I OVERVIEW OF THE MARKET

Since the listing of the first real estate investment trust (REIT) on the Singapore Exchange (SGX) in July 2002, the Singapore REIT (S-REIT) market has grown rapidly. With a total of 44 S-REITs and property trusts currently listed on the SGX as of the end of May 2019, the S-REIT market is now the largest REIT market in Asia ex-Japan with a market capitalisation of approximately S$100 billion.

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 Singapore capital markets. S-REITs make up one-tenth of the FTSE Straits Time Index (STI) stocks, all of the STI Reserve List stocks and approximately one-tenth of the total market capitalisation of stocks listed on the SGX.2

Reflecting Singapore's international outlook and outward-looking perspective, more than 80 per cent of the S-REITs and property trusts listed on the SGX have invested in assets outside Singapore, initially in jurisdictions across the Asia-Pacific, but with increased focus on Europe and the United States in recent years. In 2018, Singapore capital replaced Chinese capital as the major Asian investor in global property markets, with capital flows from Singapore reaching US$18 billion, comprising 36 per cent of total capital from Asia.3 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. S-REITs now represent an established ready 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. 2018 saw the largest amount of capital raised on the SGX through secondary offerings in the last eight years, with approximately S$4.3 billion raised by S-REITs and property trusts, primarily to finance new acquisitions.

As a leading wealth management hub with over S$3 trillion assets under management in Singapore, S-REITs are able to benefit from a wide pool of global and Asian institutional investors, private wealth investors and family offices. While the S-REIT space has traditionally been dominated by local developers and fund managers, an increasing trend observed is for overseas sponsors, lured by the access to capital and by the openness to overseas investments, to seek REIT listings on the SGX for their offshore assets.

The broader Singapore commercial real estate sector has also seen considerable activity from private equity (PE) funds attracted by the access to capital and talent, ease of investment 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. The Singapore market also remains attractive to PE funds that are less constrained than S-REITs by the hunt for yield accretive acquisitions and by leverage limits. In particular, foreign PE funds have been active in the Singapore market, with several investors such as Allianz Real Estate, Gaw Capital (a Hong Kong-based PE firm) and Kenedix Inc. (a Japanese real estate fund management company) making their maiden investments into the Singapore real estate market in 2018.

Local real estate companies have also long utilised 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, including Mapletree Investments which closed the first private fund in Singapore focused on student accommodation assets with US$535 million of equity, CapitaLand which raised US$391 million for its first discretionary PE fund which will invest in value-add and transitional office buildings in Asia's key gateway cities and Keppel Capital's tie-up with MindChamps PreSchool to establish a new PE fund to invest in preschool and early learning real estate assets in the Asia-Pacific region.

The continued growth of the S-REIT and PE real estate market has led to real estate transactions being highly securitised and increasingly complex, with investors becoming more sophisticated and often utilising novel structured financing to acquire assets in the most tax efficient manner. Transactions often involve cross-border elements, with issuers and professionals required to manage multiple workstreams across legal, tax and financial aspects.

II RECENT MARKET ACTIVITY

i M&A transactions

There has been an increasing trend of large high-profile M&A transactions involving S-REITs and real estate companies. Some of the major recent transactions include:

