Singapore ECM slumps as REITs struggle

Equities: Reliance on property trusts hurts SGX listings

Singapore ECM slumps as REITs struggle

A recent bout of investor aversion to real-estate investment trusts and yield stocks has led to a dismal start to the year for Singapore equity issuance.

At the current rate, equity and equity-linked issuance on the Singapore Exchange in 2014 will be less than a quarter of last year’s total of US$11.3bn.

A S$350m (US$277m) primary share placement in Suntec REIT last week was the largest equity deal in Singapore so far this year, almost doubling the total raised year to date. Before then, only US$327m had been raised from all equity and equity-linked offerings in 2014, almost entirely from the S$346m IPO in January of OUE Commercial REIT.

Two deals that would have added considerably to that total appear to have been delayed.

South Korea’s Lotte Shopping postponed a REIT IPO on the SGX earlier this month after investors sought a higher yield. PACC Offshore Services Holdings, a rare straight equity deal, which was not a trust or a property play, also put a US$400m offering on hold after premarketing.

The delays are an unwelcome outcome for the city state’s stock exchange, which has seen a lacklustre pipeline so far this year.

OUE Commercial REIT’s IPO has traded flat since listing at S$0.80 a share. Yet, OUE’s performance is not inconsistent: Singapore’s benchmark stock index is down 3.5% so far this year, particularly due to poor performances of REITs and other yield stocks.

The subdued level of new issuance is an indictment of the SGX’s heavy reliance on REITs and business trusts for deal-flow.

It has not helped that some of the equity transactions that were marketed for listing were at levels deemed too expensive for investors.

“One of the deals was fairly unrealistic, asking for valuations we saw at the peak of last year, which is not what we are seeing in today’s environment,” said Lai Yeu Huan, senior portfolio manager at Nikko Asset Management.

“If you have sponsors expecting to issue at the yields we were seeing in the fives, for example, versus participants looking at the market in the higher sixes, then clearly there’s a gap,” Lai added.

High-quality only

The mismatch in pricing expectations has persuaded some investors to focus primarily on secondary markets for better valuations.

“Singapore REITs trade at book value or at net asset value. Obviously, no issuer is going to price below book value until valuations rise in Singapore and Hong Kong, and that’s going to make it difficult to launch new REITs,” said one Singapore investor.

“Selling at a discount is also no guarantee, if you look at what happened to Chinese deals like Spring REIT,” the investor added.

Spring REIT, which priced its Hong Kong IPO at HK$3.81 per share in December, plunged to HK$2.88 at the March 20 close.

The prospects of a more active primary REIT pipeline in the second half also look mixed.

“There is appetite for REITs, but only the high-quality names,” said one ECM banker. “If you have a third-tier name, you’re going to struggle.”

Two blue chips have already announced plans for Singapore REIT IPOs this year and have good chances of success. Thai tycoon Charoen Sirivadhanabhakdi’s Frasers Centrepoint, a property development and investment company spun off from Fraser and Neave, plans a hospitality REIT that will hit the markets in the second quarter.

Keppel Telecommunications Transportation, part of the Temasek-backed Keppel Corp, is readying a data centre REIT.

Lotte is also expected to make a second attempt at listing its REIT in the coming months.

Still, Lai at Nikko Asset Management is cautiously optimistic that REIT valuations will improve.

“Investors need to gain confidence in the direction of bond yields and that point has arrived in my view,” Lai said. “We have seen yields peak at the end of last year and, with the advent of tapering, yields have been more benign. I believe yields have risen as high as they need to be on the long end.”

Lai said he was focused on areas positioned to take advantage of growth, such as the Singaporean hospitality and the Hong Kong prime office sectors.

Singapore ECM slumps as REITs struggle