Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Monday, 11 April 2016

Consolidation of Singapore REITs

We came across an article on Bloomberg on the 24th of March 2016.
It was an article that said that the smaller REITs in Singapore are going to experience a phrase of merger in the midst of raising compliance cost.
Full Article Site HERE
We think this presents a good investment opportunity for investors seeking income + potential for a little capital appreciation.

What Are REITs?
Please refer to HERE for a more detailed post on it.

Why would they Merge?

1) Cope with rising regulatory costs 
Monetary Authority Singapore (MAS) is requiring REITs in Singapore to comply with new and tighter regulations which translate to higher compliance costs for REITs managers.
Thus REITs manager would seek to grow their Asset Under Management (AUM), grow their management fees to pay for the raising compliance costs.

2) Seek liquidity in the marketSingapore is ranked the 6th largest REIT market in the world by market capitalisation.
However, less than half of its 35 listed REITs have market capitalisation of more than US$1 billion.
REITs that are not listed on indexes (eg; Straits Times Index STI) tend to trade at a disadvantage against their peers listed on indexes.

How would they Merge?

1) Smaller REITs combine to Form a Larger REIT
Smaller REITs may combine to form a bigger REIT
Owners of separate and smaller REITs may soon own 1 bigger REIT

2) Big Fish Eats Small Fish
While I think this type of event is less likely to occur, this is one of the possibility that may play out.
Instead of the big players buying up the small players, smaller players might go to the big players and ask to be bought over.

Investment Insights

1) Continue to own REITs for Income
REITs have become an important part of people’s portfolio – Retirement or Investment portfolio.
It has also become a good source of consistent income stream.
Thus, if you already have it as part of your portfolio, GREAT!
If you do not have it, considering having it as part of your portfolio.
It can be a good source of income, growth and diversification

2) Consider Owning Smaller REITs
If a consolidation is due to happen, it will happen particularly for smaller sized REITs.
Smaller REITS also pay decent income.
In addition, because of the regulatory regime in Singapore, they are more likely to merge with another REIT to scale their operations and achieve cost synergies.
Consider owning some smaller REITS (market capitalization of less than SGD$1 billion).
While receiving monthly income, they might also be the next REIT to merge, thus allowing for some capital growth.

Recommended Post: What to own during rate hikes?

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