The Real Estate M&A and Private Equity Review: Singapore

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.2

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.3 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.

Real estate companies and firms

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

S-REITs are collective investment schemes that 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 the 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 that 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 required to be a licensed third-party professional trustee company that 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 that 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 that have yet to stabilise, the BT vehicle would be suitable. The tradeoff, 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.

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 real estate players with fund management platforms and development pipelines, including CapitaLand, Mapletree Investments and Keppel Capital, and PE firms, including Blackstone, KKR, PGIM Real Estate and ARA.

In its 2018 Singapore Asset Management Survey, the Monetary Authority of Singapore (MAS) estimated that S$145 billion of assets under management in Singapore was invested in real estate (excluding REITs), growing by a robust 44 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.

The structure of real estate PE funds in Singapore often depends 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 fundraisings 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 a 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. This exit strategy was employed in the listing of Elite Commercial REIT, which was initially constituted as a private fund, on the SGX in February 2020.


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 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 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 a transaction and also depending on whether the transaction is between related parties, certain thresholds may be triggered that 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, acquires 30 per cent or more of the units in an S-REIT, or 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

All S-REIT mergers to date 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. To date, four out of five S-REIT mergers involved REITs within the same sponsor group.

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, 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 other things, requirements relating to the minimum offer price, the form of consideration, the conditions that can be imposed, the timetable and the 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 that 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. 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 of 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 the approval of the 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 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 that 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 that 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 that included 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

As part of a slew of measures to provide S-REITs with greater flexibility to manage their cashflows and raise funds amid the challenging environment posed by the covid-19 pandemic, the MAS announced in April 2020 an increase in the aggregate leverage limit applicable to S-REITs from 45 to 50 per cent of its deposited property, provided that an S-REIT meets a new minimum interest coverage ratio (ICR) requirement of 2.5 times. The introduction of the ICR as a secondary metric aims to provide investors with greater transparency and assurance on the ability of an S-REIT to service its debt obligations. While the higher leverage limit took effect immediately, the implementation of the ICR requirement has been deferred to 1 January 2022 as the MAS recognised that S-REITs' ICRs will likely come under pressure in the near term due to the negative impact of the covid-19 situation on their earnings and cashflows. In addition, the SGX has also announced that it would provisionally allow listed issuers (including S-REITs) to seek an enhanced general mandate from shareholders to issue up to 100 per cent of their share capital on a pro rata basis – an increase from the original limit of 50 per cent. This enhanced share issue limit would apply until 31 December 2021. This is aimed at allowing greater flexibility in equity fundraising efforts to mitigate the effects of the covid-19 pandemic.

The ways in which an S-REIT can undertake equity fundraising 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 fundraising exercises are dilutive to existing unitholders, 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 that 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 that controls the S-REIT, and such covenants are permitted if required by the lenders and if they are clearly disclosed. An increasing trend in the Singapore real estate and S-REITs sectors is the use of green loans and sustainability-linked financing, which provide for lower financing costs if borrowers meet and maintain certain ratings on global sustainability benchmarks.

Other than debt securities, S-REITs are also able to issue hybrid securities known as perpetual securities that are not required to be included in the calculation of the 50 per cent aggregate leverage limit, subject to meeting certain conditions, including:

  1. having a perpetual term;
  2. that they can only be redeemed at the sole discretion of the S-REIT;
  3. that distributions on such securities are non-cumulative;
  4. that there is no step-up in the coupon; and
  5. they are deeply subordinated.

However, for purposes of calculating the new ICR requirement that takes effect from 1 January 2022, interest on such perpetual securities will need to be included.

As financing by an S-REIT usually requires the public equity or debt markets, or both, 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 that 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 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 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. As part of the measures to mitigate the impact of covid-19 on S-REITs, the Singapore Ministry of Finance and the Inland Revenue Authority of Singapore announced in April 2020 an extension of the timeline for REIT trustees to distribute at least 90 per cent of their specified income from three months to 12 months after the end of financial year 2020 to qualify for tax-transparency. A significant advantage of investing in an S-REIT is that individual unitholders can enjoy a full tax exemption on specified income earned by the S-REIT.5 In addition, foreign non-individual unitholders will only be subject to a final withholding tax at a rate of 10 per cent on specified income distributed by the S-REIT.6 Recognising the prevalence of S-REITs investing in assets overseas, a 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.7

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 are 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 counsel 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 an 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.

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 that 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 a 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 recycle capital for new developments while retaining operational control over divested assets. Asia-Pacific sale and leaseback deals reached more than S$16 billion in 2019, up by approximately 48 per cent over the past four years from 2015 to 2019. Given the uncertain economic environment in 2020 amid the covid-19 pandemic, there may be an increase in sale and leaseback transactions particularly with distressed companies looking to unlock capital and ease cash flow.8


The unprecedented impact of covid-19 on the global economy and continued US–China tensions have caused market turmoil and economic uncertainty all over the world, and Singapore is no exception. Retail and hospitality S-REITs have been particularly impacted due to strict lockdowns and social distancing measures. In this climate, smaller S-REITs trading at steep discounts to net asset value may come under greater pressure and become targets for larger real estate players, including other S-REITs as well as PE funds. Despite market uncertainty, the Singapore real estate market remains resilient. In a vote of confidence for the Singapore real estate market, it was announced in May 2020 in the midst of the covid-19 pandemic that Alibaba Group had acquired a 50 per cent interest in AXA Tower (where it is currently an anchor tenant) from a consortium of investors led by Perennial in a deal that values the property at approximately S$1.7 billion. Technology and e-commerce companies remain in healthy capital positions and stand in good stead to expand their operations and deploy capital.

With economic uncertainty and a continuing low interest rate environment, investor appetite for defensive investments should still remain strong. There also remains significant liquidity in the market for real estate investments, with an estimated amount of more than US$50 billion of dry powder that can be deployed over the next few years by Singapore-focused real estate funds, assuming a leverage ratio of between 40 to 50 per cent.9 S-REITs and property trusts, being commonly perceived as safe havens, are also positioned to perform relatively better than the general market. With measures rolled out by the government to help S-REITs navigate the uncertain climate, with factors such as the increased leverage limit and an extension of the time to distribute income to qualify for tax-transparency, S-REITs with prudent capital management strategies may still be able to make opportunistic acquisitions and take advantage of moderate valuations.


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

2 SGX, 'Significant Milestones for S-REITs in 2019', (6 Jan 2020) (

3 CBRE, 'Asian Outbound Investment 2019 - New Sources of Capital Emerge', (March 2020) (

5 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.

6 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.

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 JLL, 'The next normal: Investors to take advantage of sale and leaseback', (

9 CBRE, 'Singapore Real Estate Market Outlook 2020', (

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