With the latest announcement that Ascendas-Singbridge is looking into a potential listing of its US$500 million United States real estate investment trust (REIT) portfolio on Singapore Exchange, all eyes will also be turning towards another government listed enterprise (GLC), CapitaLand, where there could be a potential listing of its newly acquired US-based multifamily residential properties located across different key US cities ranging from Seattle, Portland, Greater Los Angeles, and Denver.

Ascendas-Singbridge’s US Assets

The Business Times reported on 16 November 2018 that Ascendas – Singbridge (AS) is planning to look into raising about US$500 million from the potential listing of its newly acquired US office properties. The potential listing date is targeted to begin in early 1Q19, though it is not firm up yet.

Readers might recall that AS has disclosed in September that it had bought a portfolio of 33 properties in the US with Grade ‘A’ tenants including Nike Inc. and Oracle Corporation. The deal comprised of net lettable area (NLA) of about 3.3 million square feet (sqf) spread across San Diego, California; Portland, Oregon, and Raleigh, North Carolina.

In a 2015 media report cited by The Business Times, it noted that AS could be eyeing prospects of putting together an office REIT in the medium term.

US Office Property Market

According to research by JLL, the amount of office space coming to the market is expected to be massive. In the report, “US office market statistics, trends & outlook”, it noted that there will be total of 37.7 million square feet (msf) of new office construction hitting the market, with vacancy rates expected to rise by 40 basis points (bps) in 2018 to 15.2 per cent.

The report noted that since 84.1 per cent of the currently under-development properties will deliver in the next two years, the longer-term increases in vacancy are likely to be more limited, and oversupply will be confined to selected pockets. This pullback was evidenced by only 3.5 msf office breaking ground in 3Q, well below recent quarterly figures.

Co-Working Expected To Be A Leader In Leasing

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Source: JLL (3Q 2018 “US office market, statistics, trends, & outlook” report)

Although at the time of the publication of the report, the US property market rental growth looks relatively robust with an annual growth of 6 percent or so.

CapitaLand’s Potential US REIT Listing

Moving onto CapitaLand Limited where it announced on 18 September 2018 that it has acquired a portfolio 16 freehold multifamily properties for US$835 million ($1.1 billion). This portfolio of properties comprised 3,787 apartment units, all located in the suburbs with good transportation networks. These multifamily properties are located in metropolitan cities like Seattle, Washington State; Portland, Oregon; Greater Los Angeles, California, and Denver, Colorado. The transaction price for the entire portfolio works out to be US$220,000 per unit, and estimated initial yield of 5– 5.5 per cent, in line with markets.

The Company went on to note that these properties are operating at over 90 percent average occupancy, with average occupancy period of about two years. The profile of most occupants is of middle-income and skilled professionals working in the nearby employment hubs. Moreover, the employment growth in most of the cities where the tenants live is strong.

DBS Equity Research team pointed out two favourable factors, namely the resiliency of the cash flows derived from the rentals from these multifamily properties. The team thinks that metrics like the portfolio location in big US cities, strong employment growth, and expanding multinational presence are considered major drivers for these homes.

The DBS research report also noted that CapitaLand has earmarked to achieve a 10 percent total return in a few years, and aimed to scale up its exposure to this sector in the longer term through partnerships (JVs, funds or even a REIT).

Market outlook For US Multifamily Housing

The DBS research report cited a report from CBRE that the US multi-family sector is second in terms of liquidity compared to the office sector, and has shown to weather downturns as compared to other property types.

According to data from the National Council of Real Estate Investment Fiduciaries (NCFREIF), the investment return of this asset class averaged 9.8 percent over the past ten years.

Moreover, according to CBRE, 68 percent of multi-family properties are privately owned. This could offer CapitaLand the opportunity to grow its footprint in the longer term.

Concerns Over US REIT Type Structure

Recently, there have been concerns about the Trump administration’s tax reforms which might disincentivise the setting up of a REIT structure. Under the new set of tax rules, there could be potential changes to the REIT’s portfolio interest exemption rule, which shields withholding tax on interest and principal on shareholder’s loan. Some analysts dismissed this potential impact noting that the probability of any drastic change is low as the existing structure is used by a large number of private funds and will have broad implications on foreign investments in the US.

Some analysts also noted that if the drastic tax rules do change, most believe that there will be a proactive approach by managements to evaluate any counter measures, like increasing the depreciation charges or changing the tax domicile entity, to limit the impact.

Receptiveness Of US REIT Listing

We think that if both Ascendas-Singbirdge, and CapitaLand do come forward to the public, and put out its US properties for listing through a REIT structure, most investors will generally welcome. However, it is not certain whether the pace of US economic growth, and the current low unemployment rates will still hold going forward as there are many economic uncertainties ranging from a potential slower than expected earnings growth, the so-called “Sugar Rush” coming from the December 2017 tax reforms might grind to a halt, and the various trade tensions that the US is engaging with.

Moreover, investors might also view cautiously about the potential negative impacts of any drastic changes to the tax rules on a US REIT structure. We think that unless the tax issues get sorted out, both GLCs may pause or even seek other alternative forms of monetisation structures for their US assets.

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