What would a CapitaLand-Mapletree merger mean for S-Reits in their respective stables?

[SINGAPORE] There seems to be little doubt now that the US Federal Open Market Committee will announce a rate cut at its coming meeting from Sep 16 to 17.

This could add to the backdrop of softening interest rates in Singapore, and reinforce the chorus of bullish calls on locally listed real estate investment trusts (S-Reits).

The excitement may also spur speculation of corporate action by the sponsor groups of some leading S-Reits to better position them for long-term growth. In particular, it might reignite market talk of a possible merger of the CapitaLand and Mapletree groups, and what that would mean for the S-Reits within their corporate stables.

Expectations of a Fed rate cut intensified last month, after chairman Jerome Powell indicated that a shift in US monetary policy stance is finally in the offing. During his keynote speech at the Jackson Hole symposium on Aug 22, Powell noted that US economic growth had slowed significantly in the first half of the year, and that the labour market was showing signs of weakness.

This, he said, makes it unlikely that tariff-induced inflationary pressures will stick. “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” he added.

Then, the poor US jobs report last week seemed to seal the deal. The US Bureau of Labor Statistics said on Sep 5 that total non-farm payroll employment increased by only 22,000 jobs in August. Meanwhile, the seasonally adjusted unemployment rate for August ticked up to 4.3 per cent, from 4.2 per cent in July and 4.1 per cent in June.

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Reflecting the increased likelihood of softer US growth and an imminent Fed rate cut, the benchmark 10-year US Treasury bond yield ended last week at 4.08 per cent – down about 15 basis points for the week, and down nearly 50 basis points since the beginning of this year.

S-Reit rally has legs

The possible loosening of US monetary policy comes as falling rates in Singapore have been spurring local market sentiment.

On Aug 29, RHB said it expects 10-year Singapore government bond yields to fall to 1.68 per cent by the end of this year, stoking investor interest in S-Reits as well as stocks with sustainable high dividends.

The yield on 10-year Singapore government bonds ended last week at 1.85 per cent, down more than 100 basis points since the beginning of this year.

While S-Reits have rallied recently, they have lagged the broader Singapore market. During the first seven months of this year, the iEdge S-Reit Index rose 6.9 per cent, versus the Straits Times Index’s gain of 12.7 per cent.

With distributions re-invested, the iEdge S-Reit Index returned 11.3 per cent during the period. The STI returned 17.5 per cent on the same basis.

The ingredients for a further climb in S-Reits seem to be in place.

On Aug 26, DBS Group Research said H1 2025 earnings reports showed continued positive rental reversions across most real estate subsectors. It also noted that a number of prominent S-Reits reported faster growth in distributable income than net property income (NPI).

“This trend points to improvements in non-operating costs, particularly financing costs,” said DBS.

Further declines in interest rates should continue to reduce financing costs for the S-Reits, supporting their distributable income as well as distributions per unit (DPU), while also enhancing the relative appeal of these yield-oriented investments.

Some S-Reits are already taking advantage of their stronger market valuations to raise funds for acquisitions. According to the DBS report, some S$3.4 billion in new equity has already been raised this year through placements and initial public offerings. S-Reits have announced close to S$2 billion worth of acquisitions, DBS said.

Value unlocking moves

While bullish market sentiment might prompt analysts and investors to take a chance on some of the smaller, higher-yielding S-Reits, my own inclination is to stick with the largest S-Reits backed by big Singapore-based sponsors, such as CapitaLand Investment, Frasers Property, Keppel, and Mapletree Investments.

For one thing, valuations among these S-Reits seem attractive enough, especially in the light of their growth potential.

CapitaLand Integrated Commercial Trust (CICT) – which acquired the remaining 55 per cent of CapitaSpring’s office tower for S$1.045 billion just last month – is trading at an annualised H1 2025 DPU yield of just under 5 per cent, and at about 1.06 times its net asset value (NAV).

The sponsor groups behind these S-Reits might also attempt to unlock value if they fail to garner decent market valuations. The best-performing component of the iEdge S-Reit Index during the first seven months of this year was Frasers Hospitality Trust (FHT), thanks to a privatisation offer in May at 1.11 times its NAV from Frasers Property.

FHT is up 20.5 per cent this year, just ahead of CICT’s gain of 18.1 per cent. It is scheduled to be suspended from trading this week, on Thursday (Sep 11).

CapitaLand-Mapletree merger?

Could there be a rationalisation of the S-Reits under the CapitaLand and Mapletree groups some day?

To be clear, neither group has even hinted at this being a possibility.

However, Temasek’s recently announced organisational revamp suggests it plans to take a more active approach in managing its Singapore-based portfolio companies.

Notably, Temasek highlighted the restructuring of Keppel and Sembcorp Industries – which involved the spin-off and merger of their respective offshore and marine businesses under Seatrium – as an example of how value has been created at its Singapore-based companies.

“It happened after 30 years of trying,” said Temasek chief executive Dilhan Pillay Sandrasegara during a presentation on Aug 29. “So today, you have a combination of Sembcorp where the market cap is S$10.9 billion, you have S$15.2 billion in Keppel, and you have a new creation of a S$7.9 billion market cap company in Seatrium.”

If CapitaLand and Mapletree were merged, it would probably make sense to combine some of their S-Reits. But some transactions could be easier to pull off than others.

CapitaLand Ascendas Reit (Clar) could probably easily subsume Mapletree Industrial Trust (Mint). The two S-Reits happen to be trading at almost the same P/NAV ratio – 1.26 times for Clar and 1.24 times for Mint – and the combined entity would have a property portfolio almost as large as CICT’s.

Indeed, anticipation of such a deal could result in both Clar and Mint garnering higher P/NAV valuations in the market.

Combining CapitaLand and Mapletree’s flagship S-Reits could be trickier, though. CICT is currently trading at 1.06 times NAV, while Mapletree Pan Asia Commercial Trust (MPACT) is trading just under 0.8 times NAV.

Minority unitholders of MPACT may baulk if they aren’t offered a price close to NAV, while minority unitholders of CICT may fear such a deal will dilute the market valuation of their own units.

This is exactly what happened more than three years ago, when MPACT (then known as Mapletree Commercial Trust) proposed to acquire Mapletree North Asia Commercial Trust (MNACT). Their sponsor group eventually stumped up S$2.2 billion of cash to push the transaction through. MPACT’s latest annual report shows Mapletree Investments holds a deemed interest in 55.9 per cent of its units.

MPACT’s minority unitholders haven’t stopped questioning the merger with MNACT, though. Ahead of its recent annual general meeting in July, a number of queries were submitted about the adverse impact of the deal on the market valuation of its units, and what can be done about it.

The way I see it, CICT is likely to face strong resistance from its unitholders if it attempts to subsume MPACT in its current form. In fact, the mere speculation of such a deal could weigh on the market value of its units.

So, should investors sell CICT and buy MPACT? Perhaps MPACT should consider hiving off the assets it came to own as a result of the merger with MNACT. While this would shrink its portfolio, it might result in its units garnering a stronger market valuation. And, if CapitaLand and Mapletree were ever combined, it would be in a better position to merge itself with CICT.

The writer owns shares in CapitaLand Investment, and units in CapitaLand Integrated Commercial Trust

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