SINGAPORE (June 18): In a recent report, UBS reminds us that real estate investment trusts venturing abroad for growth is a story that has been told before. In the years before the global financial crisis (GFC), Australian REITs took that path. In roadshows held in April and May, local investment bankers and a handful of REIT managers have articulated that Singapore is small and Singapore REITs (S-REITs) have to venture overseas for growth. Indeed, many have, and by some calculations, overseas assets account for as much as 41% of average geographical exposure by value.
As a hybrid of equity and fixed income, REITs are meant to consistently pay investors a steady, relatively resilient income, with a modest dose of growth if possible. However, because of the investment and business cycle, rents can also fall, leading to declines in distributions per unit (DPUs). This could also cause capital values to fall, as valuations of investment properties depend on their cash flow. Since REIT managers’ fees depend on their assets under management, net property income and DPU growth, REIT managers are incentivised to grow both AUM and DPUs.
Australia’s REIT model is different from Singapore’s. The management companies are usually internalised. In addition, the Australian REIT market is far older than Singapore’s, having started in 1971, and has experienced more cycles. For instance, in the 2000s (and before the dominance of China), in order to expand, Australian REITs ventured overseas, as a large portion of the country’s investment-grade assets was already in REITs and funds. Instead of delivering steady DPU, a number of REITs opted for growth. To fund this growth, they took on more debt in the decade leading up to the GFC.