*This article was originally distributed on January 23, 2020

Dear Clients and Friends,

新年快乐! We wish you a healthy, happy and prosperous year ahead!

We ring in 2020 on a more positive note than where we started 2019. In the past year, a slowdown in manufacturing has weighed on economic growth both globally and in Singapore. GDP growth in Singapore for 2019 was modest at 0.7%, but is expected to increase in 2020. The Government’s growth forecast for 2020 is 0.5–2.5%, with another revision anticipated in February. Going forward, we are cautiously optimistic for 2020. We continue to look closely at real estate investment trusts (“REITs”), which saw a bumper year of mergers and acquisitions (“M&A”) and equity fundraisings last year. Other bright spots to look out for include communication and information, healthcare, as well as finance and insurance.

We share 10 key trends for the Singapore market in 2020.

1.  The world on an uplift

Global financial markets rallied in late 2019, buoyed by optimism about an improving economy. This outlook has been boosted by the easing of trade tensions between the US and China. Both sides inked the “Phase One” trade deal on 15 January 2019, amidst mutual recognition of the necessity of and benefits from trade. Another factor which has stimulated economic growth is the expansionary policy of central banks across the world. This has helped to offset the trade shock and sustain economic expansion. Overall, the global economy is on the uplift. Indeed, the International Monetary Fund has predicted that the world economy will strengthen and global growth will accelerate up from 2.9% in 2019 to 3.3% this year, the first pickup in growth in the past three years. Barron’s annual roundtable of ten veteran investors and economists has also gathered again to opine on the economic outlook and agreed that investors are entering 2020 with the financial markets heading higher.

2.  Heading to the polls

2020 will be a busy year for politicians in the US and Singapore as both countries head to the polls. President Donald Trump has every incentive to keep the markets on an upswing, given that the US economy is a pillar of his re-election campaign. After three rate cuts in 2019, the target range for the federal funds rate stands at 1.50–1.75%. Still, President Trump has advocated further rate cuts to sharpen the competitiveness of the US economy. As it stands, the Fed has signalled its intention to hold rates steady till end of 2020, citing that the US economy is in a “good place” and should continue to support sustained growth.

Across the pond, last month, the British electorate handed Prime Minister Boris Johnson and his Conservative Party a commanding majority in the UK parliament with a mandate to “get Brexit done”. Financial markets celebrated the news – the FTSE 100 rose by nearly 1% the morning after the election, while the sterling leapt 2% against the greenback. Whether or not the UK will eventually secure a trade deal with the European Union, market players have braced themselves for Brexit. They are now looking forward to an end to Brexit fatigue, having collectively spent billions of British pounds on contingency planning, while also suffering from opportunity loss as customers hoarded cash and held back on investments.

In Singapore, a general election is around the corner. The incumbent leaders are poised to pass the torch on to a strong and steadfast team of new leaders. Backed by the guidance of experienced senior leaders, the new team is well-placed to steer Singapore through the changing global environment and preserve Singapore’s reputation as a city-state which punches above its weight. Against this backdrop, we believe Singapore will continue to be politically stable and be regarded by investors as an attractive investment market.

3.  Improving IPO landscape

The Singapore initial public offering (“IPO”) market performed relatively well last year. In 2019, the market raised a total of S$3.06 billion from 11 IPOs, four times the amount of funds raised in 2018. The Mainboard of Singapore Exchange Securities Trading Limited (the “SGX-ST”) welcomed four new IPOs (all REITs) – ARA Hospitality Trust, Eagle Hospitality Trust, Prime US Real Estate Investment Trust and Lendlease Global Commercial Real Estate Investment Trust. According to Bloomberg, IPOs of Singapore REITs made up over half of the global REIT IPOs in 2019. This has cemented Singapore’s reputation as a leading REIT hub in the world.

We believe that enthusiasm for new IPOs will remain strong in 2020. Last week, Elite Commercial Real Estate Investment Trust lodged its preliminary prospectus, positioning itself to be the first REIT IPO in Singapore this year. The launch of this UK-focused REIT demonstrates that Brexit is a manageable risk and signals a positive turn for investor confidence in the UK market. Within the real estate sector, we expect to see continued interest in office and hospitality assets as well as student accommodation as an up-and-coming asset class. In terms of company IPOs, we are also hopeful that there will be interest in new listings in F&B, healthcare and other industries.