  1. CapitaLand's proposed acquisition of the business of Ascendas-Singbridge for approximately S$6 billion to be satisfied in cash and new shares, which was announced in January 2019. Upon completion, the combined total assets under management of CapitaLand will exceed S$116 billion, putting it among the top 10 real estate investment managers globally, as well as the manager of the three largest S-REITs, namely Ascendas Reit, CapitaLand Mall Trust and CapitaLand Commercial Trust;
  2. CapitaLand's and City Development Limited's joint acquisition of Liang Court mall for S$400 million from PGIM Real Estate's Asia Retail Fund, the largest non-listed retail mall fund in Singapore, which was completed in June 2019;
  3. Frasers Property Limited and Frasers Centrepoint Trust acquiring additional stakes in PGIM Real Estate's Asia Retail Fund to around 47.8 per cent and 18.8 per cent respectively for an aggregate consideration of around S$635 million in March 2019;
  4. OUE Commercial REIT's proposed merger with OUE Hospitality Trust by way of a trust scheme with OUE Commercial REIT acquiring all of the stapled securities of OUE Hospitality Trust for approximately S$1.5 billion to be satisfied in cash and new units, which was announced in April 2019. Upon completion, OUE Commercial REIT will become one of the largest diversified S-REITs with total assets of approximately S$6.8 billion;
  5. ESR-REIT's merger with Viva Industrial Trust by way of a trust scheme with ESR-REIT acquiring all of the stapled securities of Viva Industrial Trust for approximately S$936.7 million in cash and new units, which was completed in October 2018. Post-completion, ESR-REIT has become the fourth largest industrial S-REIT with total assets of approximately S$3.0 billion;
  6. Frasers Logistics & Industrial Trust's acquisition of a portfolio of 21 industrial properties in Germany and the Netherlands from a subsidiary of its sponsor for approximately S$972.2 million, which was completed in May 2018. This was Frasers Logistics & Industrial Trust's maiden entry into the European market, expanding from its initial focus on Australia;
  7. City Developments Limited's acquisition of a 50 per cent stake in the REIT manager of IREIT Global from Tikehau Capital, a pan-European alternative asset management and investment group and the existing sponsor of the S-REIT, and a 12.4 per cent stake in IREIT Global from certain major unitholders; and
  8. OUE Limited's acquisition (together with its subsidiary) of the REIT manager of First REIT and a 10.6 per cent stake in First REIT from its sponsor, PT Lippo Karawaci Tbk.

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 privatisation of Global Logistics Properties Limited, which owns a global portfolio of warehouses and other logistics facilities, by way of a scheme for approximately S$16 billion by a consortium of Chinese PE investors including Hopu Investment Management, Hillhouse Capital, Vanke Group and Bank of China Group Investment in January 2018. This is the largest PE buyout of an Asian company to date;
  2. the privatisation of ARA Asset Management (ARA), a Singapore-based global integrated real estate fund manager, which manages multiple REITs and private funds, for approximately S$1.8 billion by a consortium including Warburg Pincus, a unit of AVIC Capital Co and certain existing investors in April 2017;
  3. several transactions by AEW in the Singapore market in the last two years, including acquisitions of Twenty Anson and 55 Market Street from S-REITs and the divestment of Rivervale Mall to SC Capital Partners, a Pan-Asian real estate investment firm;
  4. ARA's joint acquisition with British property group Chelsfield, through their respective private funds, of Manulife Centre for S$555.5 million from City Developments Limited and a fund managed by Keppel Capital in January 2019;
  5. Gaw Capital's acquisition of Robinson 77, a Grade A office building in Singapore, from a fund managed by CLSA Capital Partners for approximately S$710 million in February 2019;
  6. Allianz Real Estate's acquisition of a 20 per cent stake in Ocean Financial Centre, a Grade A office building in Singapore, from Keppel REIT for approximately S$537.3 million which was completed in December 2018;
  7. CapitaLand's joint acquisition, through its Raffles City China Investment Partners III fund, of Raffles City The Bund, Shanghai's tallest twin towers, in a 50:50 joint venture alongside Singapore's sovereign wealth fund, GIC, for approximately S$2.54 billion, which was announced in November 2018; and
  8. an affiliate of Lone Star Funds' acquisition of Saizen REIT's entire portfolio of Japanese residential properties for approximately S$517.3 million, which was completed in March 2016. Upon completion of the sale, Saizen REIT became a cash trust and it was proposed to be the subject of a reverse takeover by Sime Darby Group through an acquisition of certain of Sime Darby's industrial assets in Australia which ultimately fell through. Saizen REIT subsequently was the first S-REIT to be delisted.

III REAL ESTATE COMPANIES AND FIRMS

i Publicly traded REITs and REOCs – structure and role in the market

S-REITs are collective investment schemes which are structured as unit trusts with a separate trustee and manager. Unlike retail unit trusts which are typically open-ended investment vehicles, S-REITs are closed-end and do not permit redemption of units at the option of their investors. Practically, this has little impact on investors' liquidity as S-REITs are listed on the SGX and investors are free to buy and sell units on the market.

