it is considering raising their current leverage limit of 45 per cent.
"S-Reits have acquired overseas for diversification and growth, yet maintain strong balance sheets. An increase in leverage from 45 per cent to 50 per cent raises debt headroom by 10-14 per cent for AUMs (assets under management), and opportunities for DPU-accretive deals," Mr Chua said.
Analysts from Maybank Kim Eng also see industrial S-Reits as likely beneficiaries, especially as they push further into Europe and the US. The brokerage cited MIT, Ascendas Reit, Frasers Centrepoint Trust, CDL Hospitality Trusts and Far East Hospitality Trusts as their top picks due to DPU recovery, yields and acquisition-growth upside.
In addition, Singapore Exchange (SGX) market strategist Geoff Howie noted that much of the world has seen a rotation into Reits on the outlook for lower interest rates, while slower growth outlooks have had much more impact on trade-related sectors.
As Mr Howie explains, lower interest rates have benefited S-Reits on two key fronts. The first is that lower interest rates mean lower costs of capital on debt used to acquire properties, and the second is that the premium of the Reit yields to interest rates has increased. "From a global perspective, the median yield of the global Reit market is 4.8 per cent. At the same time, the 10-year US Treasuries are currently yielding 1.8 per cent.
"There have also been reports this year that institutional investors have been turning away from private equity real estate and infrastructure investments in favour of liquid funds that put their money to work faster," added Mr Howie.
These suggest healthy investor demand for Reits, he noted, citing the fact that over the first eight months this year, S-Reits have raised close to S$2 billion in placements on the secondary market combined.
Likewise, Tricia Song, Colliers International head of research for Singapore, noted that S-Reits have always wanted to grow their asset base and diversify beyond Singapore, in a bid to build economies of scale and grow their income.
"The reason why we notice a spike in acquisitions recently could be because the costs of funding have come down, and there are more opportunities available," she told BT in an email statement on Thursday.
According to Ms Song, S-Reits could issue new units at more favourable valuations as their trading prices have increased significantly this year. The iEdge S-Reit Index for instance has clocked total returns of 25.5 per cent this year as at Sept 8, following SGX data.
Borrowing costs for Reits have come down with the "lower-for-longer interest rates", and more sellers are putting up their assets for sale as valuations are deemed to be more attractive with the buoyant capital flows seeking acquisitions, she said.