Frasers Centrepoint is pressing ahead with the initial public offering of an Australian real estate investment trust in Singapore but the timing might be less than ideal with a US interest rate hike looming next month.
On Friday the Singaporean property developer began bookbuilding for the S$903 million ($663 million) Frasers Logistics & Industrial Trust, which is backed by its Australian assets acquired through the takeover of Australand Property Group in 2014.
The transaction comes at a time when market sentiment for the asset class appears to be deteriorating after US policymakers revealed last month there is a high possibility of an interest rate hike in June.
A rate hike will make Reit assets comparatively more expensive against other income-generating products. It will also increase borrowing costs for Reits, which generally rely on debt financing for acquisitions.
Manulife US Reit, which completed a $470 million IPO before the comments from US policymakers last month, was inevitably affected and has struggled to keep its share price afloat since the listing. The Reit recovered slightly this week but remains 3.7% below the IPO offer price.
To minimize the impact of a US rate hike decision, syndicate banks have shortened the bookbuild by two days and is now set to close the institutional offering on June 9, one source familiar with the situation told FinanceAsia.
Under the accelerated schedule the Singapore public offer from June 10 to June 16 means it will end just before the Federal Open Market Committee releases the interest rate decision on June 15.
Frasers Logistics & Industrial Trust is set to list on June 20.
Terms
Indicative terms of the S-Reit include 1.01 billion investment units offered at S$0.85 to S$0.89 apiece. The trust will have a free float of 71% pre-shoe and 73% post-shoe.
Based on the indicative price range, the Reit will offer an annualized dividend yield between 7% and 7.2% for the 2017 financial year. Upon exercising a call option to acquire three additional properties, the dividend yield could increase to 7.3% to 7.5% depending on final pricing.
Unitholders can request dividend payments to be made in either Singapore or Australian dollars.
About 47% of the total offering will be placed with 15 cornerstone investors comprising mainly banks, insurance firms, real estate specialist funds and asset managers. Excluding the cornerstone tranche, the deal could raise $360 million assuming top-end pricing.
The cornerstone investors are Morgan Stanley Investment Management ($55 million), Affin Hwang Asset Management ($50 million), Lion Global Investors ($50 million), Principal Real Estate Investors ($40 million), JF Asset Management ($34 million), Asdew Acquisitions ($30 million), DBS ($25 million), Nuveen Asset Management ($25 million), Blackrock ($21.6 million), B&I Capital ($20 million), Meren ($20 million), NTUC Income Insurance ($20 million), DBS on behalf of private banking clients ($20 million), Nikko Asset Management ($15 million) and AEW Asia ($13 million).
After the listing, Frasers Centrepoint will retain 22.5% of Frasers Logistics & Industrial Trust while Thai tycoon Charoen Sirivadhanabhakdi will hold up to 6.6% through holding company TCC Group.
DBS and Citi are joint global coordinators of the IPO and are also joint bookrunners with Morgan Stanley, OCBC and United Overseas Bank.
Comparables
The initial portfolio of Frasers Logistics & Industrial Trust will comprise 51 Australian properties including factories, car parks and warehouses. The bulk of the properties are located in the states of Victoria, New South Wales and Queensland.
It will be the first pure-play Australian S-Reit so there is no direct comparable in terms of geographic distribution of assets.
Asecndas Real Estate Investment Trust (A-Reit) could be the closest comparable since it owns 27 industrial properties in Australia, accounting for 14% of its asset portfolio. At the current price the Reit yields 6.7% for the 2016 financial year, representing a slight discount against Frasers Logistics’ implied dividend yield of 6.83% to 7%.
Including the call option Frasers Logistics & Industrial Trust will offer similar returns compared with the recently listed Manulife US Reit, which at the current price yields 7.36% for next year.
One S-Reit specialist said Frasers Logistics & Industrial Trust will be a good alternative to local industrial trusts, which have struggled from declining yields in recent years. According to CBRE, rental yields for warehouses in Singapore declined to 2.5% in the third quarter last year from 3.2% in 2010.
"Industrial occupancy and rental rates in Singapore will remain under pressure in 2016 as new supply outpaces demand growth," Moody's analyst Rachel Chua said in a note.
Chua said industrial supply in Australia will be underpinned by continued demand for logistic and distribution center space this year.
Click here for FinanceAsia’s previous coverage of Frasers Logistics & Industrial Trust.