The Singapore Government has been trying to nurture enterprises and encourage promising businesses to list on the SGX-ST, although there has been stiff competition from other financial hubs such as Hong Kong. To incentivise listings here, the Monetary Authority of Singapore’s (the “MAS”) Grant for Equity Market Singapore (“GEMS”) scheme provides a S$75 million grant to defray part of the IPO costs for enterprises (including foreign enterprises) seeking to raise capital through Singapore’s equity market. Such efforts are a step in the right direction and we believe that they will bear fruit in time to come. But more can be done. One initiative which Singapore can explore is the establishment of funds with a broad mandate to invest in new and existing issuers listed on the SGX-ST. These funds can provide the necessary liquidity to promote healthy activity in the Singapore IPO and secondary equity capital markets.

4.  Big and beautiful – Mega-mergers and acquisitions

M&A activity in Singapore was at a historic high in 2019. For the full year of 2019, M&A activity in Singapore totalled US$35.3 billion, up 125.6% from the previous year. The real estate and financial sectors accounted for the lion’s share in terms of deal amount.

As businesses looked to scale up quickly, our deal scene witnessed a string of mega-mergers and large acquisitions. A landmark deal was CapitaLand Limited’s (“CapitaLand”) S$11 billion acquisition from Ascendas-Singbridge Pte Ltd (“ASB”) of all the shares in ASB’s two wholly-owned subsidiaries. This acquisition has made CapitaLand Asia’s largest diversified real estate group. Also, Blackstone Group acquired US$18.7 billion of US logistics assets from GLP in what it says is the world’s biggest private-equity real estate deal. Other significant acquisitions in 2019 included Allianz Finance VII Luxembourg S.A. (“Allianz”) and Gaw Capital Partners’ joint acquisition of the office and retail areas of the Duo complex for S$1.58 billion, as well as Ascendas Real Estate Investment Trust’s (“Ascendas REIT”) portfolio acquisition of 28 business park properties in the US and two such properties in Singapore for S$1.66 billion. There were also numerous other private M&A transactions in the Singapore market in 2019.

On the public M&A front, 2019 saw the merger between OUE Commercial Real Estate Investment Trust and OUE Hospitality Trust, the combination between Ascott Residence Trust and Ascendas Hospitality Trust, as well as the merger between Frasers Logistics & Industrial Trust and Frasers Commercial Trust. Yesterday, CapitaLand Mall Trust and CapitaLand Commercial Trust announced a proposed merger to form CapitaLand Integrated Commercial Trust. With a combined property value of S$22.9 billion, this will make it one of the largest mergers in Singapore’s history. The enlarged REIT will also become one of the top three REITs in Asia-Pacific by market capitalisation, thus positioning it to explore more large-scale integrated projects in the future. In all these mergers in the Singapore REIT space, given that both the target and the acquirer were listed trusts, the acquirer could fund a significant component of the consideration for the target units in the form of new acquirer units. As target unitholders get a slice of the pie in the enlarged entity, they stand to benefit from the synergies between the merging entities. With the trend leaning towards larger REITs, small and medium REITs may also explore whether they should merge or otherwise scale up in order to stay competitive.

Within the real estate sector, a trend which may drive M&A activity is the shift towards integrated developments, which offer a seamless live-work-play experience for visitors. The merger to create CapitaLand Integrated Commercial Trust is a case in point. The blending of business and leisure has encouraged real estate players to develop integrated projects which not only offer the shopping experience, but also house offices, residential units and/or hotels. Large-scale REITs may have greater firepower to tap into this trend and pursue huge integrated developments. Overall, the recent mega-mergers will put Singapore on the world map and position our key M&A players to go toe-to-toe with the big boys on the global stage. In light of these exciting trends, we expect to see strong M&A activity in 2020.

5.  A frenzy of follow-on equity fundraisings

The follow-on equity fundraising market was in fine form in 2019. Follow-on equity offerings by Singapore REITs raised around S$6.1 billion, up from S$3.8 billion in 2018, according to Bloomberg. The REITs favoured private placements as a quick and easy method of fundraising. Some REITs also coupled their private placements with preferential offerings. Mapletree Commercial Trust (“MCT”) raised S$458 million and S$460.5 million in gross proceeds from its private placement and preferential offering respectively, to partially fund its acquisition of Mapletree Business City (Phase 2). Ascendas REIT raised approximately S$1.3 billion in gross proceeds from a rights issue, to part-fund the acquisition of the business park properties. This was also the biggest secondary equity offering in 2019.

