There has been a flurry of REIT IPOs coming to market, with Overseas Union Enterprise (OUE) and Singapore Press Holdings (SPH) announcing their proposed listings on the Singapore Exchange within a week of each other.
Both REITS are expected to raise more than S$1.5 billion from the market.
Market observers expect strong demand for these REITs, mainly for their high yields of between 5.5 and 6 percent.
But they warn that the REIT market is getting saturated and REIT managers must find ways to grow their respective trusts.
OUE, led by Indonesian tycoon Stephen Riady, is planning to list a hotel REIT to diversify its portfolio.
Among the assets that will be injected into the OUE REIT are Mandarin Orchard Hotel and the adjoining Mandarin Gallery.
OUE has received approval to list its REIT on the SGX. Although the timing and size of the IPO has not been confirmed, some market watchers say they are expecting to see pretty strong demand for this type of REIT as investors are still chasing yields in the current environment.
In a filing with the SGX, OUE said the REIT manager plans to appoint real-estate veteran Chong Kee Hiong as chief executive officer and executive director. Mr Chong is the former CEO of The Ascott, the serviced-apartment arm of property developer CapitaLand.
Similarly, SPH said it plans to raise more than S$1 billion by selling part of a REIT whose assets are two shopping malls.
The market is already saturated with over 20 REITs and 15 business trusts.
Still, some analysts say prospects are good.
Matthew Song, head of equity capital markets in Southeast Asia at HSBC, said: “The Singapore hotel sector has been doing well… looking at the benchmark valuation of the Far East hospitality trust and Ascendas hospitality trust and the existing CDL hospitality trust, the pricing for OUE will be around 5.5 per cent at the forward distribution basis.
“SPH on the other hand is more a retail play. Obviously Paragon is an iconic asset in an irreplaceable location. Clementi Mall offers the suburban resilience of a REIT. So given the combination of Paragon and Clementi Mall, you’re looking at an exposure to prime Orchard Road rental rates and also a defensive resilience suburban mall distribution yield. So looking at comparables, like CapitaMall trust and Frasers Mall trust, I believe distribution would be around 5 per cent forward distribution yield.”
Mr Song added: “It makes sense for OUE to consider a REIT structure. It really unlocks the value and number two, it also provides a platform for them to grow, given the REIT’s ability to recycle capital and create shareholder value. It also gives the sponsor control over the asset. By putting the assets into a REIT, the real net asset value will trade closer to where the parent is currently trading.”
Yields may remain strong but experts also caution that investors may have other options to park their money.
Roy Ling, managing director at RL Capital Management, said: “Singapore REITs went up almost 70 per cent in 2012. This year they’re still up but last month they pulled back about 10 per cent on average. This is due mainly to a fear of rising interest rates due to US pulling back on quantitative easing.
“We’ve seen long-term bond yields rising but now it’s a bit more uncertain over what happens to interest rates. Our view is that any pull back in interest rates would likely be more backdated rather than in the near term. So if there is any pull back in REIT prices, it will present a pretty good opportunity to buy if you’re able to hold the REIT for at least 12 to 24 months.”
With increasing uncertainty in the markets and more REITs anticipated to list experts say REIT managers must be able to demonstrate the growth potential of the trust.
These include highlighting plans to increase net income from the REIT assets in coming years.
Source : Channel NewsAsia – 6 June 2013