Singapore REIT: Our view on M&A theme now a possibility

In our 2007 strategy report we had postulated the possibility of M&A in SREIT
sector. This is becoming a possibility with the Securities Industry
Council's (SIC) surprise announcement on Friday that it will extend the
Singapore Code of Takeover & Mergers to REITs. This move is significant
as it means that there is now clarity on M&A rules for S-REITs. We see
the REITs that will benefit from the rule change to be those REITs that are
potential targets for acquisition. These will be REITs trading with low price
to book and high trading yield relative to their peers in the same sector.
We identify these REITs to be Allco, Cambridge, Macarthur, MM Prime
and First REIT

Surprise rule change on REIT M&A. In our 2007 strategy report dated 11
Dec 2006 "M&A theme a strong possibility in 2007/08", we had articulated
that M&A could be another avenue for growth. This scenario is now coming
closer to reality with the Securities Industry Council's (SIC) surprise
announcement on Friday that it will extend the Singapore Code of Takeover
& Mergers to REITs. This move is significant as it means that there is now
clarity on M&A rules for S-REITs. Now anyone who acquires 30% or more
of any REIT must make a general offer (GO) for the remaining units.
Furthermore, anyone who owns 30%-50% of any REIT and acquires a further
1% of the units must also make a GO for the rest of the units.

Market getting more competitive. The key issue with the high-beta REITs
such as CCT, MLT, CMT, ART, AREIT is the ability of the managers to meet
market growth expectation. This is particularly so in a property up-cycle
where fewer properties are available to be acquired. Some are venturing
overseas, while others remain domestic focus (AREIT, Cambridge). Another
avenue for asset size growth is via own development (AREIT, CMT), but
this is a riskier strategy and is constrained by REIT guidelines. However
with the SIC rule change on M&A, the REIT manager has another avenue to
meet market's growth expectations

A function of risk appetite. In our opinion, the market has segmented SREITs
into two camps, i.e. REITs with high and low growth expectations.
The key differentiating factor is the P/B ratio. We see potential for both
camps, and the choice for investors for either is a function of their risk
appetite. The high-beta REITs are those with high P/B ratio. As the market
has already priced in growth, the risks are higher. On the other hand lowbeta
REITs, we see minimal downside risks. In fact with them now being
eyed as targets for acquisitions, we see a strong upside possibilities.
Potential winners in M&A. We see the likely winners in the new M&A
rules to be those trading with higher yield and low price to book relative to
their peers in the same sector. We see these REITs to be Allco, Cambridge,
Macarthur, MM Prime and First REIT.