Asian equity markets are witnessing a mini renaissance in secondary offerings from Reits and trusts as market participates debate whether 10-year US Treasury yields have peaked (temporarily at least).
As table 1 below shows, one of the most striking aspects of May’s secondary market activity across Asia (ex-China) was the dominance of yield plays from Singapore and Thailand, which accounted for six of the top 10 deals by size.
So far this year, Singaporean reits (real estate investment trusts) and trusts have raised S$2.052 billion ($1.54 billion), close to 2016’s overall total and about 67% of 2017’s.
Even more impressively, all bar one of the deals, went on to trade up through to the end of the month. From investors’ perspective, the timing was particularly fortuitous, coming right at the end of a secondary market down-cycle driven by rising Treasury yields.
Reits typically underperform in a rising interest rate environment, as companies’ cost of funding rises and the attractiveness of their dividend yields declines relative to risk free government rates. The FTSE Straits Times Reits Index also performed spectacularly well during 2017 (up 28%), setting it up for a sharp fall as soon as US Treasury yields started rising at the beginning of 2018.
Consequently few market participants expected much issuance during 2018 particularly after 10-year US Treasury yields shot through 3% in April. The FTSE Straits Times Index has also been following them in the opposite direction and is still down 5.84% in the year-to-Wednesday’s close.
However, the index has recently reversed course and fund managers believe the positive momentum could continue thanks to a combination of factors, which are helping to underpin the Reit sector.
Stephen Metcalfe, director at Coriolis Capital Management, notes that recent ECM activity from Singapore has been sparked by an M&A spree, particularly overseas.
Limited real-estate investment opportunities in Singapore are pushing reits to become more geographically diversified. For example, at the beginning of May, CapitaLand Commercial Trust had been Singapore’s single remaining pure play office reit.
But in mid-May it joined its peers, executing an S$217.88 million ($167.12 million) follow-on deal to fund commercial properties in Frankfurt. Germany has been a favoured destination generally for Singapore reit managers, with Frasers Logistics Trust and Keppel DC Reit also raising funds for German assets in May.
Meanwhile, proceeds from Mapletree Logistics Trust’s S$220 million ($164.61 million) follow-on, from later the same month, are being used to purchase 11 new logistics assets in China.
Coriolis’s Metcalfe told FinanceAsia that the recent spate of deals all worked “because the underlying acquisitions are DPU (distribution per unit)-accretive".
However, analysts also highlight how finely balanced the sector’s trading performance remains given the spread between forward dividend yields (about 6%) and 10-year Singapore Government Securities is still more than one standard deviation below the long-term average of (410bp).
YIELD CURVE INVERTING?
Key will be which direction US interest rates move in. Economists and market strategists remain divided whether May’s tightening in US Treasury yields was a temporary phenomenon caused by a rush to safe haven assets, or a signal that tighter monetary conditions are slowing growth and will end in recession.
Many have noted the diminishing spread between two- and 10-year Treasuries, currently 43.9bp as of Wednesday.
In a strategy piece, published on May 31, Morgan Stanley went overweight Asian real estate on the grounds that “defensive assets do better in an environment of flattening yield curves.”
Its base case is for the spread differential to tighten to 20bp by the fourth quarter of 2018 and for the yield curve to invert to a minus 15bp spread by the second quarter of 2019.
One factor, which Singapore and Thailand both share in common are two of the lowest yielding benchmark government bonds in Asia.
As of Wednesday’s close, 10-year Singaporean Treasuries were being quoted at 2.57%, while 10-year Thai government bond yields were only fractionally wider at 2.58%. By contrast, neighbouring Malaysian Treasuries are yielding 4.2% and Indonesian Treasuries 7.16%.
THAILAND THE OUTLIER
Singaporean rates tend to track the US, while Thailand remains an outlier among Asian nations. It has not yet adopted a tightening bias unlike many of its peers such as India and the Philippines, which have both recently succumbed, raising rates for the first time since 2014.
The Bank of Thailand has kept its policy rate unchanged for 24 consecutive meetings. CIMB economist Michelle Chia argues that, “Thailand’s circumstances justify the BOT being a tortoise rather than a hare when it comes to policy normalisation.”
Like many economists, she believes its strong current account surplus and nascent domestic consumer recovery insulate it from the external funding pressures buffeting other emerging market nations.
But this has not stopped foreign portfolio managers remaining net sellers.
Indeed, outflows accelerated in May. By the end of the month, foreign portfolio managers had sold $4.143 billion year-to-date.
However, this had no impact on Asia’s (including China) largest secondary offering of the month – a $1.668 billion offering by Thailand’s Digital Telecommunications Infrastructure Trust.
In many ways, the deal’s execution strategy underscores many of the dynamics driving Thai financial markets.
One is the huge liquidity being generated by domestic retail and institutional investors as they continue to shift out of low yielding bank deposits into higher yielding instruments like reits and trusts.
| Company Name (in order of performance) | Issue Type | Exchange | Offer Price | Trade Date | Performance % (to end May) | Bookrunner |
|---|---|---|---|---|---|---|
| Hyundai Rotem | FO - acc bookbuild | Kospi | 28,000 | 3-May | 38 | Citi |
| Frasers Logistics & Industrial Trust | FO - acc bookbuild | SGX | 0.99 | 10-May | 7.1 | DBS, BAML, Citi |
| Digital Telecommunications Infra Trust | FO - guarantee pref | SET | 13.9 | 15-May | 4.32 | SCB, Credit Suisse |
| Samsung Electronics | FO - acc bookbuild | Kospi | 48,800 | 30-May | 3.89 | Goldman Sachs, JP Morgan |
| Keppel DC Reit | FO - acc bookbuild | SGX | 1.35 | 8-May | 3.7 | Citi, DBS |
Veena Lertnimitr, EVP and Head of Primary Distribution at Siam Commercial Bank (SCB) told FinanceAsia, “There’s huge liquidity in the domestic equity markets and we believe it will continue.”
She agreed that investors’ hunger for yield is being fuelled by “an environment where domestic rates remain near historic lows.”
And she added that there has also been plenty of issuance because, “companies are at a part of the investment cycle where they want to spin-off mature assets and re-invest the proceeds into new projects.”
SCB, alongside Credit Suisse, led the Digi Tel deal, which had unusually high 50% allocation to retail.
“This was one of the unique features,” she said. “It was a very popular offering because investors are looking for yield products. Thailand’s current account surplus is holding interest rates down so a 7.5% yield looked quite attractive.”
But she concluded that as, “ it’s not a sector retail investors are particularly familiar with, the education process on the steady and reliable nature of the income generated from the invested assets was crucial to the success".
