Singapore's financial centre, Raffles Place
There’s not a whole lot for investment banks to do in Singapore these days: very few new listings, tech companies who are quite content with private market funding, local debt markets that are strong, but somewhat commoditized.
However, there is a new game in town: Reit mergers.
On Singapore’s somewhat illiquid and listing-starved stock market, Reits have long been a mainstay of volumes.
There are 42 Reits and property trusts in Singapore, which have a combined market capitalization of S$90 billion at the end of 2018, representing 8% of total market capitalization, making it the biggest such market in ex-Japan Asia.
But here, too, there are challenges. Most of the obvious real estate you can see on the Singapore skyline is already securitized. Singaporean investors have gone right off trusts that hold questionable emerging-market assets.
In recent years, the best chance has been to build Reits filled with European and US property, and list them in Singapore; more than 75% of Reits here own property outside Singapore. In fact, there are only eight that don’t.
To bolster the sector, Singapore has sought to consolidate some of its existing Reits to give them greater heft and, crucially, liquidity.
The first such transaction completed in October, when Viva Industrial Trust and ESR-Reit merged to create a single organization with about S$2.6 billion of industrial, logistic and business park assets.
Then in April, a proposed merger of OUE Hospitality Trust and OUE Commercial Reit was announced. If successful, this will be Singapore’s biggest merger, creating a vehicle with a total asset base of S$6.8 billion.
These are not particularly straightforward deals to complete.
In the Viva deal, for example, the transaction was structured as a trust scheme of arrangement, in a scrip-for-scrip deal, uncommon in Asia where deals tend to be based on cash.
There were two deals taking place at once: a share-for-share merger at the equity level, and a parallel deal at the fund-management level, since both are externally managed Reits.
Shareholders had to approve both layers, and to get over the line 8,000 shareholders had to be coaxed to vote in favour. The whole thing was done with two live share prices, making execution complicated.
“You fix the exchange ratio, and then have a period of time to get the documents in places for both parties, the offeror and offeree,” says one banker familiar with the structure. “All the advisers involved have to work in tandem.”
Even the logistics are not straightforward. There aren’t many places in Singapore where you can have 5,000 shareholders show up, and then a voting system has to be arranged, and the capacity to answer questions in Singapore’s multiple languages.
[The OUE combination] is a bold step, but potentially a necessary one in an era where big is beautiful among the Singapore-listed real estate investment trusts- Mervin Song, DBS
The OUE deal will take a similar course: a trust scheme of arrangement, scrip for scrip, but on a larger scale. There are 25,000 shareholders involved in that one – leading to the half-joking idea that they’re going to have to do the shareholder meeting in the National Stadium.
At least the regulatory roadmap has been set by the Viva deal: those involved include the Securities Industry Council, the Monetary Authority of Singapore, the SGX and tax authorities.
The Viva deal later had to be sanctioned by the Singapore High Court and even required approval from Jurong Town Corporation, though this won’t be the case with OUE.
“The markets are supportive,” says one banker. “It helps with the problem of liquidity. Combining the two helps to re-rate the stock and increases research coverage.”
The OUE merger will also put the stock into benchmark indices.
Bank of America Merrill Lynch was sole financial adviser to Viva, and will also be lead merger coordinator and sole financial adviser to OUE Hospitality Trust. Citi, UOB and RHB also worked on the Viva-ESR deal; Citi, Credit Suisse and OCBC are also on the OUE merger.
Investors love Reits in Singapore; they pay a reliable yield, are well covered by the local investment press and analyst community, and contain assets people can understand – and are often see: the OUE merged trust will include the Crowne Plaza Changi Airport, One Raffles Place and the Mandarin Orchard Singapore.
Indeed, Hou Wey Fook, DBS’s chief investment officer for wealth management, once told an investment conference he had 75% of his wealth in Singapore Reits.
More mergers are expected to follow. Morgan Stanley, for example, has been calling for them since at least 2015. A 2017 benchmark report from analyst Wilson Ng concluded that consolidating into bigger Reits should result in 15% to 30% re-ratings.
“Reits are rewarded in the market for their size and liquidity,” he says.
About 15 of Singapore’s Reits have a market capitalization of S$1 billion or lower. Merger candidates include Ascendas Hospitality Trust, AIMS Apac, Cache Logistics Trust and Sabana Shari’ah.
The OUE combination “is a bold step, but potentially a necessary one in an era where big is beautiful among the Singapore-listed real estate investment trusts,” says Mervin Song, analyst at DBS.
“A larger and more liquid OUECT-HT will likely place it on the radar of a wider pool of institutional investors and potentially result in greater broker coverage… A virtuous positive cycle could result in a lower cost of capital over time.”