All questions
Transactions
i Legal frameworks and deal structures
S-REITs have traditionally grown inorganically through acquisitions of new assets from both the available pipelines of sponsors as well as from third parties. Given the importance of overseas investments to S-REITs, regulators have been flexible and receptive in permitting S-REITs to adopt the most tax-efficient acquisition structures within Singapore’s regulatory regime. As a result, S-REITs now hold their assets through a range of different holding structures depending on the jurisdictions in which the assets are located, including through US REITs, Australian managed investment trusts, Chinese wholly foreign-owned enterprises and Japanese tokutei mokuteki kaisha structures. Typically, the most important aspect that the Singapore regulators focus on is the ability of the S-REIT to ultimately control the underlying assets and obtain proper legal and good marketable title to the assets.
As S-REITs look to grow and scale up rapidly, there has been an increasing trend of large M&A transactions between S-REITs in recent years. Broadly, REIT M&A transactions have taken the following structures:
- a trust scheme between merging S-REITs;
- a takeover offer for all the units of an S-REIT;
- the acquisition of an entire portfolio of properties; and
- the acquisition of shares of a REIT manager.
The structure to adopt for a particular transaction is dependent on the ultimate commercial objective, such as whether the intention is for the acquiror to acquire the S-REIT or all of its underlying assets, or whether it is just to gain control of management. The specific circumstances of the acquiror, for example whether it is already a controlling unitholder of the S-REIT, as well as tax considerations, would also be key factors to consider.
Any M&A or acquisition involving an S-REIT would be subject to the SGX listing rules as well as the Code on Collective Investment Schemes issued by the MAS. Depending on the size of a transaction and whether the transaction is between related parties, certain thresholds may be triggered that would require the S-REIT to seek the approval of its unitholders. In the case of related-party transactions, the relevant interested persons (including non-independent nominee directors of the REIT manager) would generally need to abstain from voting. To ensure that the interests of minority unitholders are protected, the independent directors of the REIT manager, based on independent valuations and advice from an independent financial adviser, would then make a recommendation that the particular transaction is on normal commercial terms and not prejudicial to minority unitholders. For acquisitions by S-REITs from related parties, the acquisition price generally cannot be above the higher of two independent valuations commissioned for the purposes of the acquisition.
S-REITs are also subject to the Singapore Code on Take-overs and Mergers (the Takeover Code). Under the Takeover Code, any person that, together with its concert parties, acquires 30 per cent or more of the units in an S-REIT, or holds at least 30 per cent but not more than 50 per cent of the units in an S-REIT, and which acquires more than 1 per cent of the units in any six-month period, is required to make a mandatory general offer to all the other unitholders.
ii Acquisition agreement termsTrust schemes
All S-REIT mergers to date have been carried out by way of a trust scheme. In a merger through a trust scheme, the acquiring S-REIT acquires all the units of the target S-REIT in consideration for the issuance of new units in the acquiring S-REIT to the existing unitholders of the target S-REIT. The consideration to the unitholders of the target S-REIT typically also includes a cash component. The privatisation of Soilbuild Business Space REIT in 2021 was also undertaken through a trust scheme, with the acquirer, backed by the Soilbuild Group’s founder, Lim Chap Huat, his family and funds managed by Blackstone, paying the consideration fully in cash. An application to court to convene a scheme meeting for unitholders of the target S-REIT to approve the trust scheme (of which the threshold for approval is a majority in number of the unitholders representing at least 75 per cent in value of the units held by unitholders present and voting) and the court’s approval for the trust scheme are required to make the trust scheme effective.
A trust scheme is adopted in a friendly transaction, with the parties typically entering into an implementation agreement to agree on the process by which the scheme will be carried out. Warranties would not usually be very extensive given the nature of a trust scheme and the substantial information publicly available on the target. The implementation agreement would also include conditions precedent, which are critical given the significant number of regulatory approvals and other approvals required. Trust schemes may also be implemented in parallel with an acquisition of the target S-REIT’s manager by the manager of the surviving S-REIT. To date, six out of seven S-REIT mergers involved REITs within the same sponsor group.
