S-REITs market sparks US asset listings

Analysts expect two more listings to follow Keppel-KBS US REIT’s footsteps.

UOB Kay Hian expects more US assets to form a larger part of the Singapore REITs market. Analyst Vikrant Pandey noted that the successful listing of Manulife US REIT has underlined a new structure that minimises a range of US taxes, such as withholding taxes levied on overseas dividend payments. “The traction gained has already attracted Keppel-KBS US REIT to follow in its footsteps (by adopting a similar US sub-REIT structure). Two more of such listings are also in discussions, according to our channel checks.”

Pandey added that other appeals to listing foreign assets in Singapore include the size and depth of the market providing ample liquidity. Some of the previously listed REITs with foreign assets also include Frasers Logistics and Industrial Trust, which focuses on Australian properties, and BHG Retail REIT, which focuses on Chinese assets.

Moreover, Singapore yield-spreads are compelling at 3.58% compared to the region’s, offering 15% upside potential. Pandey said, “Although current yields are below the historical average of 3.89%, this is significantly above the upcycle average of 2.79% (seen during 2004-08), signifying still significant upside potential for REITs as we head deeper into the upcycle.”

Singapore is second only to Japan in terms of REIT market capitalisation (US$55b vs US$110b) domiciled in Asia, Bloomberg data revealed. Singapore has gained a head-start over other countries due to its clear regulatory and tax frameworks.

UOB Kay Hian noted that China, despite having size to its advantage (REIT-able market potentially worth US$600b-1.8t, according to Guanghua School of Management report), has lagged behind in developing its REIT market. This is due to high costs faced by sponsors to transfer assets into a REIT, as well as enterprise income tax on transfer gains, business tax, land appreciation tax and stamp duties.

Analysts are bullish on S-REITs with the return of growth led by the office and hospitality sectors due to a recovery in spot office rents and hotel room rates.