Talk of consolidation among Singapore real estate investment trusts ramped up after the regulator strengthened rules governing the market in 2015. Four years on, it’s finally happening.
OUE Commercial REIT said it had agreed to buy OUE Hospitality Trust to create one of Singapore’s 10 biggest REITs, giving the combined entity greater firepower to make acquisitions. It’s also the city-state’s first merger among REITs of different asset classes. (Last year, Warburg Pincus LLC-backed ESR-REIT and Viva Industrial Trust merged to create a larger logistics trust.)
“The ESR-Viva merger set a template for future mergers,” said Vijay Natarajan, an analyst at RHB Research Institute Singapore Pte.
“We could see more such mergers of smaller players as the REIT markets still remain favourable.”
Larger REITs have outperformed smaller ones so there may be tie-ups among the smaller industrial and hotel trusts as they seek to consolidate and attract some of the fund flows going into their larger peers, he said.
The OUE merger will create a group with S$6.8 billion ($5 billion) of assets — including Crowne Plaza Changi Airport, One Raffles Place and Mandarin Orchard Singapore — making it the city-state’s eighth-largest S-REIT, according to a statement.
“The proposed combination of OUE Commercial Trust and OUE Hospitality Trust is a bold step but potentially a necessary one in an era where ‘big is beautiful’ among the Singapore-listed real estate investment trusts,” analysts led by Mervin Song at DBS Group Holdings Ltd wrote in a note. The larger and more liquid group “will likely place it on the radar of a wider pool of institutional investors, and potentially result in greater broker coverage.”
Potential merger candidates could include some trusts that are below S$1 billion in market value, analysts said.
Being eligible for inclusion in benchmark indexes was also a reason behind the OUE merger.
REITs in the FTSE EPRA/NAREIT Developed Index trade at a yield that’s 1.3 percentage point lower than REITs that aren’t, implying a 25 percent valuation premium, according to Morgan Stanley.