Singapore’s Mapletree group is getting ready to launch its fourth real estate investment trust (Reit), which will focus on commercial properties in mainland China and Hong Kong. The initial portfolio will comprise two properties, including the Festival Walk shopping mall in Hong Kong that Mapletree bought from Swire Properties for $2.4 billion in 2011.
Bankers will start investor education for the initial public offering of Mapletree Greater China Commercial Trust (MGCCT) today and a formal management roadshow is planned to kick off just after Chinese New Year (which falls in the second week of February). This should allow for a trading debut in early March.
The deal is expected to raise about $1.5 billion, which will make it the largest Reit IPO in Singapore ever and the second largest in Asia after Hong Kong’s Link Reit, which raised $2.8 billion in connection with its listing in 2005.
It will also be the first IPO of size in Singapore this year.
The offering will be well supported by cornerstone investors, which may buy as much as 40% to 50% of the deal. According to a source, the issuer is in discussions with about 10 cornerstone investors, including global pension funds, sovereign wealth funds and other long-term investors.
A key attraction with this Reit, aside from the high-quality of the initial assets and the well-known sponsor, is that it will offer a combination of a defensive yield and a growth rate that will exceed the Reit market average. This should be positive at a time when investors are increasing their risk exposure and gradually shifting their focus from bonds to equities.
The issuer itself is projecting an annual 8% growth in distributions going forward without any additional acquisitions.
However, the Mapletree group also has unlisted funds with commercial assets in China that could be injected into this new Reit in the future.
Another key selling point, sources say, is the fact that MGCCT Reit will have no structuring to artificially increase the yield. This is important as investors have shown time and again that they do not like such dividend boosting measures, even if they do result in a higher return in the first one or two years.
Even without this, the strong growth will support a yield between 5% and 6%, sources say. This should put MGCCT in line with or at a premium to three other Reits with Hong Kong retail properties — Hong Kong-listed Link Reit and Champion Reit, as well as Fortune Reit, which is listed in both Hong Kong and Singapore. However, the final yield range will depend on the feedback received during the investor indication.
Link Reit, which is the largest Reit in Asia with a massive portfolio of retail assets formerly owned by the Hong Kong government, is currently trading at a 2013 dividend yield of about 3.9%. Champion Reit, which holds a mixture of office and retail properties, and Fortune Reit are trading at about 5.4% and 5.5% respectively.
Smaller Reits with assets in China, such as Singapore-listed CapitaRetail China Trust and Hong Kong-listed Yuexiu Reit are trading at yields of 4.1% and 5.7%. Huixian Reit, which is listed in Hong Kong and denominated in offshore renminbi, is quoted at a 2013 yield of about 6.4%.
Interestingly, MGCCT will pay its management company based on the distribution growth, which should make the interests of the manager and the investors much more aligned. It will also give the manager an added incentive to increase dividends. Normally, Reit managers in Asia are paid a fee based on the value of the assets, while under this new system the Reit manager won’t get paid for additional acquisitions until they result in an increase in the dividend per unit.
Aside from Festival Walk, MGCCT will also own the Gateway Plaza in Beijing, a grade-A office complex located at the cross-roads between the 3rd Ring Road and the Airport Expressway that was previously part of RREEF China Commercial Trust (RREEF CCT). Mapletree bought the asset when RREEF CCT was broken up and delisted from the Hong Kong stock exchange in 2010.
The complex consists of two office towers connected by a retail podium. It is currently about 97% to 98% occupied with prime tenants like BMW, John Deere, Bank of China, Posco and BASF.
However, Festival Walk, a mid- to up-market shopping mall in Hong Kong’s Kowloon Tong district, will account for about 70% to 80% of MGCCT’s total asset value at launch, according to a source, which is why investors are comparing it mainly to other Reits with Hong Kong retail assets. Together, the two properties will have a total asset value of about S$4.2 billion to S$4.3 billion.
Festival Walk opened in 1999 and has been pretty much 100% occupied since then (aside from the mall it also has four floors of office space). The rental income has also increased consistently year-on-year since inception, even in the tough years during Sars and the global financial crisis. As a result it is viewed as a very safe asset.
Swire Properties decided to sell part of Festival Walk after failing to complete a planned IPO in May 2011. It initially invited investors to bid for a 50% stake, but as the process unfolded Mapletree expressed an interest in having management control of Festival Walk and the two parties started to talk about a 100% sell-down.
The Singapore developer and property owner eventually agreed to pay a premium to book value for the entire asset, making it the largest-ever property deal for Swire. Goldman Sachs advised Swire on the sale.
Mapletree, which is a 100% subsidiary of Temasek Holdings, is expected to sell 70% of the trust through the IPO, while holding on to the remaining 30%. The group is the sponsor of three other Reits that are all listed in Singapore: Mapletree Logistics Trust, Mapletree Industrial Trust and Mapletree Commercial Trust.
The group was previously also a co-owner and co-manager of Lippo-Mapletree Indonesia Retail Trust, which is listed in Singapore and owns a portfolio of retail malls in Indonesia. However, that stake was divested in June 2011 and the Reit has since changed its name to Lippo Malls Indonesia Retail Trust.
Mapletree's most recent listing was MCT, which went public in April 2011 and focuses on a combination of retail and office properties in Singapore. On Thursday last week it raised S$225 million ($184 million) from its first follow-on share issue since listing to fund the acquisition of a 19-storey office building named Mapletree Anson.
The IPO of MGCCT will be led by Citi, DBS, Goldman Sachs and HSBC.
