I got quite interested in this recent Ascendas REIT acquisition down under. Ascendas REIT is one of the biggest REIT in Singapore and one the oldest REIT in Singapore.
Since its listing in early 2002, their XIRR is 16%, while for the past 10 years the XIRR is about 6.77%.
It is currently priced at $2.30 and yields 6.2%.
Ascendas REIT owns the largest portfolio of industrial properties mainly in Singapore and now have some footprints overseas. To see how its dividend yield and debt leverage compares against other industrial REITs, REITs and dividend yielders, you can keep book mark my daily updated Dividend Stock Tracker here.
Ascendas proposed an acquisition of 26 logistics properties in Australia which belongs to Frasers Property Australia and the real estate arm of Singapore’s GIC. The total value is A$1.013 billion.
This acquisition is big. Consider the current value of Ascendas REIT’s investment properties to be around SG$6.9 bil, this is almost 14% of their current value.
The quality of industrial properties down under
Ascendas isn’t the first industrial REIT that went down under.
Keppel DC REIT, went IPO with data centers down under.
Aims Amp Industrial REIT, currently yielding about 8.2%, in late 2013 purchase a 49% stake in Optus Centre down under. The NPI yield was 8.1%, the average lease duration 8.6 years, the property is free hold and have a rent escalation of 3%/yr.
Cache logistics trust, currently yielding about 8.65%, in Feb 2015 acquire 3 logistics properties which lengthen their short average land lease of near 33 years. The NPI yield was 7.3%, average lease duration 9.7 years, the properties are free hold.
Mapletree Logistics Trust, currently yielding about 7.4%, proposed the acquisition of a chilled storage warehouse in Jun 2015. The NPI is low at 5.6% for the first year, average lease duration of 19 years, rent escalation of 2-3%, the property is free hold.
The common thing about the industrial or the office space in Australia is that the assets are freehold, long tenant lease and with build in rent escalation. It is very different to that of Singapore in that the lease are short at 3 years.
There are good and bad in that long lease makes income predictable and you can match funding well with it.
In the case of Ascendas REIT purchase, the average lease expiry is 6.4 years, which would lengthen their overall portfolio lease expiry.
While these industrial REIT will endure currency fluctuations since the income is in Australian dollars, the market there is matured and there is a shift from the traditional energy and mining industry to a services based industry.
From the looks of the acquisition it look as though Mapletree Logistics got a really poor deal, considering most of the acquisitions have build in 2-3% yearly rental acquisition, but starting yield is just part of the equation.
My friend raised the point that while some properties might be purchased cheap, perhaps the quality of the counterparty tenant is a factor as well, in this case the quality of Coles, the 2nd largest Australian supermarket chain and a subsidiary of Wesfarmers Group a top 10 listed company by market capitalization. The lease is very long as well.
While short tenant lease is good if the escalation rate is good, it is bad if the outlook isn’t very good. The Hong Kong logistic properties in MLT is still able to command a 17% rental renewal.
The yield spreads seem to be indicating that price is peaking, selling seem to make Frasers and the GIC look more like the winner here. Still the spread for the past 10 years in terms of yield is remarkably tight at 7% to 9%. Perhaps this is due to the long lease of each rental contract, limited and controlled supply.
The competitive nature of this acquisition
The shortlist included LOGOS Property, which is based locally but had financial backing from Ivanhoe Cambridge, a subsidiary of Caisse de depot et placement du Quebec. The others were Ascendas, ARA Asset Management with Cache Logistics Trust and Korea’s NPS, Warburg Pincus with the Redwood Group and private equity giant Blackstone. Offshore groups could take on more debt and many were willing to pay a premium to achieve instant scale.
Then the bidders were given the chance to visit the properties. From Eastern Creek in Sydney, to Altona North in Melbourne, to Larapinta in Queensland, it took each group a week to see the 26 properties.
Second-round bids were so close that parties were asked to go into a third round and make a final offer on July 29.
The shortlist was whittled down to three: Ascendas, ARA Asset Management and Warburg Pincus. In the end, the decision was made by each bidder to price the properties individually. Because there were two owners – GIC and Frasers – it was the only way to work out which offer was best for both.
After frantic number-crunching into the late hours of August 4, Ascendas emerged as the clear frontrunner.
There were five additional and intensive weeks of work on the deal, the parties not finishing the agreement until 2am on the Friday it was announced. All involved were relieved. But dinner at Long Beach would have to wait, until deal completion, including the approval of Australia’s Foreign Investment Review Board.
It looks like not just Ascendas but ARA Asset Management locally are interested including 2 private equity group. The size of the offering does not come about often, and that is perhaps what attracts these companies to purchase.
ARA probably taken this for their private funds setup and for Cache logistics
Signalling of the general interest rate and growth environment?
Perhaps the deal was too good to passed up, but I felt that the timing of this acquisition signals the situation for industrial REITs back in Singapore.
There are still supply in development and coming online within this 2 years, notably in 2016. However, when most of them are looking overseas for longer leases rentals with annual escalations, it might indicate a low growth environment.
Singapore’s cost of doing business is not cheap, and government tend to be more siding towards industrialist then the land lord. It is more so that in recent news, we see more attraction of startups from other develop countries. This might bode well for Mapletree Industrial REIT (7.3%), or those heavy in business parks such as Viva Industrial (10%) and Soilbuild (8%).
The other permutation is that we have an overhang that interest cost is going to move up. Interest rate move up have 2 effect:
- interest cost for properties will go up
- REITs as a form of investment asset will compete against more appealing new bonds, preference shares and deposits that will now yield higher
For Ascendas REIT to factor in this environment, yet take something that yields 6.4% in NPI, might signal that they don’t see this rate rising as a problem in terms of competition against other asset classes.
If this have been a real problem, they could have delayed the purchase for something that is more attractive.
Either that, or they do not think rates will rise to a level that returns to the norm.
The FED in the USA will raise rates when they think the economy is well. If they don’t raise, it is likely that they think raising would just kill the growth. In Europe growth is anemic. So is in Asia. The cheap money is not stimulating the globe.
If not there will be inflation, or in my terms, a crazier growth.
In a low growth environment, a 3% rental escalation for these long rental assets looks good if the overall GDP growth is nearer to 1%.
This move overseas seem, for me, indicating what these managers think is what we will operate in the future:
- low Singapore industrial rental growth
- low global growth
- interest rate to rise but not to a large degree
What are you guys thoughts. Would love to hear concurrence or fresh alternative views that I missed out.