REIT ASIAPAC
F E AT U R E
Fe a t u r e
MERGERS WITH COMMON
MANAGERS ARE T YPICALLY
EASIER TO TR ANSACT
Analysts expect increased consolidation to fuel
Singapore-REITs’ next phase of growth.
Mergers and acquisitions are ways to lower the
cost of capital and improve performance, but not
all mergers are the same.
One issue relates to the cost of the manager, says
Charlene-Jayne Chang, Head of Capital Markets
& Investor Relations, ESR-REIT. The industrial-
asset-focused REIT merged with Viva Industrial
Trust last year in a deal worth about S$936.75
million (US$674.93 million).
internalised before the deals were done.
An example of this is Blackstone’s buyout
of Croesus Retail Trust in 2017.
MERGING TO
BUILD SCALE
The Singapore REIT sector has seen
at least S$5 billion worth of merger
and acquisition transactions in the last
three years. The merger with the most
extensive portfolio of properties will be
the combined Ascott Residence Trust
(Ascott REIT) and Ascendas Hospitality
Trust (A-HTrust) group, which will have
total assets valued at S$7.6 billion based
on March 31, 2019 financial data. This
is followed by OUE Commercial REIT’s
tie-up with OUE Hospitality Trust, which
marks the first-ever merger of two S-REITs
belonging to different asset classes.
“Acquirers tend not to want to pay for
the manager,” says Chang. However,
in the case of a merger between two
REITs that have a common manager
or sponsor, the negotiations are
typically more straightforward.
Ascott Residence Trust (Ascott REIT) is merging
with Ascendas Hospitality Trust (A-HTrust), and
CapitaLand Limited owns the sponsors of the
two REITs. OUE Commercial REIT (OUE C-REIT)
merged with OUE Hospitality Trust earlier this
year, and they are both sponsored by OUE Limited.
The ESR-REIT and Viva Industrial Trust
transaction, touted as the first-ever merger of two
S-REITs, is one of the few REIT mergers in the past
year where the managers of the individual REIT are
not related. ESR-REIT, which is backed by private
equity firm Warburg Pincus, treated the manager’s
value as a transaction cost, with benefits accruing
over the longer term via scale and synergies,
Chang explains. This has helped to facilitate the
ESR-REIT and Viva REIT transaction, says Chang.
She added that in some cases, the managers were
Ascott Orchard Singapore
14
“The disparity between large and small
REITs simply widens over time,” says ESR-
REIT’s Chang. “There are also implications
beyond acquisitions and in asset
enhancement initiatives. For example,
industrial today is less manufacturing
centric and certain industrial buildings
like data centres require more investment
to keep current. A higher cost of capital
will be a vicious cycle that hampers a REIT
from keeping their portfolio current,” she
explains.
EXPANDING OVERSEAS
AND COMPETING WITH
P R I VAT E EQ U I T Y
According to KPMG, more than 70% of
Singapore CBD Grade A-office stock
is already owned by S-REITs and local
developers. As such, REITs’ acquisition of
assets outside Singapore has intensified
in recent years because managers are
searching for yield-accretive assets
to improve distributions to investors.
Generally, the bigger the REIT, the better
it can finance acquisitions and seek
quality assets.
Martin Seah,
Head of Asia Pacific Real Estate,
Gaming and Leisure at Bank of
America Merrill Lynch
in higher trading liquidity and greater
institutional investor following. “Secondly,
size also brings about other benefits such
as greater access to growth opportunities,
including development and conversion
projects. Lastly, larger trusts are usually
better able to tap the capital markets for
funding. All these will result in a lower
cost of capital, more growth opportunities
for the trust and hence enhanced returns
to unitholders,” she says.
RHB Research Institute said in a note that
the trend is likely to continue, with smaller
REITs feeling the pressure.
Charlene-Jayne Chang,
Head of Capital Markets &
Investor Relations, ESR-REIT
“The current S-REIT consolidation activity
is primarily underpinned by the capital
markets’ focus on their increasing scale
and trading liquidity, and their ability
to compete effectively for acquisition
growth, particularly against private
markets players,” says Martin Siah, Head
of Asia Pacific Real Estate, Gaming and
Leisure at Bank of America Merrill Lynch.
The bank was the sole financial adviser to
Viva Industrial Trust and OUE Hospitality
Trust on their respective merger with
ESR-REIT and OUE Commercial REIT.
“Smaller REITs tend to trade at
a discount due to the lack of
liquidity and often fall under
the radar of larger institutional
funds. Consolidation is a
natural option for REIT
managers who are looking
at their REITs’ next phase of
growth. We should expect
more to come as the sector
matures,” says Beh Siew
Khim, Chief Executive Officer
of Ascott Residence Trust
Management Limited.
Beh explains that mergers allow for the
creation of bigger trusts with larger
market capitalisations, which will result
15
Beh Siew Khim,
Chief Executive Officer of Ascott
Residence Trust Management Limited.
L E V E R AG E R AT I O
S-REITs may fund a merger or acquisition
through debt or equity as long as they
keep the debt to equity ratio at below
45%. However, the Monetary Authority
is considering raising the limit to enable