Overseas-centric Reits: bulk up to outmuscle home bias

LOCAL foodies have it good. While Singapore residents largely cannot travel abroad, foodies can savour many cuisines be it local, Chinese, Japanese, Korean, Indian, Thai, Malaysian, Indonesian, Italian, French, Spanish, German, American, Mexican and the list goes on.

Investors in real estate investment trusts (Reits) listed on the local bourse are also spoilt for choice. They can invest in Reits that own only local assets, a mix of Singapore and overseas assets, or only overseas assets. Reit investors can get exposure to properties in markets such as the United States (US), United Kingdom (UK), Europe, Australia, South- east Asia, China, Japan and India.

But investors may have a home market bias. Take a look at commercial Reits from the same sponsor group.

Based on unit prices at end-September, Mapletree Commercial Trust (MCT) trades at 1.2 times its net asset value (NAV) as at end-March, while Mapletree North Asia Commercial Trust (MNACT) trades at 0.8 times its end-June NAV.

MCT and MNACT have Mapletree Investments as their sponsor and are managed by entities owned by Mapletree. Both trusts own commercial assets - MCT's portfolio comprises Singapore properties and MNACT owns assets in Hong Kong, China, Japan, and Korea.

CapitaLand Integrated Commercial Trust (CICT) and CapitaLand China Trust (CLCT) trade at 1.0 times and 0.8 times their end-June NAVs respectively, as at end-September.

CapitaLand Investment is the sponsor of these commercial Reits and owns the managers of the trusts. CICT's portfolio is predominantly Singapore focused, while CLCT owns retail and business park properties in China.

The Singapore-listed Reits that own US office properties, Keppel Pacific Oak US Reit (KORE), Manulife US Reit (MUST) and Prime US Reit, hold freehold assets with decent occupancy rates. The trio should benefit from an improving US economy.

Based on unit prices at end-September and annualising the distribution per unit (DPU) of the first six months, KORE and MUST trade at yields of around 8 per cent. As at end-September, CICT's yield based on annualising DPU for the first six months is 5.1 per cent while MCT's yield is 4.6 per cent based on DPU for financial year ended-March.

Should commercial Reits with US assets trade at yields much closer to Singapore-centric ones given that 10-year government bond yields in both countries are fairly similar?

Reits owning US assets enjoy better land lease tenure than Singapore-centric ones that typically own leasehold assets. Perhaps this advantage can compensate for local investors' aversion to currency risk and lack of familiarity with the US assets.

Managers of commercial Reits appear keen to secure the perceived premium that investors attach to Singapore-centric vehicles.

Suntec Reit has been buying offices in London, UK, possibly drawn by the very long land lease tenure of the assets, the relatively long tenancy lease maturities and the yield accretion to its portfolio.

Responding to queries submitted by unitholders for its latest annual general meeting, Suntec Reit's manager said the trust will be Singapore-centric, with 30-40 per cent of assets under management being overseas assets.

CICT's manager is open to growing the trust's overseas presence but would like to limit overseas exposure to not more than 20 per cent of portfolio value.

Big appetite

Ultimately, getting big may help drive better valuations for overseas-centric Reits.

Using end-September unit prices and latest reported NAVs, the seven Reits that are members of the Straits Times Index (STI) trade at a median premium to book value of 33 per cent.

The STI is a market capitalisation weighted index that tracks the performance of the top 30 companies listed on the Singapore Exchange (SGX). Among the Reits that are included in the STI are CICT and MCT.

As at end-June, unitholders' funds of CLCT are less than a fifth of that of CICT. As at end-March, unitholders' funds of MNACT are about three quarters that of MCT.

The trio of Reits owning US offices have unitholders' funds of between US$776 million and US$1.1 billion (S$1.5 billion) each as at end-June. In contrast, CICT's unitholders' funds as at end-June was S$13.2 billion while MCT's as at end-March was S$5.7 billion.

Getting into key indices like the STI can help attract investment from funds that track a said index.

Size can then beget size. Helped by being sufficiently large to attract more institutional investors, a Reit can trade well and the said Reit enjoys a lower cost of equity thereby making it more competitive in acquisitions.

A Reit that has transformed and scaled up is Frasers Logistics and Industrial Trust (FLIT). This trust began trading on the SGX with a portfolio of Australian industrial properties in June 2016.

FLIT changed its name to FLCT in 2020 after it successfully merged with Frasers Commercial Trust (FCOT) via a scheme of arrangement.

As at end-June, FLCT has under a fifth of its portfolio comprising Singapore assets, with the rest of the portfolio comprising assets from Australia, Germany, UK and Netherlands. Logistics and industrial assets account for 58 per cent of the trust's portfolio while commercial assets and business parks contribute 42 per cent.

FLCT had unitholders' funds of S$3.9 billion as at end-March. Subsequently, FLCT completed a private placement that raised S$336 million.

FLCT became the latest Reit to join the STI in April this year. As at end-September, FLCT trades at 1.3 times its end-March NAV.

There have been successful mergers among Reits such as that of CapitaLand Mall Trust and CapitaLand Commercial Trust to form CICT, Ascott Residence Trust and Ascendas Hospitality Trust, and that of FLIT and FCOT to form FLCT. These mergers involve entities which share the same sponsor. The proposed merger between ESR-Reit and Sabana Reit did not go through.

As size matters, overseas-centric commercial Reits can explore bulking up via mergers to get better valuations.

But mergers involving Reits with different sponsors are tricky. Even if managers of trusts see merit in merging, fighting over who controls the manager, which can be a lucrative business, may pose an insurmountable obstacle.

Mergers are probably more plausible for Reits which share the same sponsor, such as a potential merger of MCT and MNACT.

Meanwhile, managers of Reits with overseas assets that are under-appreciated by the market, will just need to continue working hard at investor education. The SGX, which has every incentive to see that the Reit market here continues to draw trusts that own quality assets from diverse places, can help in these investor outreach efforts.

With adventurous palettes, local foodies have embraced cuisines from many corners of the globe. Perhaps investors here can be bolder in acquiring a taste for Reits with foreign assets.