To date, all S-REITs have adopted an externally managed structure, where the REIT manager is a Singapore-incorporated private company that is typically owned by the sponsor of the S-REIT. Unlike certain other mature REIT regimes where internalised managers have become the norm, S-REITs have so far eschewed internalised management models despite the oft-touted cost savings. This may be because investors still place more importance on S-REITs having the backing of a reputable sponsor with a strong pipeline of assets and experienced and professional management teams. In turn, the external management model appeals to sponsors which are able to maintain management control over assets injected into S-REITs while still pursuing asset-light strategies and unlocking the value of the assets on their balance sheet.

The REIT trustee is typically a licensed third party professional trustee company which acts as a custodian and holds an S-REIT's assets on behalf of the unitholders.

S-REITs are intended to be passive vehicles that hold predominantly stabilised income-producing real estate and are subject to limits on the amount of leverage and development activities which they can take up. While the market has been dominated by S-REITs investing in traditional asset classes of retail, office, industrial and hospitality, in recent years, more novel asset classes have emerged including data centres and e-commerce facilities.

An alternative structure available for property trusts in Singapore is the business trust (BT), which is essentially a business enterprise set up as a trust structure. Certain property trusts have opted to take the form of a BT due to the greater flexibility afforded to such vehicles. Unlike S-REITs, BTs can actively undertake business operations and are not subject to restrictions on the type of investments or in the manner that their investments are operated. Therefore, where the assets to be listed include a significant amount of assets under development or assets which have yet to stabilise, the BT vehicle would be suitable. The trade-off, however, is that investors tend to perceive BTs as riskier investments and this is factored accordingly into the pricing and performance of the stock.

Other than real estate, BTs have also been used to hold infrastructure and shipping assets. Listed BTs are required to be registered under, and are subject to, the Business Trusts Act. Unlike S-REITs, BTs have a single responsible entity, known as a trustee-manager, which is a Singapore-incorporated private company that is typically owned by the sponsor of the BT.

The Singapore market has also seen stapled structures comprising S-REITs stapled to BTs. This is peculiar to S-REITs holding hospitality assets and was primarily developed due to the highly operational nature of hotels and the inability of S-REITs to hold assets with significant income generated from business operations – the rationale for the stapling is that in the event that the S-REIT is unable to lease out its hotel, the BT, which is able to actively undertake business operations, would step in as a 'lessee of last resort' to lease and operate the hotels. Stapled securities must be traded together and cannot be traded separately. Such stapled securities may be advantageous as they can combine the benefits of two different business forms or structures and yet can overcome the restrictions of any particular one. As the S-REIT market matures, there may be more variations of financial instruments involving S-REITs and other structures, signalling a broader investment environment with greater choice for investors.

Apart from S-REITs and property trusts, the Singapore market has its fair share of listed real estate companies. While many of these started off primarily as developers, they have since grown into large integrated real estate players with businesses across the entire real estate value chain from construction and development to ownership, leasing and asset and fund management. Many of the large local real estate companies act as sponsors to S-REITs and own and control REIT managers. With a critical mass of S-REITs now in the market, a large bulk of the real estate M&A activity in Singapore is driven by these vehicles, creating a vibrant market for real estate investment. Real estate companies have benefited from this as well and are able to access a large market of potential buyers for assets and recycle capital efficiently.

ii Real estate PE firms – footprint and structure

Real estate PE fund managers in Singapore are largely made up of the following:

  1. large local real estate players with fund management platforms and development pipelines, including CapitaLand, Mapletree Investments and Keppel Capital;
  2. global PE firms, including Blackstone, KKR and PGIM Real Estate; and
  3. boutique local real estate fund managers.