REITs trading at a premium to net asset value (“NAV”) are well-positioned to capitalise on their lower cost of equity – for the same amount of cash raised, they can keep the number of newly issued units smaller and curb the effects of dilution on their unitholders. For instance, MCT’s acquisition of Mapletree Business City (Phase 2) was both DPU- and NAV-accretive for unitholders, despite the discounts in the issue price for the equity fundraising. The follow-on equity fundraising frenzy in the REIT space in 2019 illustrates the ability of REITs to rely on secondary offerings to raise large amounts of capital. Established sponsors with existing REIT platforms in place may therefore find it easier to inject their properties into such platforms as compared to listing new IPOs.

6.  The changing face of retail

An age-old industry in a fast-changing world, the retail sector faces challenges as well as opportunities. In November 2019, retail sales in Singapore fell 4% year-on-year, representing the 10^th straight month of decline. With the rise of e-commerce and mobile devices, consumers can shop from anywhere at any time, while enjoying greater access to product information and choices. Nevertheless, retailers which are able to keep up with the changing rules of the game will be able to thrive. For instance, some physical retailers have created online platforms and leveraged on data analytics to better understand customer behaviour.

Yet, for all the convenience e-commerce offers, some shoppers continue to prefer the “physical touch” offered by brick-and-mortar stores, where they can physically assess a product’s authenticity and value. Cognizant of this, several online retailers, such as Love, Bonito, have even gone physical. Some retailers have also sought to tailor their spaces to engage shoppers’ senses. To stand out from the crowd in an economy where experiences are increasingly prized over physical possessions, businesses will need to explore how experiential elements could be thoughtfully deployed to help them to better showcase their products. An example is Shiseido’s “Sense Beauty Pop-up” at Jewel Changi Airport – an art installation which used augmented reality technology to create a multi-sensorial experience of the brand’s beauty products. The rise of experiential retail is expected to rejuvenate the brick-and-mortar industry and shape the mall of the future.

7.  Hive of activity in the hospitality sector

The Singapore hospitality sector has been a hive of activity in 2019. Last July, hotel occupancy rates climbed to 93.8% – the highest in over a decade – according to the Singapore Tourism Board. Given the political unrest in Hong Kong, some business events, such as the Global Wellness Summit, were relocated to Singapore, and some tourists shifted their travel plans to Singapore as well. With the compound annual growth rate for hotel supply expected to slow to 0.7% between 2019 to 2022, hoteliers are likely to benefit from the supply-demand dynamics in the hospitality industry.

The bright prospects for hospitality have also translated into record levels of deal-making in the sector. Hospitality deals hit S$5.7 billion as at 30 November 2019, about five times the figure for 2018 and the highest for at least the past 10 years. Recently, a number of developers have even jumped onto the hotel-conversion bandwagon. For instance, Fragrance Group’s flagship office building in Alexandra Road and Lian Beng’s Wilkie Edge have received approval from the Urban Redevelopment Authority (the “URA”) for redevelopment into hotels. Looking ahead, co-living could be an emerging sub-asset class within the hospitality sector. Featuring leases as short as three months and access to shared spaces such as kitchens, co-living targets millennials who favour networking and community living.

8.  A technology hub in the making

As Mr Loh Boon Chye, the Chief Executive Officer of the Singapore Exchange, observed in one of his speeches in 2019: “Over the years, we have put together the building blocks of what we call a Smart Nation. This is where investments in digital infrastructure, a tech-savvy population and a single-layer government are brought together.” In line with this vision, fintech investments in Singapore quadrupled to US$453 million in the first half of 2019, making Singapore the third-largest fintech market by funds in Asia-Pacific. In addition, the MAS’ move to introduce digital banking licences in Singapore has attracted strong interest from a competitive group of 21 applicants, including Ant Financial, Grab, Singtel and Razer.

Further, the focus on technology is manifest in the investments made by Singapore issuers. In the property sector, there has been interest in high-tech real estate. In July 2019, Mapletree Industrial Trust announced plans to redevelop a flatted factory cluster in Kallang Way into a high-tech industrial precinct at a total project cost of about S$263 million. In December 2019, Keppel DC Real Estate Investment Trust acquired a data centre in Germany for approximately S$125.3 million, marking its third data centre acquisition for the year. With keen interest in the digital sector, Singapore is shaping up to be a leading technology hub.

