Such a deal, of course, is “potentially transformational” for CLI over the medium term. The two entities coming together will help speed up CLI’s funds under management (FUM) target of $200 billion. “The rationale is straightforward, we think. As capital tightens, scale has become the defining advantage for real estate platforms,” say the UBS analysts.
Below the two entities, the implications are “broader” given the numerous listed REITs that both CLI and Mapletree control. Such a tie up would redraw the map, and force a rethink of capital allocation, asset ownership, and platform alignment across both groups’ REIT families. “We believe this could mark the next phase of consolidation for REITs,” say the analysts.
‘Established playbook’
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Lim and Lee see several signs that a possible deal is likely. The two entities, naturally, have remained tight lipped thus far. First, UBS observes that CLI, even before its current form, has historically, consistently, undertaken a “major” corporate action every three to four years. In 2014, then CapitaLand privatised CapitaMalls Asia. In 2019, CapitaLand acquired Ascendas-Singbridge; in 2021, the enlarged entity was split into privately-held CapitaLand Developments and listed CLI. “Each step was preceded by a reset in growth ambitions. In this context, a larger-scale CLI-Mapletree platform transaction is not an outlier but could be the continuation of an established playbook,” says UBS.
Next, even as the Straits Times Index reaches new record levels regularly with the market review measures, CLI’s share price has been rangebound over the past years. Keppel, which has also adopted an asset manager strategy, has delivered a “material” re-rating. “This divergence is notable, particularly as Keppel’s recovery followed a series of deliberate restructuring, portfolio rationalisation and clearer articulation of its growth strategy.” CLI’s prolonged value stagnation, according to UBS, could be a catalyst for restructuring. A consolidation that accelerates fee growth, scale and capital recycling would directly address this gap.
Furthermore, parent entity Temasek is undergoing its own restructuring and the timing involving CLI and Mapletree is “unlikely to be coincidental”. Besides organising its portfolio into three distinct entities, one underlying thrust is Temasek’s willingness to drive value and one way is via M&As. “A potential consolidation within its real estate stable would be consistent with this broader strategy, we believe,” says UBS. However, the analysts warn that mergers of such a scale will come with a certain level of complexity, especially given the spread of assets, markets and capital structure that the two groups now operate with and in.
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Friction, then reinvigorate
Regardless of the structure, there will be “friction”. However, the larger platform could “re-invigorate” the growth of the FUM of both entities and help improve the “strategic relevance” among global asset managers, says UBS, whose call on CLI is “buy” with a target price of $3.21.
According to UBS, there are several benefits of the merger. The most immediate benefit would be a “stepchange” in scale. The combined entity’s FUM would increase from CLI’s $117 billion and Mapletree’s $31 billion to $148 billion, speeding up growth that would otherwise take years to achieve through small platform builds. “The primary benefit is not scale for its own sake, but the pull-forward in timing. A larger platform can deploy capital faster, compete for bigger mandates and engage in transactions that are otherwise inaccessible to sub-scale managers,” reasons UBS.
In addition, the two entities are more exposed in different markets but their underlying business models are largely aligned. Both operate private platforms pursuing value-add, development and opportunistic strategies, with S-REITs focused on core, income-producing assets. “This common structure reduces integration risks and similar operational processes create scope for cost synergies, without forcing a shift in strategy for shareholders or fund investors,” says UBS. Other benefits include breadth in product range, improved pricing in terms of fees that can be collected and also cost synergies, says UBS.
Festival Walk an ‘impediment’
According to UBS, a successful consolidation at the sponsor level would likely entail a deleveraging plan and also “force” a rationalisation of the various listed REIT platforms. CLI has six while Mapletree has three. Under what UBS calls a widely assumed scenario, CapitaLand Integrated Commercial Trust (CICT) will combine with Mapletree Pan Asia Commercial Trust (MPACT), given that both REITs are diversified commercial REITs with compatible operating profiles. However, there is an “impediment”.
MPACT’s portfolio holds a substantial yet underperforming asset in the form of Festival Walk, a Hong Kong mall valued at $4.1 billion, which will introduce “Hong Kong retail risk at scale” that CICT unitholders will spurn. This asset needs to be taken off the table for deal optics to “materially improve”, says UBS. Even then, from CICT unitholders’ perspective, the risk-reward is already “asymmetrically skewed to the downside”. CICT is already trading at a “meaningful” premium above the portfolio’s book value. Acquiring MPACT’s Singapore portfolio, anchored by VivoCity and Mapletree Business City, while positive, would be unlikely to drive a material re-rating.
CLAR: MINT or MLT?
CapitaLand Ascendas REIT (CLAR) has plenty of commonalities with Mapletree Industrial Trust (MINT), and Mapletree Logistics Trust (MLT) in the form of tenant behaviour and lease structures. However, realistically, CLAR has the capacity to absorb only one of the two Mapletree REITs and UBS believes that either could be “viable”. That said, MINT would likely represent a cleaner and more executable transaction. MLT, meanwhile, may be better positioned as a standalone long-term logistics pure play rather than folded into a diversified industrial platform.
What might happen is for CLAR and MINT to consolidate first, says UBS, and then, the combined entity can consider longer-term options to monetise or re-house the data centre assets, potentially seeding them into a larger CapitaLand-branded data centre pure-play, which is currently absent in its REIT stable. UBS warns that as it is, MINT’s data centre portfolio is “structurally challenged” with asset age, power density and hyperscale requirements all coming together to limit the long term competitiveness of this portfolio. “Improving portfolio quality could therefore be contingent on access to pipeline assets from CLI and Mapletree. This discussion, however, is separate and does not need to be resolved upfront,” says UBS.
MLT: ‘everywhere’ yet ‘nowhere’
From the perspective of UBS, MLT is “structurally awkward” and the most difficult REIT to rationalise. “It fits everywhere and yet nowhere at the same time.” According to UBS, MLT’s existing geographical footprint overlaps extensively with existing CapitaLand vehicles: India logistics aligns with CapitaLand India Trust; Singapore and Australia logistics with CLAR; Malaysia with CapitaLand Malaysia Trust; and China with CapitaLand China Trust.
As such, a “clean, single-step” solution is unlikely. One near-term approach to avoid sponsor conflicts could be to ring-fence expansion mandates. For example, CapitaLand India Trust could become the default vehicle for exposure in India undertaken by the combined entities. However, the same approach might not be viable for all markets. For example, CLAR now owns 21 logistics assets in Singapore valued at $1.6 billion. Its portfolio in Australia, meanwhile, is almost as big at $1.5 billion. MLT, on its part, holds $3.5 billion worth of assets in both Singapore and Australia. “This makes it difficult to establish a clear lead vehicle in either market. Asset swaps are possible, but would require valuation alignment and unitholder support, making them difficult to execute at scale in the near term,” says UBS.
