Regulatory changes are set to spur Singapore-listed real estate investment trusts (REITs offshore) to acquire overseas properties even as asset prices in the city state rise.
Singapore, which has surpassed its traditional rival Hong Kong in developing listed property trusts as popular investment vehicles, is looking to change the rules to make it easier for REITs to add foreign assets to their portfolios.
“As our market develops, REITs will increasingly look overseas for investment opportunities because there is a limited pool of properties that a REIT can acquire in Singapore,” said Shane Tregillis, Monetary Authority of Singapore deputy managing director, market conduct, while speaking to a property investment conference Monday.
While there are no laws preventing Singapore REITs from cross-border buys, trust managers are holding back because they would have to pay unit holders more due to higher risks, analysts said.
But the central bank’s plans to give property trusts greater flexibility in their foreign joint ventures and allow them to nearly double their gearing from the current 35 percent cap could nudge them to move ahead.
“Cross-border REITs are likely to be geared higher [than REITs that invest domestically], and the regulators are accommodating that by letting the gearing go up,” said UBS Asian Real Estate head Michael Smith.
In addition to having to pay investors more due to the higher risks, a property trust buying assets abroad would also face the cost of hedging foreign exchange risks.
To maintain an average yield of 4.8 percent, a Singapore property trust would have to find a building that yielded 9.1 percent in the Philippines, 8.7 percent in Indonesia, 7.8 percent in Vietnam, 6.4 percent in Malaysia, 6.2 percent in China or 5.3 percent in Hong Kong, Smith estimated. Singapore has five listed property trusts with a combined market capitalization of S$10 billion (HK$46.6 billion). Four of these – Suntec REIT, Ascendas REIT, CapitaMall Trust Management and CapitaCommercial Trust – are based entirely on local assets. The fifth, Fortune REIT, is based entirely on Hong Kong shopping malls. This means only 13 percent of Singapore’s REIT portfolio is invested abroad compared with Australia’s 35 percent.
Diversifying abroad would help Singapore property funds as competition for yield-generating assets has intensified since July 2002 when the first REIT was listed in the city state.
“There has been yield compression. We used to see yields of about 8 to 8.5 percent at the start but this has come down to 7.5 to 8 percent,” said Philip Pearce, Portfolio Manager of Ascendas REIT, which focuses on business parks and industrial properties.
Yields come down when the values of properties increase relative to rent.
CapitaMall Trust chief executive officer Pua Seck Guan said his trust – Singapore’s largest – would eventually look abroad in the region.
“Southeast Asia and China markets would be logical markets for us,” he said on the sidelines of the conference.
CapitaMall, together with CapitaCommercial, are controlled by CapitaLand, which has about 80 percent of its pretax profits generated from outside Singapore and is seen as a prime candidate to launch a REIT based on properties in China.
Last week, Hong Kong media reported that Chinese property development group Guangzhou Investment was planning to raise HK$2 billion by listing a REIT in Singapore or Hong Kong. The company said a REIT was one of the options it was considering but it had not reached a decision.
Source: REUTERS via The Standard
Photo credit: Paul Saad (( ON/OFF )) via VisualHunt.com / CC BY-NC-ND
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