For REIT-Heavy Singapore Exchange, Fed Tapering Would Make Life Tougher

By Cynthia Koons and P.R. Venkat

A recovery in the U.S. economy is usually good news, but for Singapore’s real-estate investment trusts and stock exchange, it’s the opposite.

If the U.S. Federal Reserve decides the economy is strong enough for it to begin winding down its monetary stimulus–perhaps as soon as this week–it would likely mark the official beginning of the end of the global low-yield environment that made Asia’s REITs so attractive.

This could hurt Singapore Exchange, which has dominated Asia’s trust listings and where REITs and business trusts this year have accounted for 85% of new initial public offerings. Singapore has relied on trusts in recent years to keep up with rival Hong Kong, the top global IPO destination from 2009 to 2011. Trust listings have contributed more than half of the IPO proceeds in Singapore over the past five years.

Now investors are showing signs of trust fatigue. They started to sour on business trusts–which hold assets such as ports, ships or water-management facilities–late last year because those trusts are more challenging to value than REITs, a more established asset class.

Singapore’s REITs have also lost some of their luster, bankers say. Investors typically buy them for their yields, but they became less attractive after Fed Chairman Ben Bernanke in late May began talking about tapering, or gradually withdrawing, the Fed’s monetary stimulus. U.S. Treasury yields rose and Singapore’s REITs tumbled.

“It’s been a bit of a roller-coaster ride as far as REITs are concerned in 2013. REITs rallied strongly from January to May, and then witnessed a large correction after tapering talk started,” said A. Rajagopal, global head of equity capital markets at Standard Chartered.

The FTSE Straits Times Real Estate Investment Trust sub-index, which represents all REITs listed on Singapore Exchange, is down 7.5% year to date and nearly 18% since late May. Of the six REIT and business-trust listings in Singapore this year, three are now trading below their IPO price and two are roughly flat. Singapore’s benchmark Straits Times Index, meanwhile, has dropped 8% from its peak in late May but remains roughly flat on the year.

REITs and business trusts have raised US$3.76 billion in Singapore IPOs this year, according to data provider Dealogic. But analysts say the changing global environment will prove challenging.

“REIT and trust IPOs will continue to work in Singapore and Hong Kong, but at a certain price,” said Ian Long, head of China equity capital markets at Deutsche Bank. “With low interest rates looking like they’re coming to an end, a prospective IPO will have to offer higher yields to attract investors.”

Singapore-listed REITs and business trusts have average yields of 6%-7%.

Singapore Exchange officials declined to comment.

To be sure, nearly US$4 billion of trust IPOs remain in the pipeline. Viva Industrial Real Estate Investment Trust, for example, is planning to list Singapore industrial properties, and people with knowledge of the deal say it could raise up to S$500 million (US$396 million), with a listing expected this year.

Also, Lotte Department Store, South Korea’s largest department-store operator, said it is exploring a listing of some of its retail mall assets in Singapore. People with knowledge of the deal said the IPO could be worth as much as US$1 billion.

“We do have some deals in the pipeline which we are helping clients to structure,” Vivian Lam, partner at law firm Paul Hastings, said in an email. “Investors will be more selective, though, and will look more carefully at the underlying property portfolio, the manager’s experience, etc.”

For REIT-Heavy Singapore Exchange, Fed Tapering Would Make Life Tougher