Here in the U.S., the IPO market may be in doldrums, but it’s a different story on the Singapore mainboard, thanks to swelling valuations and a string of successful listings for Singapore-listed real estate investment trusts (S-REITs) this year.
This month, Lendlease Global Commercial REIT, a subsidiary of Australia’s Lendlease Group—saw its Singapore initial public offering subscribed 14.5 times over, a five-year high for a REIT listing.
The superlatives didn’t end there. Lendlease REIT’s listed stock rose 6.3% at the open from its offering price, the biggest opening day spike for an S-REIT since mall owner SPH REIT’s 8.8% IPO pop back in 2013.
Higher yields and tax havens
According to data from Bloomberg, S-REITs have raised $1.64 billion in funds as of the end of this year’s third quarter, with seemingly insatiable demand driven by yield-seeking investors.
The S-REITs do indeed offer a tantalizing yield morsel. The average yearly dividend yield for the group is 6.5%, compared to an average 4.1% yield for the FTSE Straits Times Index. Meanwhile, the market value of Singapore-listed REITs has grown at a 22% compound annualized growth rate over the past decade.
Tax incentives are core to the appeal of the asset class, particularly among high-net-worth investors. Rental and other income generated by Singapore-based properties owned under a REIT structure are granted tax-transparency treatment under the city-state’s tax code. Those that generate foreign income receive additional, preferential incentives. According to KPMG’s data, as of May 2019, 80% of Singapore-listed REITs hold overseas real estate assets.
In addition to the tax incentives for individual REITs, tax parity was granted to S-REIT ETFs as part of the Singapore government’s 2018 budget, a benefit that was recently extended to 2025.
Lendlease drew 13 anchor investors for the IPO, featuring Asia-Pacific cornerstones DBS Holdings and Fullerton Fund Management—both of which are controlled by Singapore’s $313 billion sovereign wealth fund Temasek—along with BlackRock and others.
Secondaries and shopping sprees
Secondary share sales among Singapore REITs have totaled $2.3 billion this year, the highest level since 1999. In recent weeks, Keppel Pacific Oak U.S. REIT, a Singapore-based fund that invests primarily in U.S. office properties, announced that it would seek $73 million through a private share placement to purchase an office building in the Dallas-Fort Worth, Texas area.
The announcement followed similar news from Mapletree Commercial Trust, whose portfolio consists mostly of Singapore-based office and retail properties, and which announced plans to seek $902 million through a secondary offering later this month to fund an office park expansion.
In addition to IPO-ing and secondaries, S-REITs have also been hard at work acquiring more things. Keppel DC REIT, which holds data centers across Asia, recently announced the purchase of two Singapore data centers in a deal that is expected to boost its assets under management by more than 30%. Mapletree Industrial Trust has also announced plans to buy more than $1 billion in data center assets based predominantly in the United States.
For its part, latest IPO darling Lendlease, which holds just two properties—an office development in Milan, Italy and the 313@somerset shopping mall in Singapore—has said it is in “no hurry” to buy more assets.
Hmm…
Earlier this year, analysts were beginning to express concerns about overstretched REIT valuations in Singapore. Still others have turned cautious more recently about potential spillover effects of WeWork’s implosion on the region’s office market. (Today, SoftBank announced that it would take control of WeWork via a lifeline infusion that could leave the company valued at a small fraction of its previous, inexplicable $47 billion valuation)
Credit Suisse analyst Nicholas Teh wrote in a recent report,“Office REITs have mentioned in recent briefings that corporate demand has slowed, while the narrow drivers are tech and co-working…There are growing market concerns around the sustainability of co-working demand going forward.”
Twelve of WeWork’s 25 locations across Southeast Asia are based in Singapore, and earlier this month (even after its planned IPO was shelved) the company announced intentions to open two more.
In tandem with the real estate rally, the number of flexible office spaces has tripled in Singapore since 2015.