A general introduction to real estate M&A and private equity in Singapore (2024)

SingaporeSeptember 22 2021

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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.