In its 2017 Singapore Asset Management Survey, the Monetary Authority of Singapore (MAS) estimated that S$101 billion of assets under management in Singapore was invested in real estate (excluding REITs), up by 13 per cent from the previous year.4 Similar to other jurisdictions, real estate PE funds in Singapore follow a range of strategies from core and core-plus to value-add and opportunistic. Unconstrained by the operational restrictions that S-REITs are subject to, real estate PE funds are generally able to close transactions quickly, before stabilising the assets for subsequent sale through upgrading and repositioning activities. The greater flexibility that real estate PE funds possess also allows them to invest in non-traditional asset types, including student accommodation, shophouses, medical suites, nursing homes, petrol stations, carparks and dormitories, with transactions in such assets reaching a 10-year high of more than S$1 billion in 2018.5

The structure of real estate PE funds in Singapore often depend on multiple factors including the type and number of investors, the reputation of the fund manager and the intended exit strategy. Small club deals may take the form of simple joint venture structures between a handful of 'friends and family' investors with minimal offering-type
documentation, while larger fund raisings may see the fund manager hiring investment banks to market the funds through their distribution channels to institutional and high net worth investors.

Fund structures range from more traditional corporate and limited partnership structures but in recent years, trust structures have gained popularity as well, particularly if a potential exit strategy is through a listing of the private trust as an S-REIT or BT. Such a structure could potentially minimise stamp duty compared to a sale of the underlying assets of the fund.

IV TRANSACTIONS

i Legal frameworks and deal structures

S-REITs have traditionally grown inorganically through acquisitions of new assets from both the available pipelines of sponsors as well as from third parties. Given the importance of overseas investments to S-REITs, regulators have been flexible and receptive in permitting S-REITs to adopt the most tax efficient acquisition structures within Singapore's regulatory regime. As a result, S-REITs now hold their assets through a range of different holding structures depending on the jurisdictions in which the assets are located, including through US REITs, Australian managed investment trusts, Chinese wholly foreign-owned enterprises and Japanese tokutei mokuteki kaisha (TMK) structures. Typically the most important aspect that the Singapore regulators focus on is the ability of the S-REIT to ultimately control the underlying assets and obtain proper legal and good marketable title to the assets.

As S-REITs look to grow and scale up rapidly, there has been an increasing trend of large M&A transactions between S-REITs in recent years. Broadly, REIT M&A transactions have taken the following structures:

  1. a trust scheme between merging S-REITs;
  2. a takeover offer for all of the units of an S-REIT;
  3. the acquisition of an entire portfolio of properties; and
  4. the acquisition of shares of a REIT manager.

The structure to adopt for a particular transaction is dependent on the ultimate commercial objective, such as whether the intention is for the acquiror to acquire the S-REIT and/or all of its underlying assets or whether it is just to gain control of management. The specific circumstances of the acquiror, for example whether it is already a controlling unitholder of the S-REIT, as well as tax considerations, would also be key factors to consider.

Any M&A or acquisition involving an S-REIT would be subject to the SGX listing rules as well as the Code on Collective Investment Schemes issued by the MAS. Depending on the size of the transaction and also depending on whether the transaction is between related parties, certain thresholds may be triggered which would require the S-REIT to seek the approval of its unitholders. In the case of related party transactions, the relevant interested persons (including non-independent nominee directors of the REIT manager) would generally need to abstain from voting. To ensure that the interests of minority unitholders are protected, the independent directors of the REIT manager, based on independent valuations and advice from an independent financial adviser, would then make a recommendation that the particular transaction is on normal commercial terms and not prejudicial to minority unitholders. For acquisitions by S-REITs from related parties, the acquisition price generally cannot be above the higher of two independent valuations commissioned for the purposes of the acquisition.

S-REITs are also subject to the Singapore Code on Take-overs and Mergers (Takeover Code). Under the Takeover Code, any person which, together with its concert parties, (1) acquires 30 per cent or more of the units in an S-REIT, or (2) holds at least 30 per cent but not more than 50 per cent of the units in an S-REIT, and which acquires more than 1 per cent of the units in any six-month period, is required to make a mandatory general offer to all the other unitholders.

ii Acquisition agreement terms

Trust schemes

Two recent REIT M&A transactions – the merger between ESR-REIT and Viva Industrial Trust and the ongoing merger between OUE Commercial REIT and OUE Hospitality
Trust – have been carried out by way of a trust scheme. In a trust scheme, the acquiring S-REIT acquires all of the units of the target S-REIT in consideration for the issuance of new units in the acquiring S-REIT to the existing unitholders of the target S-REIT. The consideration to the unitholders of the target S-REIT typically also includes a cash component. An application to court to convene a scheme meeting for unitholders of the target S-REIT to approve the trust scheme (of which the threshold for approval is a majority in number of the unitholders representing at least 75 per cent in value of the units held by unitholders present and voting) and the court's approval for the trust scheme are required to make the trust scheme effective.

