Should more Singapore property groups venture to the US?

Dec 21, 2021

SINGAPORE property groups are adventurous. Perhaps because of a small domestic market, many are active abroad.

There may be fresh impetus to grow overseas as residential development at home could slow down due to property cooling measures that kicked in last week.

Local groups are active in neighbouring Malaysia, Indonesia and Thailand as well as fast-emerging Vietnam.

Given its scale, China is key for various groups. CapitaLand Development and Keppel Land build homes and other developments in China. China contributed around two-thirds of the homes sold by Keppel Land for the first 9 months of 2021.

Groups with a track record in commercial and/or residential property in China include GuocoLand, Ho Bee Land, Frasers Property, UOL Group and City Developments (CDL).

But China is reducing its reliance on the real estate sector. If South-east Asian markets cannot fill the void left by fewer property development opportunities in China, Singapore groups chasing scale and diversification may need to focus more resources on developed markets.

Helped by the transparency, use of the English language, the rule of law and the familiarity of many head honchos, various groups are engaged in property development and investment in the United Kingdom and Australia.

But while CDL, Frasers Property, UOL, GuocoLand and Ho Bee are exposed to the residential and commercial property segments in the UK and Australia, they are generally inactive in these segments in the United States.

As a new year beckons and plans get refreshed, might more local property groups prioritise growing in the US?

Temasek Holdings' wholly-owned Mapletree Investments is active in the US where it manages around US$14.8 billion of real estate in the logistics, data centre, commercial, multi-family, serviced apartment and student housing sectors.

Mapletree manages 355 logistics assets with assets under management (AUM) of US$6.9 billion, totalling around 70 million square feet of net lettable area, placing it among the top 10 managers of logistics real estate in the US.

One of the group's listed real estate investment trusts (Reits), Mapletree Industrial Trust (MIT), completed its US$1.3 billion purchase of 29 data centres in the US in July. As at end-September, data centres in the US accounted for nearly half of MIT's AUM of S$8.5 billion.

Another Temasek-linked group, CapitaLand Investment (CLI), owns 4 multi-family properties in the US.

In November, CLI's Ascendas Reit completed the purchase of 11 logistics properties in Kansas City for S$208 million, marking the trust's first foray into the US logistics market.

With this acquisition, Ascendas Reit owns a portfolio of US assets worth around S$2.3 billion that also includes business-park and office properties in Raleigh, San Diego, Portland and San Francisco.

Another of CLI's listed trusts, Ascott Residence Trust bought a 548-bed asset near the University of Illinois Urbana-Champaign for US$83 million in November, thereby growing its presence to 4 student housing assets in the US that will offer a total of 2,756 beds

Digital advances

Historically, distance may have deterred Singapore groups from investing in the US. Management may need to spend almost a whole day on travel when visiting the US. There are also timing differences of 12 hours or more to contend with.

But digital advances have enabled management from afar to be updated with timely reports as well as pictures of progress of project development and asset enhancement works.

As local groups grow their property fund management activities and portfolios of investment properties for recurrent income, the world's largest economy can be hard to ignore.

The US hosts top-ranked universities and its higher-education sector draws many students from at home and abroad. Any investor in student housing assets would likely have the US as a high priority market.

US consumers are a key source of global consumption. The plethora of players in the third-party logistics, consumer goods, wholesale and e-commerce sectors that are busy fulfilling the needs of these consumers, generate large-scale demand for warehouses.

Across the US, cities vie to draw knowledge workers particularly those working in the technology sector and high value professional services. Office landlords will benefit as businesses increase their hiring and workers gradually return to their offices.

Compelling yields

Buying US assets can be compelling from a yield perspective. Earlier this year, Keppel Pacific Oak US Reit bought 2 US office properties for a purchase consideration of US$105 million, including 105 Edgeview in Denver, Colorado. The pro forma net property income (NPI) yield on this Class A Leadership in Energy and Environmental Design (LEED) platinum building sitting on freehold land, with 100 per cent occupancy and a weighted average lease expiry (WALE) of 6.6 years, is 6.7 per cent.

Risk-free rate, as represented by 10-year yield on government bonds, is slightly higher for Singapore than the US. Yet, the initial NPI yield for buying a good grade leasehold office asset in Singapore with a shorter WALE of, say, 3 years could be 4 per cent or less. The NPI yield on valuation of leasehold business-park assets here can be around 5 per cent.

As the US property market draws liquidity from many big players, a Singapore group seeking to grow there will likely need to be armed with a large war chest to be on the radar of asset vendors.

There may be a need to set up an on-the-ground presence to establish credibility as well as get better market intelligence and access to deals. As managing property is a hands-on business, being on the ground helps a group better manage the progress of a project under development and the day-to-day issues of an investment property. Also, resources need to be spent to understand diverse micro-markets.

It probably makes little sense for a Singapore group to own the odd asset in the US. A group wanting to venture to the US should aim to build significant scale there.

While opportunities abound in the US property market to serve dynamic businesses and rich consumers, these may be best pursued by Singapore groups that operate with scale.

Expect the likes of Mapletree and CLI and their funds and trusts to continue to actively forage in the US market. Smaller groups may choose to pursue overseas adventures elsewhere.