Mapletree Commercial Trust – Major Beneficiary of the Southern Waterfront Region

by: Tam Ging Wien


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Mapletree Commercial Trust (MCT) announced in the last week of September that it was proposing to acquire a pipeline property from Heliconia Realty for a S$1.55bil, making this the largest acquisition of the S-REITs this year. Heliconia Realty is a wholly-owned subsidiary of Mapletree Investments, MCT’s sponsor. The target property is Mapletree Business City II (MBCII) and the adjacent common premises along Pasir Panjang Road.

This news comes hot on the heels of 3 other S-REITs including sister REIT Mapletree Industrial Trust (MIT) that have in recent weeks been on an acquisition binge with billion-dollar acquisitions. The climate is now ripe for equity fund raising due to the rich valuations of S-REITs coupled with lower-for-longer interest rate environment making it conducive for DPU and NAV per Unit accretive acquisitions.

The general sentiments of the S-REITs were lifted this year due to expectations of a lower interest rate environment as well as the MAS proposal to increase the gearing limits on S-REITs subjected to a minimum income coverage ratio. Besides the 2 factors above, we also cannot discount the fact that the Hong Kong situation is causing uncertainties for the Hang Seng, indirectly benefiting its next closest peer, the Straits Times.

Coming back to MCT, just earlier in the month of September, it was announced that MCT will be replacing Hutchinson Port Trust (HPH) as a component of the Straits Times Index (STI). This news elevated MCT to a blue-chip status and lifting its share price. Since the announcement of the acquisition of MBCII, MCT’s stock price has been on an upward trajectory making it the best performing S-REIT in the last 12 months with capital gains of 49.4%.

As a comparison, the entire market cap of the S-REIT universe has grown approximately 30.2% while the FTSE ST REIT Index has risen 21.1% from 766 to 928. With a large number of S-REIT listings this year on the SGX, the market cap has risen significantly.


Source: REITScreener.com

With all the good news backing MCT, lets us turn our attention to three major factors which we think will play a significant part in MCTs long term growth trajectory:

  • Biggest REIT to benefit from the Singapore Government's Greater Southern Waterfront Region
  • Inclusion into the STI giving MCT a blue chip status
  • Acquisition of Mapletree Business City II (MBC II) which we will be covering in our next blogpost

The Greater Southern Waterfront Region

Unveiled during the National Day Rally 2019 (NDR 2019) by Prime Minister Lee Hsien Loong, the Greater Southern Waterfront (GSW) region will revitalised and rejuvenated to a “new place to live, work and play”. Stretching from Gardens by the Bay East area to Pasir Panjang, the GSW covers over 30km of the Southern coastline. Over 2,000 hectares of land maybe earmarked for potential redevelopment, almost six times the size of Marina Bay.

The rejuvenation will include private and public housing, office space and recreation. The GSW will be linked up with surrounding green areas all the way from West Coast Park to East Coast Park. The link will connect Kent Ridge Park, Southern Ridges, Mount Faber Park, the Rail Corridor and Sentosa.

There will also be a future transport system that will connect the waterfront to Mount Faber. One Faber Group is currently studying a new funicular system at Mount Faber to bring visitors from the foothills to the hilltop and cable car station by 2023.


Source: URA

Founded in 1904 and is the oldest golf club in Singapore – Keppel Golf Club’s land lease will expire on 31-Dec-2021. When the lease expires in just over 2 years time, the country club would be 117 years old and will make way for the development of 9,000 public and private housing units.

Over on the other side is the disused Pasir Panjang Power District which was built in the 1950s and 60s to power Singapore’s industrial ambitions and cater to the burgeoning power needs.

Sweetly nestled between these 2 redevelopments is the heart of the GSW commercial area encompassing Vivocity, BoA Merrill Lynch, Harbourfront Centre, and Harbourfront Tower 1 & 2 and Keppel Bay Tower – all assets either belonging to MCT or which MCT has the rights-of-first-refusal (ROFR). With increased commercial offering and an expected population growth in the region, this will likely fuel rental rises in the vicinity with MCT being the biggest beneficiary of all the S-REITs for this initiative.


Source: URA

In the medium term over the next 5 to 10 years, the PSA City Terminal in Tanjong Pagar, Keppel and Pulau Brani will be relocated to the Tuas Port in phases from 2027 onwards. In its place will be the release of prime waterfront land with a mix of residential, commercial and retail offering enhancing the southern region as a live, work and play giving more vibrancy to the region.

We this this is likely to attract more businesses to migrate towards the GSW region or expand outside the traditional CBD area of Marina Bay and Tanjong Pager. As demand continues to rise, so will the development of new commercial offerings. One upcoming development is Mapletree Lighthouse. Formally known as the SPI Building and now part of HarbourFront Centre, Mapletree Lighthouse will be redeveloped into a four-storey premium office building which will offer panoramic views of Sentosa Island and Keppel Bay. MCT has a ROFR to acquire this asset in the future.

There are plans to convert the current Pulau Brani Terminal to a leisure island complimenting Sentosa with a new premier leisure and tourism destination. Sentosa itself will also be rejuvenated – the Singapore government announced plans to demolish the iconic Sentosa Merlion to make way for Sentosa Sensoryscape, a themed thoroughfare that will link Resorts World Sentosa (RWS) in the north of Sentosa with the southern beaches. The project is expected to complete by 2022, enhancing the “play” factor of the GSW region, creating a catchment to drive population growth over the longer term.