Takeover offers
The process for a takeover of an S-REIT or property trust, similar to a listed company, is regulated by the Securities Industry Council and is subject to the Takeover Code, which covers, among other things, requirements relating to the minimum offer price, the form of consideration, the conditions that can be imposed, the timetable and the rules regarding break fee arrangements.
Depending on the interest held by the controlling unitholder, either a voluntary or a mandatory takeover offer may be made by the controlling unitholder to acquire the units from all the other unitholders. For example, the Nan Fung Group acquired more than 30 per cent of the units in Forterra Trust and triggered the requirement to make a mandatory takeover offer, which resulted in the eventual privatisation and delisting of the trust in February 2015. Another example is the privatisation of Perennial China Retail Trust by Perennial, which was done by way of a voluntary offer as Perennial held less than 30 per cent of the units in the trust. More recently, following the privatisation of Singapore Press Holdings Limited (SPH), the sponsor of SPH REIT, by a consortium known as Cuscaden Peak comprising affiliates of Hotel Properties Limited, CLA Real Estate Holdings and Mapletree Investments, the consortium made a mandatory cash offer to acquire all the units in SPH REIT (now known as Paragon REIT) in compliance with certain chain principle requirements under the Takeover Code, resulting in the consortium and its concert parties holding around 61 per cent of the REIT’s units.
Portfolio acquisitions
Portfolio acquisitions are essentially similar to acquisitions of single assets, but are larger in scale and usually involve S-REITs acquiring the entire portfolio of assets from PE funds nearing the end of their term and that are looking to exit. As S-REITs have grown, the number of large portfolio acquisitions from PE funds has also been on an increasing trend. Acquisition of a portfolio allows an S-REIT to gain immediate scale in a particular jurisdiction, sector or asset class. The acquisition terms and structure of portfolio acquisitions would largely be consistent with acquisitions of single assets. Such acquisitions from PE funds that are exiting their investments are also often characterised by the use of warranty and indemnity (W&I) insurance to cover any potential claims by the purchaser. Instead of having funds withheld in escrow or the seller providing contractual indemnities, W&I insurance allows PE fund sellers to have a clean exit of their investments on a fully non-recourse basis, and to close their funds after the sale and return of all proceeds to their investors.
The S-REIT market has also seen the converse situation where an affiliate of Lone Star Funds acquired the entire portfolio of Saizen REIT in March 2016. Another example is Accordia Golf Trust, a BT, which sold its entire portfolio of 88 golf courses in Japan to its sponsor for approximately S$848.4 million in September 2020, after raising its initial offer price of approximately S$804.1 million. An S-REIT or listed property trust would require the approval of the SGX and of its unitholders for such a transaction to dispose of its entire portfolio, and may therefore be subject to some regulatory uncertainty as well as a more protracted timetable to close.
Acquisitions of shares of REIT managers
A cheaper and potentially faster alternative for acquirors looking to gain control of an S-REIT may be to acquire all the shares of its REIT manager. With the external management model, in practice, the REIT manager is able to effectively control the activities of the S-REIT. The acquisition of the REIT manager is often coupled together with an acquisition of the exiting sponsor’s stake in the S-REIT as well so that the acquiror effectively steps in to replace the outgoing sponsor. Prior to entering into any arrangement where a purchaser would acquire or gain control of an interest of 20 per cent or more in a REIT manager, approval from the MAS must be obtained as REIT managers are regulated and hold a capital markets services licence for REIT management. An acquisition of a REIT manager does not require the approval of the unitholders of the S-REIT. A recent example of such a transaction is the acquisition in 2022 by ESR of ARA Asset Management, which owned three S-REIT managers.
iii Hostile transactions
There have not been any successful hostile takeovers of S-REITs, and such attempts remain relatively rare in Singapore. With investors becoming more sophisticated and discerning, shareholder activism in Singapore is likely to grow. Hot-button activist issues include conflicts of interest, REIT performance and management fees.
