An extract from The Real Estate M&A and Private Equity Review, 5th Edition

Overview of the market

The growth of the Singapore REIT (S-REIT) market continues apace. Despite market volatility caused by global trade tensions, geopolitical uncertainties such as Brexit, and unrest in Hong Kong, there were four new S-REIT listings on the Singapore Exchange (SGX) in 2019. Prior to the outbreak of the covid-19 pandemic, an additional two new S-REITs were listed in 2020, with the most recent, United Hampshire US REIT, listing on 12 March 2020 amid already rising fears of the unprecedented economic fallout due to covid-19. As of the end of May 2020, there were a total of 44 S-REITs and property trusts listed on the SGX with a market capitalisation of approximately S$98 billion, representing approximately 12 per cent of Singapore's total stock market capitalisation.

The enduring popularity of S-REITs has helped to strengthen the SGX's status as an Asian REIT hub, with S-REITs forming a cornerstone of the Singapore capital markets. The FTSE Straits Time Index (STI) now includes five S-REITs with a combined index weighting of approximately 10 per cent, with four out of five of the STI Reserve List stocks also comprising S-REITs.

Given Singapore's small geographic size and limited supply of land, it is natural that S-REITs have increasingly looked to overseas markets to grow. More than 85 per cent of the S-REITs and property trusts listed on the SGX have invested in assets outside Singapore, with a particular interest in Europe and the United States in recent years. Of the six new S-REITs listed in 2019 and 2020, four of them have investment mandates focused exclusively on the US with one focused on the United Kingdom.

S-REITs have become an important source of capital from Singapore for real estate investment both onshore and offshore, while providing a transparent and liquid market for institutional and retail investors to access a wide range of asset classes in diverse geographies. For the second consecutive year, Singapore topped Asian outbound real estate investment in 2019 at US$15 billion, comprising about one-third of total capital from Asia. In addition, 2019 saw record high capital raisings on the SGX through secondary offerings, with approximately S$7.6 billion raised by S-REITs, mainly to fund new acquisitions.

The large-scale secondary fundraising has been partly fuelled by a rising trend of S-REIT consolidations in the past two to three years. Since the first S-REIT merger in 2018, there have been another four S-REIT merger transactions announced. The most recent merger announced in January 2020 between CapitaLand Mall Trust and CapitaLand Commercial Trust is expected to create the third-largest REIT in Asia-Pacific and the largest in Singapore. Such mergers allow S-REITs to scale up rapidly to compete more effectively with global competitors for quality assets, to achieve greater trading liquidity and access to a wider pool of institutional investors, and to diversify their exposure across geographies and asset classes. This could potentially lead to a more competitive cost of capital for the merged vehicles. For S-REITs managed by the same sponsor group, consolidation may also allow economies of scale to be realised.

The Singapore commercial real estate sector also continues to see considerable activity from private equity (PE) funds attracted by the access to capital and talent, business-friendly environment and a favourable tax regime. The regulatory framework for fund managers solely managing PE real estate funds affords quite a lot of flexibility, with exemptions from licensing requirements generally available for such fund managers. In addition, the government continues to actively encourage and promote Singapore as a wealth and fund management hub. A significant development in this area is the introduction of a new corporate structure tailored specifically for investment funds known as the variable capital company (VCC). A key feature of the VCC is its flexibility. It has the ability to segregate the assets and liabilities of different sub-funds with different strategies (including real estate) under a single umbrella fund, with different pools of investors investing in each sub-fund. Unlike ordinary corporate structures, a VCC is suited for investment funds as it allows for redemption from out of capital without having to go through lengthy and onerous whitewash procedures as well as payment of dividends from out of capital. While not specifically targeted at real estate PE funds, the VCC offers another fund structuring option that enhances the Singapore PE fund offerings and could potentially further bolster the real estate sector.

Local real estate companies continue to use PE fund platforms as an alternative investment structure to expand their investor base and diversify their sources of capital. In recent years, they have continued to expand rapidly in this space and offer novel products in diverse asset classes. For example, Keppel Capital established a new private fund investment manager focused on alternative asset classes such as senior living, education and infrastructure. Beyond traditional PE funds, real estate fund managers in Singapore have also started to leverage on technology and look at complementary fundraising platforms, including establishing private credit funds offering financing to the real estate sector and even utilising crowdfunding platforms that give retail investors the opportunity to participate in real estate mezzanine debt financing. With Singapore at the forefront of the fintech sector, we foresee real estate players in Singapore continuing to adopt more innovative and technology-driven means of real estate investment.

