Hongkong Land should do a listed Reit with its Singapore commercial properties instead of a private fund

[SINGAPORE] Hongkong Land Holdings is pressing ahead with growth in fund management.

The 136-year-old property group said recently that it has made significant advancements towards launching its first private real estate fund – the Singapore Central Private Real Estate Fund (SCPREF).

SCPREF, which is expected to be the largest Singapore private real estate fund with over S$8 billion of assets under management at inception, will focus on prime commercial assets in the city-state.

Hongkong Land plans to transfer its 33.3 per cent interests in One Raffles Quay (ORQ) and Marina Bay Financial Centre (MBFC) Towers 1 and 2, as well as its 100 per cent interest in One Raffles Link (ORL) into SCPREF.

Combined, these Central Business District (CBD) properties have a total attributable property value of S$3.9 billion as at end-June and contribute around 3.2 million square feet of prime office space on a 100 per cent basis.

Might Hongkong Land be wrong to choose a private fund instead of a Singapore-listed real estate investment trust (Reit) to hold prime Singapore commercial property? Arguably so, in my opinion.

Certainly, the Singapore Exchange and the Republic’s public equities market lose out from not having a multi-billion dollar new Reit listing. 

Indeed, yield-focused institutional and retail investors in public equities would likely very much welcome being able to invest in a trust owning only Singapore assets and predominantly Grade A office space. This is especially as the supply of CBD Grade A office space is tight, and the Republic is an attractive destination for businesses from diverse sectors to set up operations.

Of course, Hongkong Land’s board of directors need not be too concerned with helping the Singapore listed equities market grow. Nonetheless, some of the group’s minority investors might welcome having the opportunity to own units in a Singapore-listed Reit that is seeded by Hongkong Land’s prime commercial assets in the city-state.

Permanent platform for growth

Crucially, while a private fund may have a lifespan of say seven years, a Reit is a permanent platform. And in the Singapore context, a Reit with size, high-quality assets, a strong sponsor and an astute external manager can grow substantially.

Today, the Republic’s largest Reit, CapitaLand Integrated Commercial Trust (CICT), has a portfolio of properties worth around S$27 billion.

This trust made its trading debut on the local bourse as CapitaLand Mall Trust in July 2002 and was renamed CICT in November 2020 following the merger with CapitaLand Commercial Trust. The value of the property portfolio in the initial public offering in 2002 was a much smaller S$895 million.

Drivers of CICT’s growth include the merger, asset acquisitions, asset enhancement initiatives, asset redevelopments and organic growth. 

With its size, track record and trading liquidity among others, CICT is well liked by investors and trades at a premium to its end-June net asset value per unit of S$2.13. 

Importantly too, Singapore Reits have a good track record of raising debt and equity to support growth. On the equities front, many examples exist of Reits raising sizeable sums from private placements and preferential offerings.  

Yield challenges

Perhaps, listing a trust owning mainly Singapore Grade A office space is challenging on the yield front given Grade A office buildings typically transact at lower net property income (NPI) yields than other non-residential properties such as malls, business parks, warehouses, industrial properties, dormitories and hospitality assets.

The annual NPI yield of a Grade A office building with around 70 years of remaining land lease might be about 3.5 per cent based on market valuation. A trust focused on prime Singapore commercial assets could look to boost the overall property portfolio’s NPI yield to close to 4 per cent per annum by including CBD retail spaces or Grade A office buildings with shorter remaining land leases of say under 50 years.

Assume that Hongkong Land assembles at the inception of a potential Reit a Singapore commercial property portfolio with annual NPI yield of 3.8 per cent and such a trust is funded 60 per cent by equity and 40 per cent by debt, which costs 2.2 per cent per annum. 

The said Reit’s initial annual distribution per unit (DPU) yield could work out to around 4.3 per cent. This is equal to a spread of about 240 basis points over the five-year Singapore government bond yield of around 1.9 per cent per annum as at Dec 23.  

Possibly, an initial annual DPU yield of 4.3 per cent is sufficient for investors to support a trust with a strong sponsor that owns only Singapore prime commercial assets – the bulk of which is Grade A CBD office space.

Where needed, a sponsor of a Singapore prime commercial Reit may even be justified to inject properties into the trust at a slight discount to independent valuation to boost DPU yield. After all, a manager of the said Reit may subsequently execute well in growing the trust’s returns to unitholders, thus resulting in investors in turn trading the trust at above its book value.

Sure, a public listing can involve a long and arduous journey. And numerous obligations come with being a public-listed entity.

Nonetheless, a listing of a Reit with a sizeable portfolio of premium assets by a strong sponsor can potentially pay off richly.

Ultimately, it may be a loss for the Republic’s bourse, as well as Hongkong Land’s shareholders that the property group is not launching a Singapore-listed Reit owning prime commercial assets including interests in ORQ, MBFC Towers 1 and 2 and ORL.

The writer owns shares in Hongkong Land