SINGAPORE (Nov 1): The metrics that The Edge Singapore used to compare the real estate investment trusts that qualify for the Billion Dollar Club are somewhat different from those we used for ordinary companies. Instead of looking at pre-tax profit growth over three years, we looked at net profit growth over the period. We calculated return on equity (ROE) by dividing distributable income by shareholders’ equity. The reason is that REITs are structured to maximise their distributable income, and managed to make the most of their tax breaks.
On that basis, Mapletree Industrial Trust (MIT) came out tops. Not only did it have the highest net profit growth and weighted ROE over the three years to 2015, but it also delivered the highest return to investors. The second-best performer was CapitaLand Mall Trust, the first REIT to be listed in the local market, and the largest by market value and assets. CMT achieved only middling scores for ROE and total return, but it had a high score for net profit growth.
Yield-oriented investments have been popular with investors since the global financial crisis, as interest rates were driven to exceptionally low levels. However, investors have been concerned about the underlying fundamentals for most segments of the commercial property sector. For instance, soft economic growth and the growing tendency for people to shop online are creating challenges for REITs that own shopping malls. Local office property REITs have been affected by a surge in supply of new space over the past couple of years. Meanwhile, soft commodity prices, the slowdown in China and weak international trade are weighing on REITs that own industrial properties.
Despite that tough backdrop, the biggest REITs backed by government-linked property groups such as Ascendas, CapitaLand and Mapletree Investments have managed to keep delivering growth and drawing investors looking for the certainty of steady yields.
For instance, MIT secured a deal with HP for a major build-to-suit development on Depot Road. While MIT is assured of a tenant when the development is completed next year, other industrial and commercial REITs such as Frasers Commercial Trust could be affected as HP consolidates its operations in Singapore at its new facility. Also, unlike other major industrial REITs such as Ascendas REIT and Mapletree Logistics Trust, MIT’s assets are all in Singapore, which means it faces no currency risks.
MIT has been among the best-performing REITs this year, rising 12.8%. For 1QFY2017 to June 30, it reported a 3% y-o-y rise in revenue to S$84 million and a 6% rise in net property income to S$63.8 million. Its distribution per unit (DPU) was up 4.4% to 2.85 Singaporean cents. These gains were made even though its overall occupancy rate slipped 0.5 percentage point y-o-y to 93%. Its high-specification industrial space and business park occupancy rates rose 4.9 percentage points and three percentage points to 94.1% and 89.2% respectively.
Rentals for these properties are 1.6 times and three times, respectively, higher than rents it receives for its flatted factories. Across its portfolio, it saw an average rent reversion of 3% y-o-y in the quarter. Still, with a tough outlook for the industrial property sector, and after the big run by MIT’s units, analysts are mostly neutral on the REIT.
Which REITs will grow?
With a large portfolio, CMT has more flexibility than its peers to pursue asset enhancement initiatives and experiment with new ideas while still delivering steadily higher DPUs. As at June 30, CMT had about $10 billion worth of assets, including 14 wholly-owned malls, a 30% stake in Westgate and a 40% stake in Raffles City.
On June 30, CMT closed Funan DigitaLife Mall and is now redeveloping the property. The new mall will be called simply “Funan” and themed as a mall of the future. It will have some 611,000 sq ft of net lettable area, up from 298,814 sq ft currently. At least 56% of the space will be for retailing, 30% for offices and 14% for serviced residences. CMT will place the office and serviced residence components under separate business trusts. These could eventually be sold to other units of CapitaLand or third parties.
For 1HFY2016 to June 30, CMT reported a 7.4% rise in net property income to S$244 million. This was partly due to the addition of Bedok Mall last October. For 1HFY2016, Bedok Mall reported NPI of $S21.5 million. The funds to acquire Bedok Mall came partly from the sale of Rivervale Mall last December. Funan DigitaLife Mall contributed NPI of S$5.6 million during the period. For 1HFY2016, CMT reported DPU of 5.47 Singaporean cents, up 1.5%.
Another trend to watch in the REIT sector is the possibility of REITs turning to acquisitions to drive their growth. With their yields having compressed and physical commercial properties suffering from soft rents, REITs are in an increasingly strong position to raise equity to pursue acquisitions that would be immediately accretive to their DPU. Clearly, REITs with low gearing and those backed by parents with a pipeline of assets would be best placed to capitalise on this.
Mapletree Commercial Trust is a prime example. On Aug 26, it completed the acquisition of Mapletree Business City Phase 1 from its sponsor for S$1.78 billion, funded by a combination of debt and equity. The property has an NPI yield of 5.6% and is expected to contribute to MCT’s NPI yield of 5.1% without income support. The acquisition is also DPU- and NAV-accretive. Prior to the acquisition, about two-thirds of MCT’s NPI came from VivoCity. With the new asset in its fold, VivoCity will account for less than half its NPI. Like sister REIT MIT, MCT’s assets are all in Singapore.
Office property REITs go long
Elsewhere in the REIT sector, local office property REITs such as CapitaLand Commercial Trust and Keppel REIT could see better performance in the next couple of years as supply of new space gradually dries up. While these two leading office property players have struggled with soft rents over the past year, they have been able to keep their new properties almost fully occupied. Now, much of the new supply slated to hit the market over the coming two years has been pre-committed. And, the supply of new space could fall to zero in 2019 and 2020. Already, units in CCT and Keppel REIT have been rising strongly in recent months.
CCT seems to be moving to position itself for an upturn in rents. It is applying for planning permission to redevelop Golden Shoe Car Park, in the heart of Raffles Place. Golden Shoe could be developed into a 280m office tower with gross floor area of up to one million sq ft, a CCT news release states. A new food centre owned by the government is expected to replace the existing food centre and adjoin the new office tower.
The new building is likely to be completed in 2021, when an undersupply is expected in the CBD. Since CCT’s portfolio valuation is around S$7.8 billion, it should be able to redevelop Golden Shoe without support from its parent CapitaLand if the total development cost is not more than S$1.94 billion, according to Religare Research. The Monetary Authority of Singapore allows REITs to develop projects where development value does not exceed 25% of the value of deposited properties, subject to certain conditions that CCT meets.
CCT recently completed the development of CapitaGreen in partnership with CapitaLand. On Oct 1, CCT acquired from CapitaLand 60% of the property that it does not already own. This will mitigate the effect of negative rental reversions for expiring leases at Six Battery Road, One George Street and Raffles City Tower next year, notes Religare Research. “Any weakness is likely to be mitigated by the acquisition of a 60% interest in CapitaGreen with full contribution expected to begin in 4QFY2016,” it adds.
For 3QFY2016, CCT reported an 8.3% y-o-y rise in NPI to S$57 million. Its distributable income rose 8.1% y-o-y to $68.3 million, translating into DPU of 2.3 Singaporean cents, up 7.1% y-o-y. That was despite CCT’s portfolio occupancy rate rising a marginal 0.5% q-o-q to 97.4%, and rents remaining soft. Based on CCT’s last close, its DPU yield is 5.7%.
The Edge Singapore has started giving the largest locally-listed companies special coverage and recognition under The Billion Dollar Club.Membership to the BDC is not by invitation but by eligibility. To qualify, a company must have a minimum market capitalisation of S$1 billion. At the cut-off date of June 30, 2016, there were 101 companies that qualified for the BDC.