At the panel discussion titled Risks and Opportunities for S-REITs Going Overseas held on Sept 26, Ronald Tan, senior vice-president, equity global market, global sales & origination, Singapore Exchange (SGX), in the opening address said he was asked why the exchange continues to promote overseas assets for S-REITs.
Among those asked were: Are we getting desperate as a country or as an exchange? Are we trying to get more IPOs? and why can’t we just focus on Asia?
“There is a bigger global marketplace that we need to scale up to. And particularly when we look at Singapore, there is a limit. In the last nine years, we have seen over 19 REITs that are listed on the SGX, [among which] there are no pure play Singapore REITs,” Tan says.
In December 2021, Daiwa House Group listed Daiwa House Logistics Trust on the SGX, and Digital Realty listed Digital Core REIT on the SGX. Earlier in 2022, GLP postponed an attempt to list a logistics REIT in Singapore.
As Tan sees it, the REIT market in Singapore accurately reflects or is a perfect mirror of the Singapore economy. Over time, Singapore companies had to expand into Asia, and some Singapore enterprises are global champions. The capital market in Singapore needs to be a platform of growth for Singaporean and Asian sponsors to become global champions of the future, and for global sponsors from around the world, beginning to come to Singapore to list REITs with global assets here, Tan says.
The panel discussion was held in conjunction with The Edge Singapore’s Celebrating 20 years of S-REITs supplement. It was also sponsored by Mapletree Investments and Elite Commercial REIT, and supported by SGX and REITAS (REIT Association of Singapore). Besides Tan, the forum panel included Chua Tiow Chye, deputy CEO, Mapletree Investments; and Shaldine Wang, CEO, Elite Commercial REIT’s (Elite REIT) manager.
While overseas assets represent growth opportunities for S-REITs, risks abound, given the backdrop to the forum was the US Federal Reserve’s rate hike cycle, and the current British government’s economic plans which cause yields on gilts to rise and the GBP to fall.
Interestingly, Elite REIT has only British commercial assets; its rental income and assets are priced in GBP as are its DPU and debt. Its main tenant for 99% of its gross floor area and gross rental income is the British government. As at Sept 28, the UK still has a sovereign rating of AA. However, its economic plans include raising its public sector borrowing requirement to fund tax cuts. As the forum started, the GBP had rebounded from a low of US$1.03 to US$1.07.
“Our revenue is coming from the UK and our expenses are mainly in the UK so we are denominated in the sterling pound,” says Wang, adding that the REIT itself does not have any currency hedges in place as it does not convert its DPU into Singapore dollars.
“We are property managers, we are not experts in foreign exchange [FX]. We are cognisant of the ever-changing environment,” she adds. Elite Commercial REIT is one of a handful of REITs which have assets, revenue, expenses and DPU in a foreign currency.
The others that trade in US dollars are Manulife US REIT, Keppel Pacific Oak US REIT, Prime REIT and United Hampshire US REIT.
Singapore’s small size
Mapletree Investments is one of the largest and best regarded sponsors of REITs in Singapore, with three listed REITs, Mapletree Pan Asia Commercial Trust (MPACT), Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MIT). Including the REITs, Mapletree Investments has $78.7 billion in assets under management in 13 markets as at March 31, making it one of the largest real estate investment managers in Asia Pacific.
As Chua sees it, S-REITs have no option but to expand outside Singapore. “It’s a question of whether you want to be a big frog in a small well, or you want to be a small frog in a bigger well, all around the world. If we stay here, we would just be stepping on each other’s toes,” he quips.
The expansion overseas explains the merger of Mapletree Commercial Trust (MCT) with Mapletree North Asia Commercial Trust to form MPACT. If MCT were to remain in Singapore, it will limit its growth potential, he says.
Going overseas also brings with it a whole plethora of issues. These include funding, having sufficient committed revolving facilities, hedging, taking on currency risk, and ensuring DPU remains relatively stable through cycles.
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“In terms of funding, there are two sources, equity and debt. The equity piece is to try to explain to people why we are doing certain things in certain ways. We try our best as managers to explain this,” Chua says. “On the debt side, bankers are likely to be sunny weather bankers. When the sun is out, they give you the umbrella. When the rain comes, they take it away.”
