23 November 2022
The Rise of Offshore REITs
In the last article, we discussed how to build a diversified investment portfolio and different ways to gain exposure to SREITs. In this final MUST Explains article, we compare and contrast onshore SREITs (those holding mostly domestic assets in Singapore) and offshore SREITs (those holding mostly overseas assets such as Manulife US REIT).
Since the listing of the first SREIT in Singapore in 2002, the SREIT sector has expanded rapidly to include about 42 SREITs and property trusts with a market capitalisation of S$100 billion as at end-October 2022. Today, Singapore has more foreign REITs than anywhere else in the world.
In recent years, SREITs have been making a more aggressive push into overseas acquisitions. Domestic SREITs have increasingly ventured abroad for higher returns, while issuers abroad have been attracted to list on the Singapore bourse, thanks to Singapore’s favourable tax regime, good corporate governance and depth of global institutional liquidity. In fact, recent initial public offerings have comprised wholly overseas portfolios. As at end-October 2022, 42.5% of SREITs listed here were offshore SREITs with 100% of their properties located outside Singapore. Altogether, more than 90% of SREITs have offshore exposure.
Local and offshore bias
However, there have been distinctive differences in the historical and current trading performances of onshore versus offshore SREITs on the Singapore Exchange. Investors accord a higher risk premium to offshore SREITs, evident from the fact that they often trade at a discount to their domestic sector peers. This larger risk premium could be due to several factors, such as forex/currency volatility, geographical unfamiliarity, and limited analyst coverage. In 2022, the U.S. Federal Reserve’s rate hikes and heightened currency volatility further fuelled declines in SREIT prices. As at the end of September 2022, the unit prices of offshore SREITs were trading at 0.7 times book value, compared to 0.9 times for their onshore counterparts.
Case study of Manulife US REIT
Manulife US REIT, as the first U.S. REIT to be listed in Singapore in 2016, has helped to open the floodgates for more U.S. SREITs to list here. Having begun with an ~80% retail unitholder base (including high net worth individuals), it has since evolved to a unitholder base that is quite equally split between institutional and retail investors. This was done through its aggressive investor relations strategy, which included thought leadership initiatives, ESG stewardship, profiling of the REIT through regional conferences, and outreach to different categories of investors, including the digital generation.
Such intensive investor engagement and education efforts were necessary to help Singapore investors understand the idiosyncrasies of U.S. office SREITs, compared to Singapore office SREITs – both in terms of the local regulations governing the REITs (e.g. withholding taxes, Sponsor’s stake, development limits) as well as the office market fundamentals.
The infographic shows the differences between office leases in the U.S. versus Singapore. It shows how the average office lease in the U.S. of 5-10 years is much longer compared to those in Singapore of about 3 years. In the U.S., there are also other initiatives such as tenant improvement allowances and free rent that are extended to tenants to entice them to seal a leasing deal.
The same risk factors to watch for when investing in any SREIT (e.g. market risk, income risk, leverage risk and refinancing risk) apply similarly to offshore SREITs. Offshore SREITs are mainly disadvantaged due to investors’ unfamiliarity with the REIT structure, Sponsor, geography as well as its market fundamentals. This makes it crucial for the Manager as well as industry bodies and regulators to engage unitholders proactively and consistently to debunk myths and shed more insight into the market conditions that they operate within.
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Disclaimer: This article is for informational purposes only and shall not be construed as financial advice or an offer, invitation or solicitation of any offer to purchase or subscribe for any securities of Manulife US REIT in Singapore or any other jurisdiction nor should it or any part of it form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. You should always do your due diligence and seek professional advice before making any investment decisions. None of the information presented are intended to form the basis for any investment decision, and no specific recommendations are intended.
- SGX, “Chartbook: SREITs & Property Trusts”, October 2022
- DFIN, “Singapore Spotlight REIT Outlook 2021 and Beyond”, 2020