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February 24, 2016

2015 saw industrial focused Singapore REITs (S-REITs) make significant acquisitions in offshore markets like Australia, Korea and Malaysia whilst their office, retail and residential counterparts chose to stay at home.

Attracted to the maturity of the market and comparatively longer lease terms with built in rental escalations, industrial S-REITs made up the lion’s share of the foreign buyers in the Australian industrial real estate market in 2015. A total of AU$5 billion worth of assets changed hands throughout the year, some 20 percent higher than the five-year average of AU$3 billion, and one of the most active years ever seen in that market where overseas buyers outnumbered domestic buyers for the first time.

The market’s attraction was cemented by a number of high profile deals, most notably Ascendas REIT’s purchase of the 26-property GIC portfolio for circa AU$1 billion in Q3, followed by another AU$77 million asset later in the year. Similarly, Mapletree Logistics Trust made an AU$253 million logistics acquisition in Sydney while Cache Logistics Trust purchased four separate logistics facilities across the Australian market.

Dan Cerf, CEO of Cache Logistics Trust, says that whilst the Australian market offers a higher NOI yield of between 6.5 percent – 8.5 percent for logistics assets depending on the sub-market as well as longer lease terms, it also has clearer land-use zoning compared to markets like Japan. “Australia has a clear-cut investment holding structure for offshore capital known as a managed investment trust (MIT) which allows investors like REITs to enjoy lower withholding tax. This coupled with the favourable AUD/SGD FX position makes the market an attractive option.”

And, according to Michael Fenton, JLL’s Head of Industrial in Australia, the market will continue to draw foreign capital, particularly S-REITs, on the back of strong fundamentals. “The Australian industrial sector offers historically higher income returns than office and retail investments. Additional capital growth is supported by further yield compression, driven by the weight of capital entering the sector, cost of debt, and the spread to bond yields.”

The United States also proved popular, with GLP expanding its market presence through a US$4.55 billion portfolio acquisition in June. While not an S-REIT per se, this transaction made GLP the second largest owner of industrial real estate in the U.S. market following its maiden U.S. acquisition a few months earlier of a 55 percent stake in IndCor Properties, a platform of high-quality industrial properties sold by Blackstone to Singapore’s GIC for $8.1 billion. Even Keppel DC REIT, an industrial S-REIT focused on owning and managing data centres, acquired new assets overseas in 2015.

So, why are S-REITs looking beyond Singapore for their industrial requirements? According to Pelham Higgins, Director of Industrial at JLL’s Asia Pacific Capital Markets, one of the obvious reasons lies in the lack of supply in the domestic market, coupled with a pricing disconnect.

“Industrial S-REITs can no longer rely on their home market as a source of external growth for their assets under management (AUM),” he says.

“Along with the benefits of geographical diversification which can sometimes come from venturing in to new markets, finding yield accretive acquisitions is often the main driver whereby new property level acquisitions are made in order to drive higher earnings per share (EPS) at the S-REIT unit level.”

“Organic growth through rental increases is also proving difficult for industrial S-REITs given the amount of new supply that has recently come on line in Singapore. This is putting downward pressure on rents, especially in the business park segment of the market, and many existing domestic leases are coming up for expiry in 2016.”

“The nature and structure of REITs make them popular with yield-hungry investors, but the Singapore market is struggling to support the required returns needed to satisfy industrial S-REIT unit holders.”

With the average distributable income of industrial S-REITs overseas growing more than the wider S-REIT market average, it’s likely that they will remain major players on the world stage.

For more information:

Michael Fenton
Head of Industrial Services Australia

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