As the pandemic drags on, REITs are busy shopping for bargains.
Early this month, Frasers Centrepoint Trust (SGX: J69U), or FCT, announced the acquisition of the remaining 63% of AsiaRetail Fund, which owns a portfolio of five suburban malls.
And just last week, Keppel REIT (SGX: K71U) entered into an agreement to purchase a commercial property in Sydney, Australia.
Now, Ascendas REIT (SGX: A17U), under CapitaLand Limited’s (SGX: C31) stable of REITs, has announced the acquisition of a suburban office in Sydney’s Macquarie Park.
Details of the transaction
Ascendas REIT will acquire a development in 1 Giffnock Avenue named MQX4 for A$167.2 million from the developers Frasers Property Industrial, a unit of Frasers Property Limited (SGX: TQ5), and Winten Property Group.
The two property developers will be designing and developing the property.
The total cost for the transaction is expected to be slightly lower at A$166 million as the REIT will receive a coupon at a rate of 5.75% per annum in return for funding the construction cost of the property.
The net property income yield for the first year after accounting for all transaction costs is expected to be 6.1%, higher than the REIT’s current dividend yield of around 3.9%.
The property sits freehold land of around 3,300 square metres. Upon completion, the property will have a net lettable area of around 19,384 square metres, of which approximately 91.6% will be used for office while the rest is allocated to retail.
The developers will provide a three-year rental guarantee upon completion in case of any vacancies, and completion is expected around mid-2022.
Here are three reasons why we like this acquisition.
DPU accretive
Income-driven investors should cheer this acquisition as it will result in a slight bump to distribution per unit (DPU) for the REIT.
With Ascendas REIT’s properties under management valued at S$12.75 billion as of 30 June 2020, it’s not easy to move the needle unless the acquisition is sizable enough.
Based on pro-forma estimates, the DPU is expected to rise by S$0.00046.
Enhances REIT’s resilience
Macquarie Park, where the property will be located, is host to a number of multi-national companies from the pharmaceuticals, technology, electronics and communications industries.
These sectors are widely-considered to be being resilient during tough times.
This resilience can help to mitigate the risk of tenants breaking the lease and leaving the property vacant, thus providing the REIT with a risk mitigant.
Strengthens and diversifies the portfolio
As MQX4 will be the REIT’s fifth suburban office property in Australia, it will increase the REIT’s suburban office exposure from the current 21% to 28%.
The acquisition will also increase the assets under management for the Australian portfolio by 10.2% to S$1.72 billion.
With greater assets under management, Ascendas REIT will also have more clout when it comes to negotiating deals and scouting for collaborations.
Get Smart: Monitor the metrics
Investors should note, however, that this contribution will only come two years later in 2022 once the property is completed.
They will need to monitor the take-up rate for the property as it is too far into the future to tell what demand for Australian office space will be like.
The pandemic has altered working patterns as more employees are allowed to telecommute.
This new trend may irreversibly alter the demand dynamics for office space in many countries.
If companies need less office space, this may increase the overall supply and push down rental rates over time.
While the risk of this occurring is not high at the moment, it pays to continue to monitor metrics such as office occupancy and reversion rates.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