A trust scheme is adopted in a friendly transaction, with the parties typically entering into an implementation agreement to agree on the process by which the scheme will be carried out. Warranties would not usually be very extensive given the nature of a trust scheme and the substantial information publicly available on the target. The implementation agreement would also include conditions precedent, which are critical given the significant number of regulatory approvals and other approvals required. Trust schemes may also be implemented in parallel with an acquisition of the target S-REIT's manager by the manager of the surviving S-REIT.

Takeover offers

While there have not been any takeover bids involving S-REITs to date, there have been property BTs taken private through takeover offers by their respective controlling unitholders. Depending on the interest held by the controlling unitholder, either a voluntary or a mandatory takeover offer may be made by the controlling unitholder to acquire the units from all of the other unitholders. For example, the Nan Fung Group acquired more than 30 per cent of the units in Forterra Trust and triggered the requirement to make a mandatory takeover offer which resulted in the eventual privatisation and delisting of the trust in February 2015. Another example is the privatisation of Perennial China Retail Trust by Perennial Real Estate Holdings Limited (Perennial), which was done by way of a voluntary offer as Perennial held less than 30 per cent of the units in the trust. The process for a takeover of an S-REIT or property trust, similar to a listed company, is regulated by the Securities Industry Council and is subject to the Takeover Code, which covers, among others, requirements relating to the minimum offer price, the form of consideration, the conditions that can be imposed, the timetable and rules regarding break fee arrangements.

Portfolio acquisitions

Portfolio acquisitions are essentially similar to acquisitions of single assets but are larger in scale and usually involve S-REITs acquiring the entire portfolio of assets from PE funds nearing the end of their term and which are looking to exit. As S-REITs have grown, the number of large portfolio acquisitions from PE funds has also been on an increasing trend. In 2018, Ascendas Reit acquired two portfolios of logistics assets in the United Kingdom (UK) for an aggregate of more than £460 million from UK-based PE vehicles. Acquisition of a portfolio allows an S-REIT to gain immediate scale in a particular jurisdiction, sector or asset class. The acquisition terms and structure of portfolio acquisitions would largely be consistent with acquisitions of single assets. Such acquisitions from PE funds that are exiting their investments are also often characterised by the use of warranty and indemnity (W&I) insurance to cover any potential claims by the purchaser. Instead of having funds withheld in escrow or the seller providing contractual indemnities, W&I insurance allows PE fund sellers to have a clean exit of their investments on a fully non-recourse basis and to close their funds after the sale and return all proceeds to their investors.

The S-REIT market has also seen the converse situation where an affiliate of Lone Star Funds acquired the entire portfolio of Saizen REIT in March 2016. An S-REIT would require the approval of SGX and of its unitholders for such a transaction to dispose of its entire portfolio and is therefore likely to be less common given the regulatory uncertainty and protracted timetable that may be required to close.

Acquisitions of shares of REIT managers

A cheaper and potentially faster alternative for acquirors looking to gain control of an S-REIT may be to acquire all of the shares of its REIT manager. With the external management model, in practice, the REIT manager is able to effectively control the activities of the S-REIT. The acquisition of the REIT manager is often coupled together with an acquisition of the exiting sponsor's stake in the S-REIT as well so that the acquiror effectively steps in to replace the outgoing sponsor. Prior to entering into any arrangement where a purchaser would acquire or gain control of an interest of 20 per cent or more in a REIT manager, approval from the MAS must be obtained as REIT managers are regulated and hold a capital markets services licence for REIT management. An acquisition of a REIT manager does not require approval of unitholders of the S-REIT.