There have been a few high-profile competitive takeover offers involving real estate assets and businesses over the years, including a bidding war that lasted more than six months in 2012 and 2013 between TCC Assets – the investment vehicle of Thai billionaire, Charoen Sirivadhanabhakdi – and Overseas Union Enterprise (now known as OUE Limited) over Fraser and Neave, a then-listed conglomerate with a large real estate business that included sponsoring several S-REITs, which was eventually won by TCC Assets. Following this transaction, certain amendments were made to the Takeover Code to codify issues that arose, including implementing an auction process in a competitive bid where a stalemate remains in the later stages of the offer period and a clarification that boards of target companies may, but are not obliged to, solicit competing offers, and that such solicitation would not normally be deemed to be frustrating an existing offer. In 2017, a takeover offer led by Yanlord Land and Perennial for United Engineers, a listed real estate conglomerate, was unsuccessful after a minority shareholder, Oxley Holdings, itself a listed developer, amassed a major stake in United Engineers and pushed its stock price above the offer price. In 2022, following a competitive bidding process between Keppel Corporation and Cuscaden Peak, SPH, together with its real estate and other assets, was acquired by Cuscaden Peak.
iv Financing considerations
An S-REIT is currently subject to an aggregate leverage limit of 45 per cent of its deposited property. However, with effect from 1 January 2022, an S-REIT may exceed this 45 per cent limit (up to a maximum of 50 per cent) if it has a minimum adjusted interest coverage ratio (ICR) of 2.5 times, after taking into account the interest payment obligations arising from the new borrowings. The introduction of the ICR as a secondary metric aims to provide investors with greater transparency and assurance on the ability of an S-REIT to service its debt obligations.
The ways in which an S-REIT can undertake equity fundraising would generally comprise one or more of the following:
- private placements to certain selected institutional and accredited investors;
- rights issues, which are offerings to all existing unitholders on a pro rata and renounceable basis (i.e., unitholders may trade their entitlements to purchase new units under the rights issue); and
- preferential offerings, which are similar to rights issues except that unitholders’ entitlements are non-renounceable and cannot be traded.
Equity fundraising exercises are dilutive to existing unitholders, so it is important for the overall transaction to be yield-accretive to unitholders.
For debt financing, S-REITs and real estate companies both have considerable flexibility, with options ranging from obtaining secured or unsecured term loans or revolving credit facilities (whether at the asset or the listed entity level) to tapping the debt capital markets and issuing bonds, convertible instruments and other debt securities. It is not unusual for the terms of debt facilities to contain change of control covenants that may require certain key shareholders to maintain a minimum stake in the listed entity. For S-REITs, this also applies in respect of the respective sponsor maintaining ownership of the REIT manager. While practically this may have the effect of entrenching the REIT manager and the sponsor, the MAS has recognised that such covenants are often important for lenders, which want assurance of the identity of the person that controls the S-REIT, and such covenants are permitted if required by the lenders and if they are clearly disclosed. An increasing trend in the Singapore real estate and S-REITs sectors is the use of green loans and sustainability-linked financing, which provide for lower financing costs if borrowers meet and maintain certain ratings on global sustainability benchmarks.
Other than debt securities, S-REITs are also able to issue hybrid securities known as perpetual securities that are not required to be included in the calculation of the aggregate leverage limit, subject to meeting certain conditions, including:
- having a perpetual term;
- that they can only be redeemed at the sole discretion of the S-REIT;
- that distributions on such securities are non-cumulative;
- that there is no step-up in the coupon; and
- that they are deeply subordinated.
However, for purposes of calculating the new ICR requirement, interest on such perpetual securities will need to be included.
