Changes to Singapore’s REIT Regulations are Expected to Strengthen the Market [May/June 2008]

Changes to Singapore’s REIT Regulations are Expected to Strengthen the Market [May/June 2008]
By Michele Lerner
Singapore, a country of only 4.4 million people, has one of the largest ports in the world. Additionally, the country is proud to possess a booming real estate market, making it a rising force in the international real estate arena.

One of the driving forces seems to be the stellar returns of 2007, which have whetted investors' appetites for more. In fact, Singapore REITs' total equity market capitalization was $20.8 billion in 2007, as tracked by the FTSE EPRA/NAREIT Global Real Estate Index.

Additionally, new legislation enacted in 2007 by the Monetary Authority of Singapore (MAS) is expected to enhance the Singapore REIT market. Currently, there are 11 listed companies in Singapore, and Daniel Ekins, head of Asia Pacific real estate securities, anticipates additional REIT IPOs in 2008.

Changes Push Continued Quality
The 2007 MAS REIT guidelines brought several changes to the original Singapore REIT rules. The current framework enhances disclosure on short-term yield enhancing arrangements, discourages arrangements that entrench a manager's position, disallows discounts to institutional investors at IPO and increases the minimum threshold for investment in real estate.
"Now REITs must invest at least 75 percent of their assets in income-producing real estate, and no more than 10 percent of a REIT's revenue may be non-rental income," says Peter Mitchell, CEO of the APREA. "The changes also introduce a licensing framework for REIT managers."
Another change affecting the REIT market is that Singapore's Securities Industry Council (SIC) is extending the takeover and merger code. Pua Seck Guan, CEO of CapitaLand Retail Limited (SIN: C31), says the new takeover code amendment creates a favorable environment for one REIT to acquire another.

"In the past, it was difficult for REITs to merge," Pua says. "Now, investors may push for one REIT to take over another if they feel the returns are not strong enough."

These changes are anticipated to have a positive impact on the Singapore REIT market. "It's a good thing that the government has increased the disclosure requirements on financial engineering to investors. In the past, these requirements were not so explicit, but this will ensure the continued quality of our REIT market," Pua says.

Mitchell adds that these regulations should result in a strengthened position for Singapore as a major Asian REIT center.

Crossing Borders
One of the more unusual features of Singapore REITs is their investment in other countries. While most Asian REITs invest only in their country of origin or perhaps one other nation, Singapore REITs currently hold assets in 10 countries, according to APREA.




"As of June 2007, foreign assets comprised approximately 21 percent of the gross asset value of Singapore REITs," Mitchell says. "This was an increase from 14 percent over the previous year. We can expect this percentage to increase as more cross-border REITs are planned and the Sing-apore government continues to encourage these products."

Additionally, Mitchell says that the Singapore government is trying to establish the country as the cross-border REIT center in Asia. "The government has passed a number of tax measures to facilitate this," he says. "These include dividend withholding tax for foreign investors in REITs of only 10 percent, no dividend tax at all for individual investors and no stamp duty payable by the REIT on acquisition of Singapore real estate."

Mitchell points to examples of cross-border REITs, including Mapletree Logistic Trust (SIN: M44U), which holds cross-border assets in Hong Kong, Japan, Malaysia and Singapore. An example of a Singapore-registered REIT with assets dedicated to a certain country is Ascendas India Trust (SIN: A17U), with assets exclusively in India.

Regardless of where their assets are located, most Singapore REITs are sector-specific. "Singapore REITs are classified into sectors, including retail, industrial and hospital REITs," Pua says. Ekins reports that the current mix of Singapore REITs includes 37.3 percent retail assets, 29.5 percent office assets, 21.5 percent industrial real estate, 7.2 percent of hotels and an additional 4.5 percent in other sectors, including hospital, health care and residential assets.
Stellar Performance While Singapore REITs invest in assets in other countries, foreign investors, in turn, are equally interested in investing in Singapore REITs.

"Singapore REITs have been performing well for the past few years and have caught the attention of investors," Pua says. "We've seen a significant increase in American investors because of the intense Asian growth."

Mitchell says that institutional investors have had a healthy appetite for Asian REITs. He expects this to increase in 2008 due to the strong performance and stability of the Singapore REIT market.

In addition to the favorable regulatory atmosphere and the positive returns that increase investor confidence in Singapore REITs, the real estate fundamentals in Singapore are strong. Pua says the country anticipates increases in population that will help the real estate outlook, along with high employment, salary increases and a strong investment banking market.
Additionally, Ekins expects real estate fundamentals to stay strong for the remainder of the year. "With strong GDP numbers expected for 2008 and negative real interest rate, we believe the positive sentiment and pick-up in market activities should resume when there is greater clarity in the U.S. economy. Developer stocks are trading at a discount to NAVs and REITs are also trading below book value," he says.

Mitchell says that both the office and retail sectors in Sing-apore are under-supplied. "If the general apprehension in the stock markets pulls down equity REIT stocks, it is expected that REITs with quality management and quality assets will represent good buying opportunities," he says.

Ekins says that the implementation of government policies to encourage the growth of the REIT sector in Singapore bodes well for the continued strength of the market. "For example, within Asia, Singapore REIT regulations are seen as very investor-friendly," he says. "Singapore has become the preferred listing destination for many companies from countries wherein the REIT regulations have yet to be put in place or wherein the REIT regulations are less advantageous."