Real estate deals leading local surge in mergers and acquisitions

The key driver was the proposed US$7.998 billion merger of CapitaLand Mall Trust and CapitaLand Commercial Trust.ST PHOTO: KUA CHEE SIONG

Updated from : The Straits Times7 Oct 2020

Deal-making in Singapore is picking up pace, with the real estate sector leading the charge.

The heightened activity signals growing optimism among companies and investors that there will be a strong rebound from the depths of the coronavirus-induced recession.

After a dull start – deal-making screeched to a virtual halt in April and May – merger and acquisition (M&A) activity surged 38 per cent in the third quarter to Sept 17, compared with the second quarter, noted Refinitiv.

The surge pushed M&As announced from Jan 1 to Sept 17 to a total of US$69.9 billion (S$95 billion).

Real estate deals led the way, accounting for 30.8 per cent or US$21.6 billion. Overall domestic M&As hit US$22.6 billion – the highest first nine-month total and 21.4 per cent above the same period last year.

The key driver was the proposed US$7.998 billion merger of CapitaLand Mall Trust and CapitaLand Commercial Trust.

This is the largest domestic M&A on record, surpassing CapitaLand’s US$7.9 billion acquisition of Ascendas last year.

Analysts said acquisition activity in real estate investment trusts (Reits) is stirring back to life, as the negative impact of Covid-19 on cash flows is fading and share prices are stabilising.

DBS Bank analyst Derek Tan said more property acquisitions are likely in the fourth quarter and the first half of next year.

Deals will be supported by low interest rates and higher capacity to raise debt after an enhanced gearing limit of 50 per cent – compared with 45 per cent previously – announced by the Monetary Authority of Singapore.

Mr Tan said: “While in the midst of a gradual recovery, we are confident that an organic earnings recovery will start to filter through from the third quarter of 2020 on the back of green shoots emerging across most Reits sub-sectors, except for hospitality, where the recovery appears to be most nascent for now.”

He believes the relatively low cost of raising capital will boost real estate acquisitions in the industrial space, especially given that demand for logistics and data centres is expected to spike.

Some office and hospitality Reits may recycle proceeds from past divestments to claw back their lost income, he noted.

However, fresh capital raising in equity and debt markets is still in the early stages of recovery.

Capital raising is seen as an indicator of companies’ ability to acquire new assets.

Refinitiv noted that equity and equity-linked capital issuance by Singapore companies totalled US$4.9 billion in the first nine months of this year – 22 per cent less than the same period last year.

Follow-on offerings fell 23.2 per cent from last year, with US$3.1 billion worth of proceeds.

Initial public offerings (IPOs) by Singapore companies raised US$681.1 million, down 67.1 per cent year on year.

Elite Commercial Reit’s US$170.5 million IPO is the largest Singapore listing so far this year.

In the debt market, primary bond offerings from Singapore-domiciled issuers have raised US$19.5 billion this year, down 24.6 per cent from a year earlier and marking the lowest first nine-month total since 2015.

Singapore companies from the financial sector captured 53.4 per cent of the debt market share and raised US$10.4 billion in the first nine months of this year.

Real estate followed behind with a 12.4 per cent market share worth US$2.4 billion.

Analysts agree that overall economic recovery here is still fragile, but the outlook is turning brighter.

“While we acknowledge that we are not totally out of the woods in terms of an organic earnings recovery post-Covid-19, we do see green shoots emerging across most sub-sectors,” said Mr Tan.

While investors may be worried about the potential “cliff effect” when government fiscal support tapers off next March, analysts believe the economy would have rebounded somewhat by then, in turn diminishing most of the systemic risks now that concern investors.

“Even in a scenario that growth restart stutters, we believe that the Government stands ready to provide the necessary fiscal support when the need arises,” said Mr Tan.

He advises investors to start considering the next phase of growth for Reits, which will come mostly from acquisitions.