More REIT mergers lie ahead as growth prospects dry up

Frasers is one of the recent casualties after the merger of its logistics and commercial trusts.

The consolidation amongst real estate investment trusts (REITs), especially between firms with the same sponsor, are expected to continue given a limited potential for organic growth and the benefits in having a larger assets under management (AUM), according to a report by Jefferies.

The report stated that a bigger size allows them greater financial flexibility to undertake larger projects, compete for acquisitions and more easily withstand economic downturns, as it allows them with increased development limits and greater financial flexibility.

“Asynchronous cycles of different geographies and property sub-sectors along with lower tenant concentration risk is likely to cushion distributions from idiosyncratic risks,” equity analyst Krishna Guha said.

It will also provide them better odds to be included to indices, which will improve their liquidity, diversify their share ownership and lower their capital costs.

However, the stock market’s reaction to these mergers have been noted to be mixed, with the share prices for ESR-REIT and OUE Commercial REIT, both which recently underwent deals, have been either in line or lagging behind the sector’s performance.

“However, we note that these are early days and it may be premature to judge the benefits of such consolidation in terms of ensuing DPU/NAV [net asset value] growth, though NAV dilution may be bit stark in some cases,” Guha said.

Frasers Logistics & Industrial Trust (FLT) recently agreed to buy Frasers Commercial Trust (FCOT) in a $1.54b deal. Including this, four REIT mergers have been announced or completed, namely between ESR-REIT and Viva Industrial Trust, OUE Commercial REIT and OUE Hospitality Trust, and Ascott Residence Trust and Ascendas Hospitality Trust.