iii Hostile transactions

There have not been any successful hostile takeovers of S-REITs and such attempts remain rare in Singapore. To date, there has only been one instance of such an attempted takeover of an S-REIT which was unsuccessful – in 2017, a number of unitholders of Sabana Shari'ah Compliant Industrial Real Estate Investment REIT successfully requisitioned the REIT manager to convene an extraordinary general meeting of unitholders to table resolutions to replace the existing REIT manager with an internalised manager wholly owned by the S-REIT, and failing which, to wind up the trust. There was dissatisfaction with the performance of the S-REIT, with falling valuations and acquisitions from the sponsor which were perceived to be at inflated prices, against the backdrop of an earlier dilutive rights issue. The failure to oust the REIT manager may be attributed to several reasons, including:

  1. the lack of a credible alternative board and management team. The requisitionists were largely made up of a disparate group of individuals who did not have the resources or the expertise to assemble a team that could lead the proposed internalisation of the manager; and
  2. the presence of contractual restrictions and covenants in the financing documents of the trust which would be breached if the existing REIT manager was removed.

While the bid to remove the existing REIT manager was unsuccessful, the incident forced the sponsor to take heed of unitholders' concerns and following a strategic review by the REIT manager, a number of proposed acquisitions were terminated while there was also a leadership renewal with the chief executive officer and several board members stepping down. With investors becoming more sophisticated and discerning, shareholder activism in Singapore is likely to continue to grow. Hot-button activist issues include conflicts of interests and high management fees.

Competitive takeover offers involving listed real estate companies are also not very common although there had been several high profile deals over the years, including a bidding war that lasted more than six months in 2012 and 2013 between TCC Assets – the investment vehicle of Thai billionaire, Charoen Sirivadhanabhakdi – and Overseas Union Enterprise (now known as OUE Limited) over Fraser and Neave, a then-listed conglomerate with a large real estate business including sponsoring several S-REITs, which was eventually won by TCC Assets. Following this transaction, certain amendments were made to the Takeover Code to codify issues that arose, including implementing an auction process in a competitive bid where a stalemate remains in the later stages of the offer period and a clarification that boards of target companies may, but are not obliged to, solicit competing offers and that such solicitation would not normally be deemed to be frustrating an existing offer. More recently in 2017, a takeover offer led by Yanlord Land and Perennial for United Engineers, a listed real estate conglomerate, was unsuccessful after a minority shareholder, Oxley Holdings, itself a listed developer, amassed a major stake in United Engineers and pushed its stock price above the offer price.

iv Financing considerations

An S-REIT is subject to an aggregate leverage limit of 45 per cent of its deposited property. As such, REIT managers typically employ an active capital management strategy to find an optimal combination of debt and equity to finance acquisitions. Particularly in the initial years after listing, an S-REIT would often have to undertake equity fund raising which would generally comprise one or more of the following:

  1. private placements to certain selected institutional and accredited investors;
  2. rights issues which are offerings to all existing unitholders on a pro rata and renounceable basis, (i.e,. unitholders may trade their entitlements to purchase new units under the rights issue); and
  3. preferential offerings which are similar to rights issues except that unitholders' entitlements are non-renounceable and cannot be traded.

Equity fund raising exercises are dilutive to existing unitholders and so it is important for the overall transaction to be yield accretive to unitholders.

For debt financing, S-REITs and real estate companies both have considerable flexibility, with options ranging from obtaining secured or unsecured term loans or revolving credit facilities (whether at the asset or the listed entity level) to tapping the debt capital markets and issuing bonds, convertible instruments and other debt securities. It is not unusual for the terms of debt facilities to contain 'change of control' covenants which may require certain key shareholders to maintain a minimum stake in the listed entity. For S-REITs, this also applies in respect of the respective sponsor maintaining ownership of the REIT manager. While practically, this may have the effect of entrenching the REIT manager and the sponsor, the MAS has recognised that such covenants are often important for lenders which want assurance of the identity of the person which controls the S-REIT and such covenants are permitted if required by the lenders and if they are clearly disclosed.

