Wednesday, March 5, 2008

Singapore REITS, feeling credit squeeze, may merge

SINGAPORE'S once booming real estate investment trusts (Reits) may face a round of mergers to weed out the weak who find it increasingly tough to raise funds and refinance loans because of the global credit crisis.

At least six of Singapore's 20 listed Reits are valued below what their properties are worth, as are many trusts in Japan and Australia, which means expansion is hampered 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 in coming months, leading to lower earnings and distribution to unitholders.

'I would expect consolidation to gather pace in the course of the next 6 to 12 months,' said Mr Tony Darwell, head of Asian equity research at Nomura. 'The cost of debt has risen and it is impacting everyone, especially entities that are highly geared.'

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 such as Macquarie MEAG Prime may get bid up to prices closer to book value.

But others such as Mapletree Logistics Trust could see their shares fall further, due to 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 Credit Suisse analyst Tricia Song.

Singapore's market for property trusts, Asia's third largest, has grown rapidly since 2002 when the first Reit, CapitaMall Trust , went to market. The industry has since grown to 20 Reits worth US$19 billion (S$26 billion), although that number may shrink as at least two players 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, Ms Song said.

Industry experts say the first Singapore Reits that may 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 Singapore's Orchard Road shopping belt, said it may sell assets or go private after main shareholder Macquarie received unsolicited offers for its 26 per cent 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.

'The yield is so high at 9 per cent; Allco Reit can't raise capital and their debt is due soon. They need to do something soon,' said a hedge fund manager, who asked not to be identified.

Allco in November dropped plans for a $150 million share sale due to weak markets. In January, Moody's cut its credit rating to Ba1, or junk, from a Baa3 investment grade rating, citing potential problems in refinancing $550 million in short-term debt due in July.

Other Reits downgraded or placed on review for downgrade this year include MMP, Mapletree Logistics Trust and Suntec Reit, on concerns of refinancing risks.

Suntec Reit last week closed a 5-year convertible bond issue worth $250 million at a 4.25 per cent yield to maturity, much higher than its average financing cost of 3.13 per cent as of end-December.

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

Aside from Macquarie and Allco, other Singapore Reits that could be privatised or sold include Cambridge Industrial Trust and MacArthurCook Industrial Reit, which lack a strong parent to block any takeover bid, analysts said.

'There are some independent Reits out there and there could be some M&A activity,' said Mr 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 per cent from record lows in January, while Allco is up 26 per cent.

But finding the right buyer could take time.

Tycoon Kwek Leng Beng, who runs Singapore's second-biggest property firm City Developments, declined to confirm talks with Allco or MMP, but said he would only consider buying if the sale includes the Reit manager, which he sees as more profitable.

'We'll be happy to look at it. But if you sell me a Reit without the management company, I say goodbye to you, I'm not interested,' said Mr Kwek, Singapore's fifth-richest man.

Consolidation would leave a sector with fewer, but larger Reits that have greater financial capacity to expand abroad.

This development would follow Australia, whose Reit market expanded from 20 listed trusts in 1994 to 51 in 1999, and has since shrunk to 34 trusts that have three times more assets.

'Singapore is not going to take 40 years to get to where Australia is. The Reit market will mature at a much faster rate, although there is still a lot more scope to grow in total size,' said Nomura's Darwell. -- REUTERS

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