SINGAPORE (Apr 16): Since 2013, eight real estate investment trust IPOs have been REITs with foreign assets. Of these, two are from local sponsors, and the rest from foreign ones.
Mapletree Greater China Commercial Trust (which is changing its name to Mapletree North Asia Commercial Trust) was listed in March 2013 and had an initial portfolio of assets in Hong Kong and Beijing. It is now expanding into Japan.
Frasers Logistics & Industrial Trust (FLT) was listed in June 2016 and has both an institutional and a retail following because its sponsor —Singapore Exchange-listed Frasers Property — is a known brand in Singapore. It was trading at 1.23 times its net asset value (NAV) as at March 29, and had a yield of 6.3%.
Manulife US REIT was listed in May 2016 with US office buildings that were either Class A or trophy class. Since its IPO, it has acquired a couple of Class A buildings, one of which was from its sponsor in the US — the US unit of Manulife Financial Corp.
Croesus Retail Trust, which was styled as a business trust — with no tax transparency — was listed in May 2013 and sold to the Blackstone Group in 2017. Prior to the Blackstone buyout, CRT traded at a high yield of 8% to 9% and at a significant discount to its NAV because it did not have a sponsor or promoters who were aligned with the trust. After its delisting, CRT left local REIT stakeholders mulling over governance issues.
Three of the foreign REITs have Chinese sponsors that local investors are unfamiliar with. They include a department store and supermarket operator, an e-commerce logistics operator, and a developer of outlet malls in China, Sasseur Cayman Holdings, which is the sponsor of Sasseur REIT.
According to Sasseur REIT’s prospectus, Sasseur Cayman Holding’s shareholders include L Catterton Asia Advisors and Ping An Real Estate. L Catterton Asia Advisors (formerly known as L Capital Asia Advisors, an affiliate of LVMH Moët Hennessy Louis Vuitton) and Ping An Real Estate Co became investors in 2015. A subsidiary of JD.com, a subsidiary of local fashion brand Charles and Keith, and Bangkok Life Assurance are among the cornerstone investors of Sasseur REIT.
Income support necessary
Investors have said that Sasseur’s sponsor is not a known Chinese brand, and that they are uncomfortable with its formula for income support. Sasseur REIT has a two-year income support to stabilise distribution per unit and to fulfil the DPU forecast. According to its pros pectus, turnover rent comprises 77.2% of property income, while the higher of fixed or turnover rent contributes 21.8% to property income, and fixed rent contributes just 0.9%. Turnover rent is dependent on tenant sales, which can sometimes be volatile.
Sasseur REIT’s leasing structure is in sharp contrast to that of CapitaLand Retail China Trust, where turnover rent is no more than 5% to 6% of property income. CRCT is the example by which Chinese retail REITs are likely to be judged.
Investors highlight that Manulife US REIT, Keppel-KBS US REIT, FLT and IREIT Global are pure-play foreign REITs that provide plain- vanilla DPU not underpinned by income support, and they question why Chinese REITs need income support. Can they not just offer properties at lower valuations?
Eng Seat Moey, head of equity capital markets at DBS Group Holdings, says income support shows the sponsor’s commitment to the REIT. “Listing a foreign REIT in Singapore has its own unique set of challenges and these differ from transaction to transaction. Take, for example, the listing of Chinese REITs in Singapore. We have been involved in a number of these IPOS and each has its own set of challenges but, ultimately, we find that the main objective is driven by the desire to tap Asian investors, broaden their shareholder base as well as to raise their profile here among Asian investors.
“So with that objective to grow the REIT platform here, Chinese sponsors have been open to considering a lower valuation to balance the unique characteristics of their REIT portfolio (such as no tax incentive, lower cap rates, among other things),” she explains.
EC World REIT styles itself as an e-commerce logistics REIT. Both BHG Retail REIT and EC World REIT have different forms of income support. The former’s is in the form of a DPU waiver by its sponsor, which holds a 30% stake in the REIT. Three of EC World REIT’s six assets — Chongxian Port Investment, Beigang Logistics and Fuheng Warehouse — are on master leases until 2020 to provide stabilised property income to investors. These three properties account for 86.7% of the REIT’s gross property income, according to its FY2017 results announcement.
BHG Retail REIT listed in December 2015. Its net property income and DPU have stabilised and are rising steadily, Eng says. At the time of its IPO, one of the REIT’s properties had converted from a department store to a multi-tenanted mall, which took time to stabilise. In the first year of business, the cash flow was relatively low because of rent-free periods. The sponsor waived its distributions.
The next phase of growth for S-REITs, according to Eng, is likely to be more listings of foreign REITs. “We branched out and asked, ‘Is the market developed enough for pure-play foreign REITs?’ It took a while to improve liquidity and education. We’ve been the pioneer in bringing foreign REITs to list because we feel that the opportunity is big. We now have pure-play foreign REITs from geographies that are home to deep REIT markets such as the US and Australia. If China has its own REIT regulations, we believe we can still continue to attract Chinese listings as well as other foreign REIT sponsors who are keen to raise their profile and branding in Asia as well as the opportunity to tap onto and broaden their shareholder base.”