Other than debt securities, S-REITs are also able to issue hybrid securities known as perpetual securities which are not required to be included in the calculation of the 45 per cent aggregate leverage limit, subject to meeting certain conditions, including having a perpetual term, that they can only be redeemed at the sole discretion of the S-REIT, distributions on such securities are non-cumulative, there is no step-up in the coupon and they are deeply subordinated.

As financing by an S-REIT usually requires the public equity and/or debt markets to be accessed, it is not uncommon for there to be financing conditions in an acquisition. This is where real estate PE funds may have a competitive advantage as they would typically not require a 'financing out' and would be able to provide greater deal certainty for a seller. PE funds and real estate companies are generally not subject to regulatory leverage limits although they would need to maintain agreed loan-to-value (LTV) ratios which are commercially negotiated with their lenders in their financing agreements. LTV ratios vary depending on the underlying asset; for commercial real estate, they typically range from 60 per cent to 70 per cent.

v Tax considerations

To promote the listing of S-REITs and to strengthen Singapore's position as a REIT hub in Asia, the Singapore government has, over the years, granted several tax concessions for S-REITs.

Tax transparency (in the context of an S-REIT) refers to an arrangement where the specified income of an S-REIT is not taxed in the hands of the REIT trustee, but in the hands of the unitholders (whether by withholding or otherwise) unless exempted. S-REITs can benefit from tax transparency subject to certain conditions, including a requirement that the REIT trustee distributes at least 90 per cent of its specified income to unitholders. A significant advantage of investing in an S-REIT is that individual unitholders can enjoy full tax exemption on specified income earned by the S-REIT.6 In addition, foreign non-individual unitholders will only be subject to a final withholding tax at the rate of 10 per cent on specified income distributed by the S-REIT.7 Recognising the prevalence of S-REITs investing in assets overseas, tax exemption has also been granted over foreign-sourced income received by S-REITs, that is paid out of qualifying income or gains in respect of overseas properties acquired on or before 31 December 2025 by a REIT trustee.8

The tax transparency treatment for S-REITs does not extend to gains realised from the sale of real properties. There is no capital gains tax in Singapore, and gains realised on a disposal of an S-REIT's real properties would be subject to income tax at the prevailing corporate tax rate if they are considered to be trading gains. The REIT trustee will then be liable to pay the tax so assessed. Whether a gain realised from the disposal of real property is deemed a capital gain or a trading gain will be determined based on the circumstances of the transaction.

Buyer's stamp duty (BSD) is payable on transfers of real estate on the execution of the sale and purchase agreement. Currently, BSD is payable by a buyer on a transfer of property, and different rates of BSD apply depending on the type of property transferred. BSD is based on the higher of the purchase price and market value of the property. BSD is normally payable by the buyer of the property, unless otherwise agreed between the parties. For industrial properties, Seller's stamp duty is also payable by a seller on a transfer of industrial property purchased on and after 12 January 2013, and sold within three years from the date of purchase.

S-REITs typically will hold Singapore properties directly rather than through a corporate entity to enjoy full tax transparency on the rental income without paying any corporate income tax. Where tax transparency is not applicable, real estate companies and PE funds can also hold Singapore properties through Singapore corporates. Acquisitions of shares of a Singapore company is subject to stamp duty at 0.2 per cent of the higher of the purchase price or the value of the shares.

For acquisitions of residential properties or interests in property-holding entities that own primarily residential properties in Singapore, additional stamp duties on both buyers and sellers will apply.

vi Cross-border complications and solutions

There are no foreign investment restrictions on non-residential properties and the ease of investment remains a key attraction for the Singapore corporate real estate market.

Similarly, outbound investment is important for the continued growth of S-REITs and local PE funds which have proven adept at navigating cross-border transactions. When acquiring assets in a new jurisdiction for the first time, REIT and fund managers need to understand not just the local market, but also the local real estate and tax laws and local counsels will need to be engaged to conduct due diligence and advise on local laws. For S-REITs in particular, it is critical from a regulatory perspective to ascertain whether the S-REIT can acquire proper legal and good marketable title to the property or the local equivalent.

For Singapore residential properties, foreign developers need to apply for a qualifying certificate under the Residential Property Act, which stipulates certain conditions such as timelines for completion of the construction works and sale of the developed units, before they can acquire restricted residential properties for redevelopment.