The easiest way to manage foreign exposure is for REITs to fund an asset bought in the US in US dollars or an asset bought in the UK in GBP — which is what the manager of Elite REIT does. It is not wise to fund an acquisition with a carry trade — that is, funding with a currency which has a lower cost of debt. For instance, REIT managers would not fund assets bought in Australia or UK with Yen debt; or assets bought in China with Singapore dollar debt.
“In hedging 101, always buy and borrow or raise capital in the same currency as what you want to buy. The first part is to protect your capital. The second part is to protect your income coming back to Singapore by hedging. But hedging isn’t free so there is a cost,” Chua elaborates.
That is why it is important to choose a REIT manager experienced in capital management so that both income and interest rates are hedged to an extent versus the cost of hedging.
As interest rates rise, capital management has become an increasingly scrutinised part of investors’ focus. While REIT managers have no control over central banks’ decisions, the CFO of the REIT manager has a range of instruments to ensure that the REIT remains liquid, and debt expiry profiles are manageable.
Different sources of debt, including bonds, perpetual securities or loans; different types of debt, either floating or fixed; and different debt tenors are some of the instruments CFOs can use to ensure that S-REIT distributions are stable.
Importantly, investors should pay attention to see if the CFO has managed all the debt such that they are not due on the same day or month, Chua suggests. Floating rate loans are the cheapest but the REIT would be vulnerable to sudden rate hikes, he points out.
“For example, if the FOMC decides to hike the interest rates by 100 bps, the interest rate is going to go up immediately. Your REIT is not going to be spared, whichever currency you’re in,” he warns. “You need to be able to hedge your interest rates so some of your loans are on fixed rates.” The rule of thumb is that REITs should ensure at least 50% of their debt is on fixed rates. “Of course, you don’t fix all your loans for say four years, and when the fourth year comes around [the loans have to be renewed], you’re in a bad market, the banks are going to take away your umbrella,” Chua points out.
Some REITs vulnerable to higher interest expenses
According to a recent report by JP Morgan, Suntec REIT is the most vulnerable to higher floating rates. The bank’s REIT research estimates that there is an 8.4% impact on DPU for every 100 bps rise in rates, based on its FY2023 estimates. This is followed by Far East Hospitality Trust which would have a 4.7% DPU impact, Keppel REIT with 4.2% and CDL Hospitality Trusts with 3.5%.
JP Morgan’s estimates do not include the latest impact on the GBP where Suntec REIT and CDL Hospitality Trusts are also vulnerable to a likely steeper rise in UK rates later this year and GBP volatility. Unfortunately, Suntec REIT completed the acquisition of a UK office building in July for the equivalent of $667.2 million when the GBP was $1.89.
“The conventional wisdom is each year about 20% to 25% of the debt will expire,” Chua says. It is the CFO’s task to ensure there are no large towers of debt expiring in any given year. In addition, the REIT should have a modest amount of committed revolving facilities from the banks to tide over any liquidity events.
If the debt expiries are modest, “if you ask for some equity to replace the debt, it is not going to be the end of the world. REITs should have a mix of floating plus some fixed rate debt, and a mix of bonds or perpetuals, and loans,” Chua suggests.
Ideally, REITs should have no more than 40% to 41% of the capital structure in debt, so that their aggregate leverage has sufficient flexibility should interest rates rise to the extent that capital values decline, and the REIT needs to raise additional equity.
No REIT manager is going to raise equity for fun, adds Chua, unless the REIT is trading way above its NAV (net asset value). Raising equity when the REIT is trading at a discount is “super expensive” as it dilutes unitholders.
“Sometimes we have no choice. In my earlier days, I had to go out and raise equity for MLT when it was trading at a discount. That was because there was a deal that had to be completed. And the banks required a certain LTV (loan to value). So we had to raise some equity. And believe me, every investor we went to see whether they were institutional or retail scolded us upside down. And that’s probably about one of the most miserable times I had as a REIT manager. My advice is, don’t go out [to raise equity] if you don’t have to, especially when you’re trading at a discount to your NAV,” Chua recounts.
Most importantly, investors need to make sure they have good, responsible REIT and property managers managing the portfolio and the properties. To that end, SGX’s Tan says: “We believe that we have a vision of the future for Singapore REITs where we believe one day more and more global sponsors will say if I’m going to list another REIT, where would that be? And in their mind, it will be Singapore. It is a growth process. It’s not a perfect process. We will get bumps along the way, but we will learn from it.”