Consolidation expected for real estate investment trusts in Singapore

Once-booming real estate investment trusts in Singapore could face a round of mergers to weed out the weak who find it harder to raise money and refinance loans because of the global credit crisis.

At least six of 20 listed real estate investment trusts, or REITs, in Singapore are valued for less than what their properties are worth, as is the case with many trusts in Japan and Australia, which means expansion is being hurt by higher financing costs and investor returns are limited.

Some of the trusts will face higher interest payments when they need to refinance their debt soon, leading to lower earnings and distributions to investors.

"I would expect consolidation to gather pace in the course of the next six to 12 months," said Tony Darwell, head of Asian equity research at Nomura. "The cost of debt has risen and it is impacting everyone."

For investors, many of whom are already steering clear of property and other assets that rely on debt financing, the takeover speculation means some REITs like Macquarie MEAG Prime could get bid up to prices closer to book value.

But others like Mapletree Logistics Trust could see their shares fall further because of large amounts of debt on their books.

"Singapore's REIT market is still very young and shouldn't have reached the stage for consolidation, but the situation now is quite conducive" to that, said Tricia Song, an analyst with Credit Suisse.

The Singapore market for property trusts, one of the three largest markets in Asia, has grown rapidly since 2002, when the first REIT, CapitaMall Trust, went to market.

The industry has since grown to 20 REITs worth $19 billion, although that number could fall because at least two are up for sale.

Acquisition targets include REITs trading at high yields, at large discounts to book value, or with quality assets that bigger funds could be interested in, Song said.

Experts in the industry say the first Singapore REITs that could be taken over will be those that have ties to firms or property funds in Australia, Asia's biggest property trust market.

Macquarie MEAG Prime REIT, which owns two large properties on the Orchard Road shopping belt in Singapore, said it might sell assets or go private after its main shareholder, Macquarie, received unsolicited offers for its 26 percent stake.

Allco Commercial REIT, which owns office properties in Singapore and Australia, is being closely watched as its Australian parent, Allco Finance, is trying to sell assets to meet debt repayment deadlines.

Allco in November dropped plans for a share sale of 150 million Singapore dollar, or $108 million, because of weak markets. In January, Moody's cut its credit rating to junk levels from a healthier investment grade rating, citing potential problems in refinancing 550 dollars million in short-term debt due in July.

Other REITs downgraded or placed on review for downgrade this year by major ratings agencies include MMP, Mapletree Logistics Trust and Suntec REIT, on concerns of refinancing risks.

Suntec REIT last week closed a five-year convertible bond issue worth 250 million Singapore dollars at a 4.25 percent yield to maturity, much higher than its average financing cost of 3.13 percent as of the end of December. The higher yield is a perception of higher risk among investors.

"Credit spreads have widened significantly over the past month," Melinda Baxter, an analyst with Merrill Lynch, said in a note to clients last week. "We believe this is likely to place pressure on both the cost and availability of future debt."

Besides Macquarie and Allco, other Singapore REITs could be privatized or sold, analysts said.

"There are some independent REITs out there and there could be some M&A activity," said Mark Ebbinghaus, head of Asian real estate investment banking at UBS. "I wouldn't say that there is going to be wholesale M&A in the sector."

Despite the difficulty in raising equity and the need to refinance debt, acquisition talks have helped lift REIT share prices. MMP's share price has rebounded 30 percent from record lows in January, while Allco is up 26 percent.

But finding the right buyer could take time.

BY Kevin Lim and Daryl Loo Reuters
Source
http://www.iht.com/articles/2008/03/04/business/reit.php