As financing by an S-REIT usually requires the public equity or debt markets, or both, to be accessed, it is not uncommon for there to be financing conditions in an acquisition. This is where real estate PE funds may have a competitive advantage, as they would typically not require a ‘financing out’ and would be able to provide greater deal certainty for a seller. PE funds and real estate companies are generally not subject to regulatory leverage limits, although they would need to maintain agreed loan-to-value (LTV) ratios that are commercially negotiated with their lenders in their financing agreements. LTV ratios vary depending on the underlying asset; for commercial real estate, they typically range from 60 to 70 per cent.
v Tax considerations
To promote the listing of S-REITs and to strengthen Singapore’s position as a REIT hub in Asia, the government has, over the years, granted several tax concessions for S-REITs.
Tax transparency (in the context of an S-REIT) refers to an arrangement where the specified income of an S-REIT is not taxed in the hands of the REIT trustee, but in the hands of the unitholders (whether by withholding or otherwise) unless exempted. S-REITs can benefit from tax transparency subject to certain conditions, including a requirement that the REIT trustee distributes at least 90 per cent of its specified income to unitholders. A significant advantage of investing in an S-REIT is that individual unitholders can enjoy a full tax exemption on specified income earned by the S-REIT.7 In addition, foreign non-individual unitholders will only be subject to a final withholding tax at a rate of 10 per cent on specified income distributed by the S-REIT.8 Recognising the prevalence of S-REITs investing in assets overseas, a tax exemption has also been granted over foreign-sourced income received by S-REITs that is paid out of qualifying income or gains in respect of overseas properties acquired on or before 31 December 2025 by a REIT trustee.9
The tax transparency treatment for S-REITs does not extend to gains realised from the sale of real properties. There is no capital gains tax in Singapore, and gains realised on a disposal of an S-REIT’s real properties would be subject to income tax at the prevailing corporate tax rate if they are considered to be trading gains. The REIT trustee will then be liable to pay the tax so assessed. Whether a gain realised from the disposal of real property is deemed a capital gain or a trading gain will be determined based on the circumstances of the transaction.
Buyer’s stamp duty (BSD) is payable on transfers of real estate on the execution of the sale and purchase agreement. Currently, BSD is payable by a buyer on a transfer of property, and different rates of BSD apply depending on the type of property transferred. BSD is based on the higher of the purchase price and market value of the property. BSD is normally payable by the buyer of the property, unless otherwise agreed between the parties. For industrial properties, seller’s stamp duty is also payable by a seller on a transfer of industrial property purchased on and after 12 January 2013 and sold within three years from the date of purchase.
S-REITs typically will hold Singapore properties directly rather than through a corporate entity to enjoy full tax transparency on the rental income without paying any corporate income tax. Where tax transparency is not applicable, real estate companies and PE funds can also hold Singapore properties through Singapore corporates. Acquisitions of shares of a Singapore company are subject to stamp duty at 0.2 per cent of the higher of the purchase price or the value of the shares.
For acquisitions of residential properties or interests in property-holding entities that own primarily residential properties in Singapore, additional stamp duties on both buyers and sellers will apply.
vi Cross-border complications and solutions
There are no foreign investment restrictions on non-residential properties and the ease of investment remains a key attraction for the Singapore corporate real estate market.
Similarly, outbound investment is important for the continued growth of S-REITs and local PE funds, which have proven adept at navigating cross-border transactions. When acquiring assets in a new jurisdiction for the first time, REIT and fund managers need to understand not just the local market, but also the local real estate and tax laws, and local counsel will need to be engaged to conduct due diligence and advise on local laws. For S-REITs in particular, it is critical from a regulatory perspective to ascertain whether an S-REIT can acquire proper legal and good marketable title to the property or the local equivalent.
For Singapore residential properties, foreign developers need to apply for a qualifying certificate under the Residential Property Act, which stipulates certain conditions such as timelines for completion of the construction works and sale of the developed units, before they can acquire restricted residential properties for redevelopment.
