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The Risks with Ascendas Real Estate Investment Trust’s Billion Dollar Australian Deal

Ascendas Real Estate Investment Trust  (SGX: A17U) announced earlier today that it will be acquiring 26 logistics properties in Australia for a total sum of A$1.013 billion (roughly S$1.01 billion).

The trust is buying these properties from GIC, one of the Singapore government’s investment arms, and Frasers Centerpoint Ltd (SGX: TQ5). I had previously looked at the deal and how it would impact Ascendas REIT’s unitholders. In here, let’s run through the risks involved.

First, Ascendas REIT is going to spend more than A$1.0 billion for the Australian properties and that sum’s not tiny – it represents 12% or so of the REIT’s total asset value at the moment. Moreover, the acquisition represents the REIT’s first foray into Australia.

It’s also worth noting that Ascendas REIT has so far only had limited experience with managing real estate outside of Singapore; to that point, the only foreign properties owned by Ascendas REIT at the moment are two business parks in China which account for less than 5% of its total assets under management. An unfamiliar operating environment – coupled with the big capital outlay – can be an important source of risk.

Second, Ascendas REIT will be taking on A$600 million in borrowings to fund part of the acquisition cost. That’s around one-fifth of its total borrowings of S$2.83 billion (as of 30 June 2015). Despite the hefty increase in debt, the REIT’s distribution per unit (DPU) is estimated to grow by only 3% to 3.5%. Given these numbers, it may be fair to question if the payoff from the deal is worth the additional financial risks that has to be taken on.

A third point of concern for investors relates to recent comments made by Reini Otter, a member of Frasers Centrepoint’s management team.

In a previous article of mine, I highlighted some thoughts about Australia’s real estate market that Otter,  Executive General Manager Commercial and Industrial for Frasers Property Australia (Frasers Property), had given:

 “Several trends that have been witnessed in the past year including a strong compression in yield which has led to an increase in asset prices, particularly in the core logistics markets of Western Sydney, Melbourne’s West and South East markets as well as Brisbane’s Trade Coast and the Logan Motorway corridor outside Brisbane.

The scarcity of quality assets available on the market combined with the continued aggressive acquisitions by offshore funds has seen some owners sell and capitalise on the high prices overseas buyers are willing to pay for quality locations.”

Otter’s comments are not directly related to Ascendas REIT’s deal. But given the rise in prices seen in parts of Australia’s property market, there’s a risk that Ascendas REIT may not have gotten the most bang for its buck.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns shares in Frasers Centrepoint Ltd.