Recent market activity

i M&A transactions

With the further maturing of the S-REIT market, there continues to be a trend of large, high-profile S-REIT mergers, particularly within the same sponsor group. Some of the major recent transactions include the following:

  1. CapitaLand Mall Trust's proposed merger with CapitaLand Commercial Trust by way of a trust scheme, with CapitaLand Mall Trust acquiring all of the units of CapitaLand Commercial Trust for approximately S$8.3 billion to be satisfied in cash and new units, which was announced in January 2020. Upon completion, the enlarged trust will become the largest S-REIT with total assets of approximately S$22.9 billion;
  2. Frasers Logistics & Industrial Trust's merger with Frasers Commercial Trust by way of a trust scheme with Frasers Logistics & Industrial Trust acquiring all of the units of Frasers Commercial Trust for approximately S$1.5 billion in cash and new units, which was completed in April 2020. Post-completion, the enlarged trust has become one of the top 10 largest S-REITs by market capitalisation, with total assets of approximately S$5.9 billion;
  3. Ascott Residence Trust's merger with Ascendas Hospitality Trust by way of a trust scheme, with Ascott Residence Trust acquiring all of the stapled securities of Ascendas Hospitality Trust for approximately S$1.2 billion to be satisfied in cash and new units, which was completed in December 2019. Post-completion, the enlarged trust has become the largest hospitality trust in Asia-Pacific with total assets of approximately S$7.6 billion;
  4. Mapletree Industrial Trust's joint venture with its sponsor, Mapletree Investments, to acquire a portfolio of 10 data centres in the US and Canada from Digital Realty and to co-invest with Digital Realty in another three data centres for a total consideration of approximately S$1.9 billion, which was completed in January 2020;
  5. Ascendas Reit's acquisition of a portfolio of 28 business park properties located in the US from a subsidiary of its sponsor for approximately S$1.3 billion, which was completed in December 2019. This marked Ascendas Reit's maiden entry into the US market; and
  6. ESR's acquisition of the REIT manager of Sabana Shari'ah Compliant Industrial REIT (Sabana REIT) and a controlling stake in Sabana REIT from its previous sponsor, Vibrant Group Limited.
ii Private equity transactions

PE funds have been active in real estate M&A and there have been several notable transactions, some of which include:

  1. the acquisition of a majority stake in LOGOS, an Asia-Pacific logistics property group, by ARA Asset Management (ARA). As part of the transaction, ARA, which counts Warburg Pincus among its shareholders, transferred its stake in SGX-listed Cache Logistics Trust and its manager to LOGOS so that LOGOS would operate as ARA's exclusive logistics platform. The acquisition was also the first merger reviewed and cleared by the Competition and Consumer Commission of Singapore in the real estate and real estate fund management space;
  2. the joint acquisition by Allianz Real Estate and Gaw Capital of Duo Tower and Duo Galleria, from a joint venture between Temasek Holdings and Khazanah Nasional Berhad, Singapore's and Malaysia's respective sovereign wealth funds, for approximately S$1.6 billion, which was announced in July 2019. This came after both Allianz Real Estate's and Gaw Capital's maiden acquisitions in the Singapore real estate market in 2018;
  3. the acquisition by Pan Asia Realty Advisors, a joint venture PE fund invested by Mitsubishi Estate and CLSA Real Estate Partners, of Chinatown Point Mall from a consortium led by Perennial Real Estate Holdings (Perennial), including Singapore Press Holdings, for approximately S$520 million, which was announced in April 2019;
  4. the acquisition by AEW of Chevron House from Oxley Holdings, a Singapore property developer, for approximately S$1 billion in April 2019; and
  5. the joint acquisition by funds managed by Keppel Capital's Alpha Investment Partners and Allianz Real Estate of an 85 per cent interest in Ronsin Technology Center, a Grade A office complex in Beijing, for approximately S$1.5 billion from D&J China, a Warburg Pincus-backed industrial property company headquartered in Shanghai.

Beyond traditional real estate M&A, Singapore's real estate fund managers have also started to venture into new and innovative areas that complement their real estate businesses. A recent example is the acquisition by Keppel Capital of a 50 per cent interest in Pierfront Capital Fund Management (Pierfront), the investment manager of an alternative credit investment company that is majority-owned by Temasek Holdings. As part of the transaction, Pierfront will establish and manage a series of private credit funds that will provide private credit and mezzanine debt to corporates or projects in real asset sectors, complementing Keppel Capital's real estate fund management business. ARA has followed a similar strategy to acquire a majority stake in Venn Partners, an investment manager of European real estate private debt, with strategies comprising a UK government-backed lending programme into private sector rental housing and value-add strategies in UK and European commercial real estate debt. ARA also recently acquired more than 50 per cent interest in a Singapore-based crowdfunding platform called Minterest, representing its first foray into the fintech sector. Marrying technology and traditional professional real estate fund management, Minterest launched its first real estate secured mezzanine debt financing product in May 2020, giving retail investors access to participate in a secured mezzanine debt financing of a residential development project in Melbourne.