With the recent news of the proposed combination between Ascott Residence Trust (SGX: A68U), or ART, and Ascendas Hospitality Trust (SGX: Q1P), or AHT, which I wrote about, it got me thinking as to whether more such Singapoe REIT mergers may take place in future. Investors stand to benefit from REIT mergers as they create a larger entity that has the scale and clout to negotiate for better development and leasing deals.
Mergers between REITs are not a new phenomenon – in April this year, a proposed merger between OUE Hospitality Trust (SGX: SK7) and OUE Commercial REIT (SGX: TS0U) was announced. If successful, it would create a huge REIT vehicle with an asset base of around S$6.8 billion. In May 2018, ESR-REIT (SGX: J91U) successfully acquired and merged with Viva Industrial Trust.
Here are three compelling reasons why I think more REIT mergers could take place.
1. REITs under the same parent
For the merger between ART and AHT, it made sense because both REITs are managed by the same parent – CapitaLand Limited (SGX: C31) after CapitaLand acquired Ascendas-Singbridge in a deal which closed on 1 July. Having fewer REITs to manage individually would lower the compliance and reporting costs and both REITs can also tap pooled resources from the parent (e.g. in the areas of human resources or investor relations).
The two OUE REITs are also managed by the same parent, Overseas Union Enterprise Limited (SGX: LJ3), and merging them would create economies of scale for the parent and reduce the overall cost base.
2. Gaining exposure to new asset classes or sub-types
Two REITs may also merge if one intends to gain exposure to new asset classes or subtypes. For example, ESR-REIT acquired Viva as it would allow it to gain immediate access to a large proportion of business parks, as this industrial property subtype is expected to be low in supply, making it tough for the REIT to purchase such properties on its own.
There could also be a case where a REIT has the mandate to invest in both commercial and retail properties but its initial portfolio only has commercial properties. It then may make sense for the REIT to acquire another REIT to provide it with instant access to a stable of well-managed retail properties, rather than buying them off the market.
3. Gaining quick exposure to different regions
The third reason for REIT mergers could be to gain access to a particular country or geographic region. REITs with properties in countries which are facing over-supply or a downward revision in rental rates may seek to acquire properties in other countries that have better industry fundamentals.
There are REITs in the market which are exposed to specific countries, such as Sasseur REIT (SGX: CRPU), which owns retail malls in China, and Manulife US REIT (SGX: BTOU), which owns prime office properties in the US. An acquisition or merger with such REITs could provide instant exposure to a region of the world with better growth prospects and lower risks.
Look at REIT’s fundamentals
When investing in REITs, it is impractical for investors to hold out for a potential merger or acquisition in order to boost the unit price or the distribution per unit (DPU). Instead, investors need to assess the REIT’s fundamentals to ensure that it offers strong growth prospects on its own merits and also pays a decent DPU. A merger or acquisition should be viewed as a “bonus” if it occurs, and not be automatically viewed as a necessary catalyst in an investment operation.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore recommends shares of CapitaLand Limited, Manulife US REIT and Ascott Residence Trust. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.