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

Overview of the market

Similar to real estate markets globally, the Singapore REIT (S-REIT) market was not spared from the unprecedented impact of the covid-19 pandemic in the first half of 2020. However, relative to its peers in other developed REIT markets, S-REITs demonstrated strong resilience, with total returns year-to-date up to 31 August 2020 falling a modest 5.7 per cent as measured by the iEdge S-REIT Index, compared with a decline of 17.9 per cent in the Dow Jones US Select REIT Index, a decline of 12.9 per cent in the Tokyo Stock Exchange REIT Index and a decline of 20.5 per cent in the Hang Seng REIT Index. While there has been a dearth of new S-REIT listings since the listings of Elite Commercial REIT and United Hampshire US REIT in the first quarter of 2020 before the full onset of the covid-19 pandemic in Singapore, the second half of 2020 saw an acquisition boom by S-REITs with total acquisition value of approximately S$9 billion in 2020, close to pre-pandemic levels of S$10.5 billion and S$10.2 billion in 2018 and 2019, respectively. This strong acquisition growth by S-REITs despite the extraordinary black swan events of 2020 was driven by low interest rates, higher debt capacity owing to an increase in the regulatory leverage limit applicable to S-REITs and pent-up demand from the first half of the year and, in turn, spurred on healthy secondary fund raising of S$4.5 billion in 2020. As of the end of May 2021, there were a total of 42 S-REITs and property trusts listed on the SGX with a market capitalisation of approximately S$111 billion, representing approximately 12 per cent of Singapore's total stock market capitalisation. Market capitalisation had increased year-on-year by over 13 per cent from S$98 billion, bouncing back from the widespread sell-off when the pandemic first broke out last year.

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. With the addition of Frasers Logistics and Commercial Trust in April 2021, the FTSE Straits Time Index (STI) now includes seven S-REITs with a combined index weighting of approximately 15 per cent, making it the third largest sector of the STI after Financial Services and Industrials. In addition, four out of five of the STI Reserve List stocks also comprise S-REITs.

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 83 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.

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 third consecutive year, Singapore topped Asian outbound real estate investment in 2020 at US$12.1 billion, comprising over one-third of total capital from Asia, although there was an approximately 31 per cent decline from US$17 billion registered in 2019.2 With social distancing and lockdowns becoming commonplace all over the world and the steep decline of international travel, asset classes such as hospitality and retail have been adversely affected. Conversely, we see an increasing popularity for 'future-proof' assets such as data centres, logistics and e-commerce properties.

The trend of S-REIT consolidations saw mixed results in 2020. While the mega merger between CapitaLand Mall Trust and CapitaLand Commercial Trust to create CapitaLand Integrated Commercial Trust, the third-largest REIT in Asia-Pacific and the largest in Singapore, was successfully completed in October 2020 despite the pandemic, the proposed merger between Sabana Shari'ah Compliant Industrial REIT (Sabana REIT) and ESR-REIT, whose managers are owned by ESR Cayman Limited, was voted down by Sabana REIT's unitholders. 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, the 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 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. With over 250 VCCs incorporated in less than 18 months, the take-up rate of the VCC has been highly encouraging. Quite a number of these VCCs have been used as part of real estate fund strategies.

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. 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

Despite the economic fallout from the covid-19 pandemic, S-REITs continued to be active in pursuing acquisition growth within the low interest rate environment with a number of sizeable portfolio acquisitions. Some of the major recent transactions include the following:

  1. Ascendas Reit's acquisition of a portfolio of 11 data centre properties located across Europe from subsidiaries of Digital Realty Trust, Inc. for approximately S$905 million, which was completed in March 2021. This marked Ascendas Reit's maiden entry into the European data centre market;
  2. Frasers Centrepoint Trust's acquisition of the remaining stake of 63.1 per cent in AsiaRetail Fund Limited (ARF) held by its sponsor for approximately S$1.06 billion, which was completed in October 2020. Following the acquisition, Frasers Centrepoint Trust now wholly owns ARF, which holds a portfolio of five retail malls and one office property in Singapore. This completes Frasers Centrepoint Trust's acquisition of ARF that began with an acquisition of a 17.1% stake in ARF, which was then managed by PGIM Real Estate;
  3. Mapletree Logistics Trust's acquisition of a portfolio of nine logistics properties across China, Malaysia and Vietnam and the remaining 50 per cent interest in another 15 logistics properties in China from its sponsor and subsidiaries of Itochu Corporation for approximately S$1.07 billion, which was completed in December 2020;
  4. CapitaLand China Trust's acquisition of interests in a portfolio of five business park properties in China and the remaining 49 per cent interest in Rock Square, a retail mall in China from its sponsor and a fund managed by a subsidiary of its sponsor at an agreed property value of S$1.01 billion in November 2020. This was CapitaLand China Trust's maiden acquisition of non-retail assets after the expansion of its investment mandate;
  5. Suntec REIT's acquisition of a 50 per cent interest in Nova, a mixed-use development comprising two Grade A office buildings in London with ancillary retail components, from Canada Pension Plan Investment Board at an agreed property value of approximately S$766.5 million, which was completed in December 2020. This was Suntec REIT's maiden acquisition in the United Kingdom;
  6. Keppel REIT's acquisition of Keppel Bay Tower, a Grade A office building located in Singapore, from its sponsor at an agreed property value of approximately S$657.2 million, which was completed in May 2021; and
  7. ARA LOGOS Logistics Trust's acquisition of a portfolio of five logistics properties in Australia from funds managed by its new sponsor, LOGOS, and investments in two existing funds managed by LOGOS, which hold Australian logistics properties for approximately S$404 million in October 2020. This was the first acquisition from LOGOS by ARA LOGOS Logistics Trust following ARA Asset Management's acquisition of a majority stake in LOGOS, an Asia-Pacific logistics property group.

