Singaporean REITS rule in cross-border acquistions

S-REITS proved attractive to overseas investors but not to domestic ones which comprise only a third of the total shares as of Q411.

According to CBRE, Singaporean REITs continued to dominate cross-border acquisitions within Asia during 2011 noting that currently, 17 out of 26 Singapore REITs are active overseas. IIn 2011, a significant S$2.51 billion (US$ 2.0 bn) were invested by S-REITS abroad when the vast majority of capital targeted China.

“2011 proved to be as strong as 2010, when S-REITS invested S$2.49 (US$ 1.98) abroad. Seven S-REITs invested solely in foreign markets whilst nine focus exclusively on the domestic market,” CBRE said in a report.

According to CBRE, reasons for S-REITs’ expansion overseas in recent years include diversification of risk, lack of domestic assets, exposure to a wider range of markets and better yields. Other drivers include the strong currency advantage and significant support from sponsors, particularly those with an overseas presence, which makes it easier for REITs to identify potential acquisitions in overseas markets.

The largest S-REITs remain focussed on the domestic market and currently hold numerous prime assets in Singapore, said CBRE noting that whilst the quality of these assets has attracted overseas investors to acquire shares in such S-REITs, it has become more unattractive for domestically focussed S-REITs to acquire additional assets in Singapore.

“Investors have already raised concerns about the low yield levels of some recent S-REIT acquisitions, such as CapitaCommercial Trust’s acquisition of Twenty Anson at an initial yield of 2.6 per cent. Acquiring further assets in Singapore would potentially dilute distribution yields and S-REITs therefore must continue to look abroad in search of income producing and yield-enhancing assets,” it said.

According to CBRE, recent years have seen international investors display a strong interest in the S-REIT market, although they briefly retreated in 2009 during the most severe phase of the global financial crisis. An analysis of identifiable institutional and major shareholders of REITs listed in Singapore shows that just a third of shares were owned by domestic investors as of Q4 2011. North American investors accounted for 46 per cent of the total.

Danny Mohr, Executive Director, International Valuation, Asia, said “Despite Asian REITs’ sustained interest in expanding their portfolios, many markets only permit investment in the domestic market or require approval for overseas acquisitions. These regulations continue to limit cross-border investment activity, Singapore being one of the few exceptions to this rule”.

CBREsaid that based on an analysis of S-REITs’ portfolios at their latest available market values, around 38 per cent of their assets are located outside Singapore, one of the highest such proportions among global REIT markets. S-REIT portfolios have a wide geographical diversification and whilst most of their assets are located within Asia, around 17 per cent of their portfolios are situated outside the region in marketsincluding the United Kingdom, Western Europe and Australia.

According to CBRE, S-REITs’ overseas assets tend to have a higher concentration of retail, hotel and residential properties, which is due to these being the primary focus sectors for those S-REITs with assets overseas. Recent years have seen two major S-REITs begin to invest in overseas markets as they shift the emphasis of their growth strategy to diversification of assets. Since January 2010, K-REIT has acquired three commercial properties in Australia as it begins to build a pan-Asia portfolio. Ascendas REIT completed its first overseas acquisition in October 2011 with the purchase of a business park in Beijing and plans further expansion into China with a focus on tier 1 cities.