9.  It pays to go green

In his 2019 National Day Rally speech, Prime Minister Lee Hsien Loong stressed the importance of mitigating climate change: “Climate change may seem abstract and distant for many of us. But it is one of the gravest challenges facing humankind.” The growing focus on sustainability has made an impact on financial markets in Singapore and abroad. Sustainable finance has increased by 46% in 2019 on the back of green deals approximating US$460 billion in value. On 11 November 2019, Minister for Education and Board Member of the MAS Mr Ong Ye Kung announced a US$2 billion Green Investments Programme (“GIP”). The MAS’ first investment under the GIP was to allocate US$100 million to the Bank for International Settlements’ Green Bond Investment Pool, in support of its global green finance initiatives.

Likewise, investors and businesses have turned their attention towards sustainability. In 2019, DBS issued a S$250 million three-year loan to City Developments Limited (“CDL”) with interest rate discounts linked to CDL’s performance on sustainability-related targets, which if met will lead to lower borrowing costs. Allianz and Gaw Capital Partners’ acquisition of Duo complex was part-financed by a S$945 million green loan from three banks. Other borrowers which have obtained green loans include CapitaLand, Hoi Hup Realty Pte Ltd, Keppel Real Estate Investment Trust and MCT. The rise of green finance demonstrates that sustainability is not just good for corporate social responsibility, but can also be good business.

10.  Risk and regulation – A balancing act

The Singapore landscape is seeing regulatory developments which are calibrated according to risk, further enhancing Singapore’s business-friendly environment. As Singapore moves towards a cashless society, the Payment Services Act 2019 (the “PSA”) will come into force on 28 January 2020. The statute creates an omnibus framework for the regulation of both new and traditional payment activities, and adopts a calibrated approach by providing for lower-level requirements for lower risk activities. The importance of the statute in supporting our financial sector was highlighted by Mr Ong Ye Kung at the Second Reading of the Payment Services Bill: “The Bill is a necessary piece in Singapore’s Smart Nation journey. It will help us build a technologically robust smart financial centre, that preserves stability while facilitating innovation and growth in the payments landscape.”

Last month, Singapore Exchange Regulation Pte Ltd (“SGX RegCo”) announced a slew of changes to enhance its regulatory regime by adopting a more targeted, risk-based approach. The changes, which will take effect on 7 February 2020, include limiting the scope of the quarterly reporting requirement to issuers associated with higher risks. This welcome development comes hand in hand with SGX RegCo’s plans to strengthen continuous disclosure requirements in areas that are of high investor interest such as interested person transactions (“IPTs”), significant financial assistance, significant transactions and secondary fundraising. More recently on 16 January 2020, SGX RegCo unveiled plans to revise the rules relating to the appointment of auditors and property valuations. New listing rules will be introduced to require issuers to comply with valuation standards set by the Singapore Institute of Surveyors and Valuers or the International Valuation Standards Council.

In the REIT space, the MAS is exploring a relaxation of the aggregate leverage restriction applicable to Singapore REITs. The present 45% gearing limit is a tad low for our REITs, and we believe an increase to 50% would be a calibrated threshold which the market can accept. A higher debt headroom would provide our REITs with more bandwidth to pursue accretive acquisitions. Moreover, established REIT markets such as the US, Japan and Australia do not impose regulatory gearing limits. This proposed increase in the debt headroom could also be coupled with a secondary credit measure as a safeguard. In line with its role as the voice of the industry, the REIT Association of Singapore has been actively engaging the MAS on the issue of aggregate leverage.

On the whole, it is laudable that the regulators are making active efforts to strike a good balance between safeguarding risk and promoting business activity.

Conclusion

We expect business conditions for 2020 to be more stable and positive compared to 2019. Against this landscape, we are confident that market participants will identify, create and execute upon strategically and financially compelling business opportunities both locally and overseas. The retail sector is seeing new opportunities for growth, amid the rise of experiential retail and omni-channel marketing. Things are also looking up for Singapore hospitality, with demand expected to outstrip supply. In addition, increased investments in technology and green initiatives by the Government and businesses alike are set to make Singapore a leading city of the future.

Amidst rapid changes in technology and the economy, exciting opportunities await. We at Allen & Gledhill stand ready to provide you with our fullest support in the new decade!