V CORPORATE REAL ESTATE

The establishment of S-REITs as well as (in the case of local real estate companies) PE funds has been fuelled by corporates undertaking asset-light strategies and spinning off assets on their balance sheets into S-REITs or PE funds. With the external management model, real estate companies have maintained control over these assets by building up large REIT and fund management platforms which may support and manage multiple S-REITs and PE funds. For the large local developers, establishing both S-REIT and fund platforms allows them to tap different sources of capital from a wide spectrum of investors by offering a range of securitised real estate products with different risks and returns. A typical structure would see the developer inject developing or non-stabilised assets into development or incubator funds before being sold to an S-REIT once stabilised.

In addition, particularly with industrial, logistics and hospitality companies and data centre operators, injecting their real estate assets into S-REITs or PE funds and putting in place sale and leaseback arrangements have allowed them to realise value from their properties while retaining operational control. In one of the largest industrial deals, and the largest single-asset industrial transaction, in Singapore in 2018, LOGOS Property Group, a privately held logistics property specialist, acquired a 25 hectare industrial site in Tuas South in a sale and leaseback transaction with REC, a global solar firm which is part of the Bluestar Elkem group. As part of the transaction, the integrated industrial and warehouse facility situated on the site, which houses REC's entire manufacturing chain for the production of solar panels, was leased back to REC on a long term lease, allowing REC to unlock capital and strengthen its balance sheet, while continuing to meet its operational requirements.

VI OUTLOOK

Increased US trade protectionism, a slowdown in China's economy and ongoing trade tensions between the US and China have fuelled macroeconomic uncertainties and volatilities in the stock market, with many S-REITs and property trusts trading at discounts to NAV. This may present opportunities for PE funds and other real estate players to make opportunistic acquisitions from the public markets. Singapore was ranked the second best real estate market in Asia-Pacific for investment in 2019,9 and is likely to continue to see a vibrant real estate M&A market with active participation among both private equity and public listed entities.

Despite market volatility, investor appetite for defensive investments should still remain strong and S-REITs and property trusts, being commonly perceived as safe havens, are positioned to perform relatively better than the general market. With two new S-REIT

listings to date this year,10 there still remains investor appetite and a healthy pipeline of S-REIT IPOs with a focus on cross-border assets, but finding the right timing to market will be a critical factor amidst the economic and political headwinds.

As the S-REIT market matures, the trend of real estate M&A and consolidation activity is poised to grow further as businesses look to scale up quickly and acquire accretive assets at attractive valuations as well as to achieve better synergy.


Footnotes

1 Jerry Koh is deputy managing partner, and Jonathan Lee is a partner at Allen & Gledhill LLP.

2 SGX, 'Five Property Acquisitions Expected to Boost Yields', (23 May 2019) (https://www2.sgx.com/research-education/market-updates/20190523-five-property-acquisitions-expected-boost-reit-yields).

3 Colliers, 'Investor Pulse: Asian Property Capital Flows in 2018 and Outlook for 2019', (25 April 2019) (www.colliers.com/-/media/files/apac/asia/Colliers-CMIS-Asia-Capital-Flows.pdf).

5 CBRE, 'Singapore Real Estate Market Outlook 2019', (https://www.cbre.com.sg/research-reports/Singapore-Real-Estate-Market-Outlook-2019).

6 In the Budget Statement for Financial Year 2019 (2019 Budget), it was announced that this exemption would no longer be subject to a sunset clause and would be granted on a permanent basis going forward.

7 In the 2019 Budget, it was announced that this exemption would be extended until 31 December 2025. It was originally scheduled to lapse after 31 March 2020.

8 In the 2019 Budget, it was announced that this exemption would be extended until 31 December 2025. It was originally scheduled to lapse after 31 March 2020.

9 PwC and Urban Land Institute, 'Emerging Trends in Real Estate Asia-Pacific 2019', (www.asia.uli.org/wp-content/uploads/sites/126/ULI-ocuments/ETRE19_EN.pdf).

10 As at June 2019.