Opportunities amid challenges in S-Reit sector

SINGAPORE — Fifteen years ago, CapitaLand Mall Trust (CMT) became the first real estate investment trust (Reit) to be listed on the Singapore Exchange (SGX), widening the range of financial products available to investors as it raised more than S$200 million in its initial public offering (IPO).

Back then, it started with just three properties — Tampines Mall, Junction 8 Shopping Centre and Funan The IT Mall — in its portfolio.

Today, with 16 shopping malls in its stable, CMT has become the largest shopping mall operator and Reit on the local bourse, boasting a market capitalisation of about S$7 billion.

CMT’s growth is testament to the “remarkable” progress of the Singapore Reit sector, or S-Reits.

The sector has grown to 43 real estate investment and property trusts with a total market capitalisation of about S$70 billion — the second largest Reit market in Asia after Japan. Singapore’s clear regulatory regime and support from the Government are among key factors that contributed to the sector’s growth.

“The pro-business and supportive regulatory regime in Singapore have laid a solid foundation for the Reit industry and created an environment conducive to CMT’s growth. The regulators’ continual efforts to refine and enhance the S-Reit regime in Singapore have further helped to improve the professionalism of the sector and promote the attractiveness of S-Reits. The results: A growing local and international investor base and an expanding pool of industry talent,” said Mr Wilson Tan, CEO of CMT Management.

S-Reits have the potential to match or even overtake those in Japan in the next few years, even while rising interest rates threaten growth prospects, said experts.

The United States Federal Reserve in December raised its benchmark rate target by 25 basis points to between 0.5 per cent and 0.75 per cent, and projected another three rate hikes this year.

Singapore’s interest rates are expected to rise in tandem with US rates, which will increase the borrowing costs for Reits here.

“The outlook for the S-Reit sector in 2017 is cautiously optimistic. The second half of 2016 ended relatively mixed, and as the world is grappling with how Brexit and the Trump administration will affect the global economy, so too will Singapore’s capital markets and economy be tied to how events turn out globally and regionally,” said Mr Leonard Ong, head of real estate tax advisory at KPMG in Singapore.

Mr Teo Wee Hwee, real estate tax leader at PricewaterhouseCoopers Singapore, said rising interest rates would make it harder to list Reits as investors demand higher yields or a wider spread between the yields and the risk-free interest rate.

“In addition, many countries are developing their own Reit regimes, so this may hamper the growth of overseas property listings in Singapore,” he said.

Despite the challenges, S-Reits are expected to continue doing well here given the favourable business environment, said the experts.

Maintaining the tax, regulatory and financial regimes that have supported S-Reits over the past 15 years is key to the sector’s success.

In Asia, Singapore’s Reit market is second only to that in Japan, whose first Reit listing took place just a year ahead of CMT’s.

There are now 56 Reits listed on the Tokyo Stock Exchange, with a market capitalisation of more than US$100 billion (S$143 billion).

“While one can argue that Japan is much bigger than Singapore in terms of size, population, economy, we must recognise that Reits are a borderless industry and need not be constrained by the size of the country,” said Mr Sonny Tan, CEO of the Reit Association of Singapore (Reitas).

“Compared to Japan, our Reits are very international. 30 per cent of our Reits have assets outside Singapore. Japanese Reits are almost purely domestic. Singapore also has an attractive tax regime here compared to Japan.”

Since the IPO of CMT 15 years ago, SGX has welcomed listings with international portfolios such as CapitaLand Retail China Trust, Frasers Logistics and Industrial Trust and Manulife US Reit.

Such geographical diversification is Singapore’s key differentiator from its competitors Japan and Hong Kong, said experts.

“Unlike Japan, Reits in Singapore are allowed to own overseas properties from day one. The regulatory framework in Singapore is also less complex than that in Japan … Hong Kong also is less attractive for overseas property listings because it has a much less extensive double tax agreement network,” said Mr Teo.

“Many overseas sponsors are still keen to look at monetising their properties through a Reit listing in Singapore. There is also continuing interest from Asian investors and funds who want to gain investment exposure in overseas properties through Singapore Reits.”

Mr Ong said having more S-Reits with a presence in Europe and the Americas would “add further depth and breadth” to the current sectoral mix, enhancing Singapore as a hub for Reit listings. Other than diversifying geographically, the S-Reit sector could also grow by diversifying across different property classes, as Keppel Group had done when it launched Keppel DC Reit in 2014 — the first data centre Reit to be listed in Asia.

Reitas’ Mr Tan said dormitories for students and foreign workers are another potential area for Reits besides data centres.

“A couple of Singapore companies have aggressively ventured into student dormitories in Australia and the UK. Such assets can be securitised into Reits at the appropriate time. Healthcare, retirement and eldercare are other examples where the demand will lead to investment in the physical facilities, which can be securitised into Reits,” he said.

“The S-Reit sector is still relatively young. We started in 2002. US Reits started as far back as 1960 while Australia had its first Reit in 1971. We are only a 15-year-old teenager,” added Reitas’ Mr Tan, underlining the growth potential in the sector here.