Source: Straits Times Singapore


Source: URA

In the longer term, the port terminals of Pasir Panjang will be relocating to Tuas by 2040, while that’s still a long time away, we are confident that clear plans for the emptied Pasir Panjang area will be rejuvenated to keep up with the demand of real estate in the GSW region.

To summarise, MCT has a short, medium and long term growth potential that is fueled by population growth in the region and potential acquisition of the following ROFR assets from its parent and sponsor. This gives MCT clear acquisition pipeline for growth in the foreseeable future:

  • 100% interest in Harbourfront Centre
  • 100% interest in Mapletree Lighthouse
  • 100% interest in St James Power Station
  • 100% interest in Mapletree Anson
  • 100% interest in PSA Vista
  • 61% interest in Harbourfront Tower 1
  • 61% interest in Harbourfront Tower 2
  • 30% interest in Keppel Bay Tower

Inclusion into the Straits Times Index

Inclusion into an established index brings about many benefits for a stock, chiefly the visibility from the recognition. The term blue-chip is generally associated with only the largest market capitalisation stocks on the respective stock market giving recognition that those firms are well-established, and financially sound. In Singapore, the Straits Times Index (STI) is the most recognised benchmark index and consists of only the top-30 largest stocks by market capitalisation.

Simply being included into the STI out of over 700 companies is certainly the best visibility a stock can have on the SGX, which usually brings higher volumes and trading liquidity.

In the last 5 years, the financial and investment world has seen a significant rise in the number of passive funds that are benchmarked against these established indexes. In other words, these passive funds invest on the basis of the composition of established indices such as the STI and their corresponding weight assigned to each stock. Changes in the components or weights of the underlying index will leads to a corresponding change in their portfolios. Stocks that are included or excluded from an index will automatically trigger buying and selling of that stock from these passive funds according to the weights assigned in the index.

These funds are sometimes traded on the stock exchange and are known as Exchange Traded funds or ETFs.

There are a large number of ETFs that track the STI. Two are currently listed on the SGX, namely the SPDR STI ETF (SGX:ES3) and the Nikko AM STI ETF (SGX: G3B). The former was introduced in 2002 and is managed by State Street Global Advisors and has a fund size of approximately S$750mil. The latter was introduced in 2009, managed by Nikko Asset Management, a subsidiary of DBS with a fund size of approximately S$300mil. The mandate of these 2 ETFs are to track and replicate the performance of the STI as closely as possible.

Besides the STI, MCT has already been included into the FTSE EPRA/NAREIT Global REIT Index with a weightage of 0.23%. The most prominent ETF to track this index is the Blackrock iShares Global REIT ETF with net assets of US$1,781mil. Just for relative comparison, Ascendas REIT, CapitaLand Mall Trust and Capital Commercial Trust weightage on this index are 0.40%, 0.33% and 0.27% respectively.

Another index that MCT could be included in the future is the MCSI Singapore Index.

Therefore, with MCT being added to the STI, at an approximate weight of 1.5% would likely mean a S$15.75mil short term buying volume injected by both ETFs alone into MCT or a volume of about 6.5mil to 7.0mil shares.

Besides the passive funds, active funds, institutional and retail investors are also likely to increase participation into MCT injecting even more trading volume and liquidity.

The fact that MCT was able to be included in the STI also indicates that its value and market cap has been increasing faster than the component that was excluded – Hutchinson Port Trust (HPH). This is mainly driven by MCT’s continued outperformances in its increasing DPU and NAV per Unit which drives REIT stock prices and values upwards. Being added to the STI is simply a recognition of that.

As a result, the inclusion of MCT into the STI brings about significant benefits in the short term to investors including recognition due to its increasing outperformance, higher volumes, increased trading liquidity, short term buying up by passive funds. In the longer term, actively managed funds will also increasingly trade in and out of MCT.

Acquisition of MBC II

Source: Mapletree Commercial Trust

On 27-Sep-2019, MCT announced the proposed acquisition of MBC II comprising of various buildings located at 40, 50, 60, 70 and 80 Pasir Panjang Road, Singapore. The acquisition will include all the common properties such as the carpark, multi-purpose hall, retail areas, landscape areas, driveways and walkways.

The acquisition cost will be approximately S$1,575.8mil and will be funded through a combination of equity and debt. The manager intends to issue up to 500mil new units in MCT through the equity fund raising and the remaining to be funded via debt up to S$800mil.

Stay tuned as we will be covering this acquisition together with the private placement and preferential offering in our next blogpost coming out later this week.

Conclusion

There is the much to like about the MCT as it is the biggest publicly traded landlord to benefit from the Singapore Government’s Greater Southern Waterfront (GSW) rejuvenation initiative and the inclusion into the STI.


Source: Mapletree Commercial Trust

MCT has done well in the past in managing its portfolio and delivering significant growth to unitholders throughout the years. It has maintained a continuously rising DPU trend of 7.1% compounded growth since IPO.

Since its last acquisition of MBCI in 2016, MCT has been able to growth organically.

We think that going forward, the inclusion into the STI as well as being the landlord who will stand to gain the most from the Greater Southern Waterfront region will bode well for MCT in the short, medium and long term.

Stay tuned to our next blogpost as we cover the MBC II acquisition and the preferential offering.

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