Singapore's real estate investment trust (Reit) market is set to consolidate as smaller vehicles merge to cope with rising regulatory costs, said Cambridge Industrial Trust.
"The wave of consolidation for Singapore Reits is about to begin," said Mr Philip Levinson, chief executive officer at Singapore-listed Cambridge Industrial. The trust has a market capitalisation of S$730.5 million and focuses on industrial real estate assets.
The city state's monetary regulator has tightened rules that could raise costs and lower revenues for Reits, making mergers between such trusts the most viable option for them to thrive, he said.
Morgan Stanley last year said consolidation in the Singapore Reit market was "unavoidable and necessary" to develop sufficient scale and stock liquidity for individual Reits to effectively compete on a global scale. Since 2002, when they were first started, Singapore Reits have grown into a US$48 billion (S$66 billion) market, the sixth-largest globally by market capitalisation, according to data compiled by Bloomberg.
More than half of the 35 Reits listed in Singapore have a market capitalisation of less than US$1 billion, the data shows. The city state's largest Reit, with assets of US$5.6 billion, is the CapitaLand Mall Trust.
New rules put in place last year by the Monetary Authority of Singapore requiring higher levels of disclosures, especially on fees, entail higher compliance costs and lower revenue potential for Reit managers. The new rules are especially punitive for smaller-scale Reits and the gradual widening of the gap with larger Reits would make conditions even more conducive to consolidation, Morgan Stanley said.
Reits that are not part of a broader index are significantly disadvantaged, Mr Levinson said.
Markets are bifurcating to such an extent that investors will only look at Reits that are included in indexes, he said.
Cambridge Industrial will continue to focus on its Singapore assets and consider selling some to reinvest in other markets such as Australia and Japan, Mr Levinson said.
"We will look to buy 'shabby sheds', B-grade assets in A-grade locations" in Australia, he said.
Yields for its Singapore industrial assets range between 6.6 per cent and 6.7 per cent, while Australian assets may potentially yield about 7.5 per cent to 8 per cent, Mr Levinson said. Industrial occupancy and rental rates in Singapore will remain under pressure this year as new supply outpaces demand growth, said Ms Rachel Chua, a Moody's analyst.
Singapore Reits in the industrial space will continue their overseas acquisition spree this year as they pursue asset growth, yield accretion and portfolio diversification amid challenging business conditions, Moody's said in January.