ii Private equity transactions

Although real estate investment volumes were down in 2020, with foreign capital inflows into Singapore dropping by 53 per cent to S$3.18 billion in 2020 owing to global travel restrictions and uncertainty caused by the pandemic, PE funds remain active in real estate M&A and there have been several notable transactions, some of which include:

  1. the privatisation of Soilbuild Business Space REIT by a consortium comprising the Soilbuild Group's founder, Lim Chap Huat and his family and funds managed by Blackstone. The acquisition was completed by way of a trust scheme of arrangement for approximately S$700.3 million representing a premium to the market price per unit. The trust scheme was granted court sanction and the REIT was delisted in April 2021;
  2. the establishment of Mapletree Investment's first European office fund – Mapletree Europe Income Trust – that closed with aggregate capital of approximately S$816 million and that was fully invested in a portfolio of seven Grade A office properties in regional cities across Europe, with a total asset value of approximately S$1.9 billion;
  3. GLP's acquisition of a €1 billion portfolio of central and eastern European logistics assets from Goodman Group in March 2020. The acquisition came ahead of the closing of GLP's new pan-European logistics fund, GLP Europe Income Partners II, which raised an aggregate capital commitment of approximately €1.6 billion;
  4. the acquisition by a private fund managed by ARA Asset Management of Parc1 Tower II, a landmark office tower in Seoul, for approximately S$1.2 billion from its developer in November 2020. This was the largest single asset transaction in Korea in 2020;
  5. the acquisition by AREAP Core I Fund, a Singapore-domiciled private fund managed by Allianz Real Estate and backed by Allianz and Korea's National Pension Service, of a 50 per cent stake in OUE Bayfront, a Grade A office property in Singapore's Central Business District, from OUE Commercial REIT for approximately S$634 million. AREAP Core I Fund also acquired a 90 per cent stake in Innov Star, a tech park property in Shanghai, from a Warburg Pincus-backed developer for approximately RMB 2.2 billion;
  6. the acquisition by PGIM Real Estate of 108 Robinson Road, an office property in Singapore's Central Business District, for approximately US$107 million from a local private equity firm, Sin Capital Group in April 2021. The acquisition follows the closing of PGIM Real Estate's new Asia Pacific value-add fund, AVP IV, which raised an aggregate capital commitment of approximately US$1 billion;
  7. the acquisition by funds managed by Blackstone of The Sandcrawler, an iconic Grade A business park asset in Singapore, for approximately S$176 million from Lucas Real Estate in April 2021. The property has a futuristic, horseshoe-shaped design inspired by the fictional vehicles with the same name from the Star Wars movies; and
  8. the acquisition by a fund managed by CapitaLand of ABI Plaza, an office building in Singapore, for approximately S$200 million from MYP Ltd in November 2020.

iii Technology and Innovation

Beyond traditional real estate M&A, Singapore's real estate fund managers have also started to venture into new and innovative areas, making use of blockchain technology in fintech and tokenisation to diversify their sources of funding beyond traditional means and thus increasing liquidity for acquisitions. As part of their fund-raising, several real estate private funds have undertaken offerings and listings of digital tokens on digital securities exchanges in Singapore, such as ADDX (formerly known as iSTOX), which is a regulated platform for issuance, custody and secondary trading of digitised securities. Examples of such real estate funds that have issued digital tokens on ADDX's platform include the aforementioned Mapletree Europe Income Trust and Elite Logistics Fund, an industrial real estate fund focusing on storage and distribution logistics facilities in Europe, which holds 11 assets in the United Kingdom and Poland.

