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Nikkei Markets

Two Singapore REITs to merge in quest for more investors

OUE Commercial, OUE Hospitality combine to create eighth-largest trust by assets

OUE Commercial REIT and OUE Hospitality Trust will together form a real estate investment trust that will have some 6.8 billion Singapore dollars ($5.02 billion) in properties.   © Reuters

SINGAPORE (Nikkei Markets) -- Two Singapore-listed property trusts have announced merger plans in hopes of attracting a greater following among institutional investors by increasing their size and the diversity of their portfolio.

OUE Commercial REIT, which owns four office properties, including One Raffles Place in the central office district, and OUE Hospitality Trust, whose biggest asset is the Mandarin Orchard Singapore, will together form a real estate investment trust that will have some 6.8 billion Singapore dollars ($5.02 billion) in properties, making it the eighth largest in Singapore by assets.

The merger comes some six months after ESR REIT completed the acquisition of Viva Industrial Trust to become Singapore's fourth-largest industrial property. Some analysts believe ESR REIT could take over smaller Sabana REIT, another industrial property trust, as it has bought shares in the latter's management company as well as a stake in the trust.

Speaking at a briefing on Monday, Jonathan Siow, director of Southeast Asia real estate and lodging investment banking at Citi, a financial adviser to OUE Commercial, said the two trusts hoped the merged entity would attract a wider investor base and be included in key stock indexes, such as the EPRA Nareit series. Compiled by FTSE, these indexes track income-producing real estate equities.

Siow added that larger Singapore-listed REITs that were part of these indexes, such as Ascendas REIT and CapitaLand Mall Trust, tended to have higher daily trading volumes and valuations compared to their smaller counterparts. In the case of ESR REIT, prices have increased slightly post-merger while trading values have risen by about 60%, he said, citing a recent news report.

"Size matters and it does have a very, very real impact in terms of trading volumes," he said.

OUE Commercial currently trades at a price-to-book value of 0.73, while OUE Hospitality trades at 0.96, according to data from OCBC Investment Research, implying the REITs are worth less than the net value of their underlying assets. By contrast, Ascendas REIT is worth 1.39 times the value of its assets minus debt, while CapitaLand Mall Trust trades at a price-to-book ratio of 1.18.

The two REITs, which are managed by units of Singapore-listed OUE Ltd, trade at lower valuations partly due to concerns about the financial health of Indonesia's Lippo Group, of which OUE is part.

Royston Foo, a property analyst who publishes on Smartkarma research portal, added that mergers and acquisitions could become a main theme in the Singapore REIT market this year. Besides attracting greater investor interest and analyst coverage, bigger REITs also provide diversification benefits in terms of reduced dependence on an individual asset or tenant.

"The successful merger between ESR REIT and Viva Industrial Trust has proven that a delicate balance of interests between the different stakeholders can be achieved," he said.

Singapore currently has around 40 listed REITs and business trusts with property assets. About 15 have market capitalization of around S$1 billion and below.

According to OUE Commercial and OUE Hospitality, the proposed merger will take place via a trust scheme of arrangement, with OUE Commercial paying 4.075 Singapore cents in cash and 1.3583 new units for every unit of OUE Hospitality.

The merged entity will have a market capitalization of around S$2.9 billion and a free float of approximately S$1.1 billion based on the latest traded prices.

The merger requires the approval of unit holders as well as the Singapore court.

OUE and its sister companies will continue to retain a significant stake of 48.3% of the enlarged entity, the two REITs added.

--Kevin Lim

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