S-Reit IPOs running scared in rising interest rate environment

THE year 2022 marks the first year in 12 that there will be no new real estate investment trust (Reit) listings on the Singapore Exchange (SGX).

The Singapore-listed real estate investment trust (S-Reit) market has seen an average of about two new initial public offerings (IPOs) since the first listing in 2002.

Even as Singapore this year celebrated the 20th anniversary of its Reit market – the biggest in Asia outside of Japan – the absence of an IPO should come as no surprise.

The last time there were no S-Reit IPOs was in 2009, as markets were dealing with the aftermath of the Global Financial Crisis.

Now, central banks are hiking interest rates to quell decades-high inflation. Their hawkish stances have many market observers predicting a recession on the horizon. Investors and management, both probably fatigued from a long-drawn battle with the Covid-19 pandemic, are now staring at another rough patch.

There was supposed to have been a number of S-Reit IPOs in 2022, according to market talk and various reports.

Mapletree Investments, for one, was said to be exploring the listing of a student housing Reit in Singapore that could raise about US$1 billion.

The Temasek-linked property developer and manager was reported earlier this year to have consulted with various banks and selected advisers for the potential IPO.

But plans for the listing of a student accommodation Reit in 2022 appear to have been shelved.

According to a source, investors in the Mapletree Global Student Accommodation Private Trust (MGSA) had recently been asked to extend the life of the fund by three years.

MGSA is a student accommodation-focused fund that owns assets in the United Kingdom and United States. It was formed in 2017 with an initial term of five years.

Mapletree declined to respond to questions from The Business Times regarding the extension of the private trust’s life or the potential student housing Reit IPO.

Another potential Reit listing that never made it to the market in 2022 was a new economy Reit by global real estate firm GLP.

GLP was reported to have begun the process to list a portfolio of logistics assets across China that cater to “new economy” industries, such as e-commerce.

Separately, Singapore-listed property giant City Developments (CDL) had as early as June 2021 said it had made the relevant applications to various regulatory authorities for the listing of a UK-focused commercial Reit on the mainboard of the SGX.

Looking at the performance of the S-Reit market amid the uncertainty and volatility this past year, it is easy to see why sponsors are giving IPOs a miss – at least for now.

The iEdge S-Reit Index has retreated close to 17 per cent in the year to date, as rising interest rates pushed investors away from an asset class that has conventionally been seen as a “safe harbour” amid financial storms.

For comparison, the benchmark Straits Times Index (STI) has climbed nearly 5 per cent over the same period.

To be fair, the S-Reits have held up reasonably well compared to its global peers. The FTSE EPRA Nareit Global Reit Index is down by over 26 per cent this year.

And, it is reasonable to expect that Reit unit prices should fall as interest rates rise. Reits are typically priced based on their yields, which would have to go up in tandem with the higher rates of lower-risk products such as government bonds.

Yet, the performance of the four most recent S-Reit IPOs – Elite Commercial Reit and United Hampshire US Reit in 2020, and Daiwa House Logistics Trust and Digital Core Reit in 2021 – would have done little to inspire confidence for new listings.

Prices in the units of the quartet have fallen between 20 per cent and 54 per cent in the year to date.

Investor appetite for S-Reits – and S-Reit IPOs – are unlikely to improve significantly in the short-term as interest rates continue to rise, albeit at a slower pace.

Some market watchers opine that the interest rate environment and recession woes are likely to improve in the second half of 2023.

But, with the long runway needed for the listing process, 2023 might well be another quiet year. If the bears are right, and the world heads for a global recession and even tougher market conditions, it may well take until 2024 before S-Reit investors have a new investment option.