Could an airport REIT finance Singapore's massive infrastructure ambitions?

Monetising the first three terminals could command market capitalisation near $10b.

An airport real estate investment trust (REIT) secured on the rental income of the first three Changi terminals could command market capitalisation near $10b, according to a report by Maybank Kim Eng (Maybank KE).

According to Maybank KE analysts Chua Hak Bin and Lee Ju Ye, monetising the first three terminals which already have stable income and cash flows could raise a significant amount of money for the new terminal. “This will reduce the amount required for borrowings for Terminal 5 which is expected to start operations in 2030,” they highlighted.

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Changi Airport’s operating profit was reported to be around $953m, with a total revenue of $2.6b for FY2018. About 50% of the airport’s revenue is said to come from airport concessions and rental income. And whilst there is no detailed breakdown, rental income from the first three terminals could be as much as $500m, the analysts noted.

Additionally, Chua and Lee highlighted that an airport REIT could help revive what has been a moribund period for the Singapore Exchange (SGX). “A Bloomberg report highlighted the sorry state, with the number of delisting exceeding listings in recent years,” they explained. “Initial public offering (IPO) proceeds raised last year only amounted to US$512m, falling 85% from the previous year. Singapore ranked 7th in Asia excluding Japan in terms of funds raised, far behind Hong Kong’s $35b and even Vietnam’s $2.6b.”

As of end-2018, there were 741 firms listed on SGX, down from a peak of 782 in 2010.

Also read: Singapore IPO proceeds plunge to $730m in 2018

An airport REIT could therefore help increase the representation and weight of “pure play” Singapore companies on the Strait Times Index (STI), they added, citing that such a REIT may help satisfy yield-hungry institutional and retail investors. “An airport REIT will help broaden and complement the current diversity of REIT and business trusts offered on the Singapore exchange. This could help catalyze Singapore’s efforts to be an infrastructure financing hub,” Chua and Lee added.

Additionally, they argued that a listed airport REIT can also be used to guarantee or partly guarantee the loans for Terminal 5, reducing the burden on the government for a guarantee or perhaps even the need for the president’s concurrence. The funds may also reduce the pressure for new taxes (including the GST) or even higher airport charges to fund the airport expansion.

In finance minister Heng Swee Keat’s 2019 Budget Speech, he highlighted that in an effort to lower costs, the government, with the president’s concurrence, would provide a guarantee for Changi East borrowings to tap on the strength of the government’s balance sheet to back the investment into Terminal 5.

“Using the government’s strong balance sheet to provide a guarantee for these loans or bonds will also help lower financing costs. The latest government balance sheet shows that fiscal assets have grown to about $1.09t as of March 2018. This is about 232% of gross domestic product (GDP),” Chua and Lee noted.

In terms of absolute change, the report highlighted that fiscal assets grew by $90.4b or 9.1% over the previous fiscal year.

“Our REITs analyst, Chua Su Tye, believes that a Changi Airport REIT is feasible given the strong cashflows supported by rental income from the retail space across all terminals,” the analysts said. “This may need to be separated from the group’s relatively more volatile aeronautical segment. According to Changi Airport Group, total concession space across all terminals is about 980,000 sf, with transit malls on the air-side accounting for 667,000 sf. The latter would mostly include rental contribution from duty-free shops and hence could be volatile as well.”

According to Chua Su Tye, the retail portion could support conservatively a capital value of $4,500 psf, implying a valuation of $4.4b. This compares against other large destinations malls such as Causeway Point (416,000 sf at SGD2,930 psf), VivoCity (1,080,000 sf at SGD2,810 psf) and Northpoint City North Wing (230,000 sf at SGD3,520 psf).

“There could also be profit-sharing element in the rental contracts. Airport stocks moreover command a high price-earnings multiple, including those in Thailand and Malaysia, because of their monopoly position,” the analysts highlighted.

Meanwhile, the report noted how Malaysia has proposed to set up an airport REIT and raise an approximate $1.3b (RM4b) to find future airport upgrades and expansion.

“The idea is to move the aviation industry towards a self-sustainable model that does not have to depend on the government’s expenditure for future upgrades and expansion,” the analysts added. “Formation of the Airport REIT will help the government to securitise its infrastructure assets.”

Photo from Changi Airport Group