What does Singapore at 60 mean for the REIT sector? In a report titled Singapore at 60, Asia's Next Top REIT Market, Morgan Stanley argues that by 2035, Singapore will be the leading REIT market in Apac, overtaking Japan and Australia by market capitalisation.
Currently, Singapore trails Japan and Australia. To do this, S-REIT market capitalisation is likely to rise to US$127 billion, the report says.
How would the S-REITs get there? “Our assumptions include: Sector-wide distribution per unit (DPU) yield spread compression alongside 2% DPU growth as well as secondary equity fund raising (EFR)." As a case in point, the two largest REITs have raised equity this year.
On Aug 6, CapitaLand Integrated Commercial Trust’s (CICT) manager announced it had raised $600 million in an upsized placement to partly pay for the 55% of CapitaSpring it did not own. In June, Capitaland Ascendas REIT (CLAR) raised $500 million to partly pay for the two properties it acquired on Aug 11 for $700 million. Of these, 9 Tai Seng Drive is a data centre and 5 Science Park Drive is a business space and life science property.
There would also be new REIT listings. In a results briefing, Pol de Win, SGX Group's head of global sales and origination, announced a pipeline of 30 IPOs.
An all-country effort is underway to revive the Singapore stock market. In August last year, the Monetary Authority of Singapore announced the formation of the equity market development programme (EQDP) which aims to boost investor interest and liquidity in the Singapore market.
See also: CGSI's Ong raises target price for BRC Asia to $4.30 on healthy industry fundamentals
Morgan Stanley suggests Singapore’s hub status should play a bigger role in reviving the stock market. “Our Singapore at 60 Blue Paper outlined the country as a data and AI inferencing hub, and the continued popularity of data centre assets among REITs here aligns well with that thematic."
Singapore has 26 subsea cables, landing across three sites — one of the highest levels in Asia. As part of efforts to enhance the country’s digital connectivity, Singapore aims to double its capacity for international subsea cable landings over the next decade, which includes Keppel's Bifrost cable system.
Singapore’s data centre (DC) market currently comprises around 70 DCs, with a cumulative 1.4 gigawatts (GW) of operational IT capacity. This places it at the forefront within Asean,
Keppel DC REIT is the leading pure-play data centre REIT, which Morgan Stanley says commands one of highest valuation premiums in the S-REIT market (5% dividend yield vs. the sector average of 6.5% as of August 17) — a consequence of not only being the largest listed data centre REIT across Asia by market cap, but also having one of the highest/most visible dividend growth profiles from M&A growth. "In fact, the valuation premiums KDCREIT enjoys also sets up a virtuous growth cycle for the REIT (DPU accretion from deals boosted by low cost of equity / overall funding)."
Morgan Stanley says: “We expect incremental cable networks and new AI data centres to bring in $20 billion in investments, and lay the foundation for tomorrow’s digital needs. Singapore’s domestic infrastructure plans to be upgraded to support 10 gigabits per second (Gbps) broadband speeds within the next five years."
All of this requires increased power generation in Singapore, but regulatory limitations (based on land and power constraints), mean that near-term capacity growth will likely be slower than in the recent past, at just 3% p.a. vs. 5% in the previous expansion cycle in 2010-15, Morgan Stanley reasons.
Already, the world’s second-largest data centre owner-operator and the third-largest data centre owner-operator have each listed a data centre REIT on the SGX: Digital Core REIT and NTT DC REIT.
Interestingly, the world’s largest data centre owner-operator, Equinix, operates five data centres in Singapore. Four are stabilised, one is in expansion mode; three are leased and two are owned. In Apac, Equinix operates 63 data centres, of which 28 are owned and 35 leased. Altogether, Equinix operates 272 data centres, of which 167 are owned and 105 are leased.
As an international REIT hub and a data centre hub, there is nothing to stop Equinix from raising equity in Singapore for its Apac business, market watchers say.
“The listing of new data centre REITs could also help entrench the sector's growth and appeal to investors,” Morgan Stanley's report points out.
For more stories about where money flows, click here for Capital Section
According to the report, more REITs are likely to attempt an IPO on our shores. The Morgan Stanley report points out that The Edge Singapore reported that IOI Properties will look into divesting IOI Central Boulevard Towers and South Beach Centre into an S-REIT.
Elsewhere, Centurion has announced it plans a REIT listing. Boustead is studying the feasibility of putting some of its industrial properties into a REIT, and Link REIT has toyed with the idea of divesting its overseas properties into an S-REIT. For Boustead, IOI Properties and Link, nothing concrete has been announced.
As it stands, Morgan Stanley’s top picks are CapitaLand Investment (CLI) and CLAR. “As scale begets scale, we believe CLI (Asia Pacific's (ex-Australia) largest REIT manager by AUM) stands to benefit from Singapore continuing to develop as a regional REIT hub. We see scope for a valuation re-rating from current attractive levels (17x P/E, 4% dividend yield)."
CLAR, Asia's largest new economy REIT, is also a beneficiary of Singapore's continued rise as a regional REIT hub, the Singapore at 60 report says. "We identify a new longer-run more than $1 billion data centre opportunity, which could lead to valuation re-rating from current attractive levels (5.6%-5.9% DPU yield)," Morgan Stanley says.
Separately, JP Morgan says CICT remains its top pick. “CICT is a unique S-REIT having delivered consistent 1.5% p.a. DPU growth over the past three years and going forward a three-year DPU CAGR of 5%, a rare occurrence in S-REITs’ 20-year history. In addition, CICT’s Singapore focus (~95% of portfolio) is resilient with limited upcoming retail and office supply. Investors are also viewing CICT as an alternative to direct real estate investments, as it offers an implied cap rate of 4.7%, which is more attractive compared to low 3% to low 4% cap rates for prime office and retail assets currently.”
JP Morgan says it is positive on CICT’s Singapore exposure given stable/rising asset values versus declines in some overseas markets. In addition, limited retail and office supply, steady population and income growth are likely to underpin growth in rents over time, it adds.