It is still possible to get Singapore sponsors to list their assets here. For instance, Mapletree Investments has a student housing fund that could fit into a REIT. CapitaLand has a fund called Raffles City China Fund, which holds Raffles City Beijing, Raffles City Shanghai, Raffles City Chengdu, Raffles City Hangzhou and Raffles City Ningbo. The stabilised assets in this fund could be divested into a REIT in the future. Singapore could also be home to a totally new asset class of REIT, such as a multi-family (apartment communities) REIT, Eng suggests.
Tapping new investors
In more developed markets such as the US, Australia and Japan, capital markets are deep and the REIT investor base is likely to be largely local, Eng says.
Singapore has a limited domestic market but as a wealth management centre, it has attracted trillions in assets under management. “We have convinced quite a lot of long funds and yield funds to invest in REITs,” Eng says, adding that insurance funds and income funds are significant investors in REITs.
Eng cites Manulife US REIT’s listing in Singapore as an example of its sponsor Manulife Financial Corp’s looking to tap a new investor base. Manulife, which has a collaboration with DBS, was interested in raising its profile in Asia and believed the best way to do that was to list a REIT with US assets in Asia.
“Manulife Financial Corp is headquarted in Toronto and listed on four exchanges — New York, Toronto, Hong Kong and the Philippines. Yet, Manulife decided to list its maiden REIT on the SGX. They chose Singapore to showcase their capability and enhance the group’s profile in the region as well as to tap the Asian investor base,” Eng explains.
Foreign REITs that have come to market have brought with them new groups of investors. When FLT listed, one of its cornerstone investors was B&I Capital, an asset manager of collective investment schemes regulated by FINMA, the Swiss Financial Market Supervisory Authority. B&I Capital invests predominantly in REITs and also manages several Asian REIT funds and mandates for institutional investors in Europe. Other cornerstone investors of FLT’s IPO such as Nuveen Asset Management and Principal Real Estate Investors are funds registered in the US. Affin Hwang Asset Management has been a cornerstone investor for a number of REITs during their IPOs, including FLT.
“In terms of shareholding, we need a good mix of institutional investors, high net worth individuals, corporates and, more recently, family offices. Now, in a lot of the deals, we do see several family offices as potential investors in S-REITs. These are highly sophisticated, focused, specialised and well-informed investors who understand the REIT market,” Eng says.
Déjà vu?
For investors with long memories, the playbook sounds like something out of 2006 and 2007. It is hoped that this new breed of foreign sponsors and REITs will do better than the previous group. Before the global financial crisis, three Australian sponsors listed their mainly Singapore assets in REITs on the SGX, and were managers of a further two listed funds. In the wake of the global financial crisis, these REITs and funds came under new managements and have changed their names.
Macquarie MEAG Prime REIT has become Starhill Global REIT, Allco Commercial REIT is now Frasers Commercial Trust, MacarthurCook Industrial REIT is AIMS AMP Capital Industrial REIT, and MacarthurCook Property Securities Fund is AIMS Property Securities Fund. Whatever the case, these restructured REITs are performing, delivering credible NPIs and DPUs.
How the foreign REITs performed
We measured the price performance of pure-play foreign real estate investment trusts within three sectors — commercial, retail and logistics. The major differences between them include portfolio quality, land tenure, weighted average lease to expiry and gearing ratio, but above all is the quality of the manager.
The latest crop of pure-play REITs could well surprise. For example, IREIT Global, which does not have a sponsor that is able to provide a pipeline to and owns a stake in the REIT, and is willing to support its growth, has performed as well as Mapletree Greater China Commercial Trust (MGCCT), which is better known to local investors (see Chart 1). In November 2016, Tikehau Capital, a French property asset manager in which Temasek Holdings has a 3% stake, acquired an 80% stake in IREIT Global’s manager. IREIT Global’s major shareholder is Shanghai property magnate Tong Jinquan, who holds 47% of the REIT, followed by Lim Chap Huat, the owner of unlisted Soilbuild Group, with 10.2%.
Tikehau is working towards a strategy to grow net property income (NPI) and distribution per unit (DPU). A major differentiation between IREIT Global and MGCCT is that the former’s properties are freehold, and cost of debt in Europe remains very low following various bouts of quantitative easing.
As for Chinese retail malls, CapitaLand Retail China Trust’s NPI grew 9.1% y-o-y, with DPU up just 0.5% y-o-y for FY2017. However, it continued to outperform BHG Retail REIT. The latter’s NPI was up 8.7% y-o-y while DPU was up 2.8% y-o-y for FY2017 (see Chart 2).
Among the pure-play logistics REITs, Frasers Logistics & Industrial Trust (see Chart 3) is by far the stronger performer compared with EC-World REIT, a pure-play Chinese e-commerce logistics REIT. FLT’s assets are largely freehold, have brand-name tenants and are better known to investors. Also, EC-World REIT’s manager has had two CEOs in less than two years.