Tokenisation of private funds on a digital securities exchange platform potentially reduces the costs of raising capital and enhances liquidity by allowing secondary trading in much smaller denominations through the use of blockchain technology. It also allows fund managers to tap new sources of capital and 'democratise' private market investments that traditionally would only be accessible to institutional or ultra-high-net-worth investors. With an increasing number of digital securities exchanges being established in Singapore, including by DBS Bank, one of the first traditional banks in Asia to launch its own digital exchange, tokenisation of real estate private equity looks poised to become an important platform for real estate fund managers and other players to tap and increase new liquidity for real estate investments.

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 2019 Singapore Asset Management Survey, the Monetary Authority of Singapore (MAS) estimated that S$142 billion of assets under management in Singapore was invested in real estate (excluding REITs), broadly in line with the S$145 billion reported the previous year.3 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 to the recently introduced VCC. 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.

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 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 merger through 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. The privatisation of Soilbuild Business Space REIT was also undertaken through a trust scheme, with the acquirer, backed by the Soilbuild Group's founder, Lim Chap Huat, his family and funds managed by Blackstone, paying the consideration fully in cash. 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. More recently, a BT, Accordia Golf Trust, sold its entire portfolio of 88 golf courses in Japan to its sponsor for approximately S$848.4 million in September 2020, after raising its initial offer price of approximately S$804.1 million. An S-REIT or listed property trust would require the approval of SGX and of its unitholders for such a transaction to dispose of its entire portfolio, and may therefore be subject to some regulatory uncertainty as well as a more protracted timetable 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 that, 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 be valid until the conclusion of the issuer's next annual general meeting, provided that the mandate is approved by shareholders prior to 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.4 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.5 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.6

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. Such asset-light strategies continue to remain popular as illustrated by the proposed restructuring of CapitaLand that was announced in March 2021, under which CapitaLand will undertake a scheme of arrangement to consolidate all its investment and asset management platforms, as well as its lodging business, into a new listed entity known as CapitaLand Investment Management (CLIM), while privatising its real estate development business. With assets under management of around S$115 billion, CLIM is expected to be the largest real estate investment manager in Asia and the third largest listed real estate investment manager globally. Part of the rationale for the restructuring was to allow shareholders to continue to benefit from the growth of an asset-light and capital-efficient investment management platform, while allowing the privatised development business to undertake attractive but longer gestation projects that require longer-term capital commitment. The privatised development business would also continue to serve as a key incubator and pipeline for CLIM's listed and private real estate fund platforms.

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.

Outlook

The acquisition spree that S-REITs embarked on in the latter half of 2020 and the continued investment by global PE funds, such as Blackstone and PGIM Real Estate in Singapore assets, is a testament to the resilience of the real estate markets in Singapore, with Singapore ranking as the top real estate investment market in Asia Pacific for two consecutive years.7 With vaccination programmes rolling out and the gradual easing of travel restrictions in many countries, real estate investment in both private and public markets should see strong interest. S-REITs and PE funds with strong balance sheets are also poised to capitalise on opportunistic investments and may target distressed corporates looking to dispose of assets.

The pandemic has accelerated the use of e-commerce as consumers have become much more accustomed to shopping online. However, these were already pre-existing headwinds facing brick-and-mortar retail even before the pandemic and there are positive signs of recovery with footfall returning to shopping centres from the second half of 2020. Retail tenants will need to continue to create better quality and differentiated retail experiences to attract shoppers, while pursuing omni-channel marketing to integrate the online and offline shopping experience. The hospitality sector also remains challenging with the full recovery of international travel still uncertain due to uneven vaccination rollouts in different countries. That said, investors with strong balance sheets and long-term investment horizons could take the opportunity to acquire undervalued assets. At the other end of the spectrum, data centres, logistics and e-commerce assets continue to be the flavour of the month and will benefit from the long-term structural trends that the pandemic has accelerated.

With continuing economic uncertainty, investor appetite for defensive investments should still remain strong. There also remains significant liquidity in the global market for real estate investments, with an estimated amount of more than US$360 billion of dry powder being held by real estate-focused funds. S-REITs and property trusts, being commonly perceived as safe havens, are positioned to perform relatively better than the general market. In a sign of returning confidence to the public markets, there have been recent reports of potential S-REIT IPOs. Investor appetite for such products remains healthy, although sponsors will need to capitalise on the right timing to bring their products to the market.

Footnotes

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

2 CBRE, 'Singapore Retains Top Position as the Most Active Source of Asian Outbound Capital for Real Estate in 2020', (25 February 2021) (https://www.cbre.us/singapore/about/media-centre/singapore-retains-top-position-as-the-most-active-source-of-asian-outbound-capital-for-real-estate-i).

4 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.

5 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.

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 PwC and Urban Land Institute, 'Emerging Trends in Real Estate – Asia Pacific 2021', https://www.pwc.com/sg/en/publications/assets/page/emerging-trends-real-estate-asia-pacific-2021.pdf).

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