I-Reit Global Management, which owns a portfolio of German office buildings, hopes to list as Singapore's first European real estate investment trust later this month following the completion of pre-marketing.
Lead managers Barclays and DBS are currently finalising the formal launch of the initial public offering, which has so far been pitched on a fair-value range of S$375 million to S$403 million ($300 million to $322 million). This equates to a 2015 dividend yield of 7.3% to 7.9% and price-to-book ratio of 1.15 to 1.23 times.
The sponsor Sella Holdings will not be taking up any units in I-Reit but its strategic partner Shanghai Summit Property Development will subscribe to 60% of the IPO and 65% of the Reit manager. This will leave institutions and retail investors with the remaining S$150 million to S$161 million ($120 million to $129 million).
Shanghai Summit's participation marks the most active involvement to date of its chief executive officer, Chinese real estate tycoon Tong Jianquan, who is fast becoming known as Mr S-Reit because of his enthusiastic participation in the sector.
I-Reit will also have first right of refusal over any European office assets owned by Sella or Shanghai Summit, although there are none in the immediate pipeline. However, the business trust has left itself room to take on new acquisitions by keeping its borrowings down relative to other German Reits, which typically have a debt gearing in the mid-50% range compared with the mid-30% that S-Reits average.
I-Reit's forecast 2014 gearing stands at 33.3%, which means the group has room to take on another €194 million in debt before that ratio hits 60%.
The underlying assets comprise four office buildings in Munich, Bonn, Darmstadt and Munster and have been assigned an independent valuation of €284.1 million, or S$500 million. The Reit is purchasing the portfolio for €283.1 million, a 0.5% discount.
Comparables
This asset valuation makes I-Reit a minnow compared with other listed S-Reits and German Reits. At one end of the scale in Singapore is CapitaCommercial Trust with an asset valuation of S$7.22 billion and OUE Commercial Reit at the other on S$1.63 billion.
In Germany the nearest Reit comparables are Alstria Office, Hamborner and Prime Office. Prime Office has the largest asset base at €1.9 billion.
Based on a pre-marketed range of 7.3% to 7.9%, I-Reit is being offered at a 15.5% to 22.5% discount to the S-Reit 2015 average yield of 6.1%.
Singapore's biggest office Reit, CapitaCommercial, is currently trading on an estimated 2015 yield of 5.2%. Its shares are up 13.7% so far this year, easily outperforming the benchmark Straits Times Index, which has gained 3.4% over the same period.
The laggard is OUE Commercial Trust, which listed in January and is pretty much flat to its IPO price, yielding 6.8%.
Relative to German Reits, I-Reit's prospective yield is more attractive still. Here, the average is about 5.3% on a 2015 basis.
I-Reit's deal also has an inexpensive valuation relative to risk free rates. German Bunds are almost back at their historic lows following a sell-off earlier this week as a result of disappointing industrial production figures. Benchmark 10-year Bunds were trading around the 1.21% level on Wednesday, not far shy of the 1.13% low they hit in the summer of 2012.
Economists are currently revising down their second quarter estimates and now believe Europe's largest economy may struggle to register positive growth. This follows first-quarter growth of 0.8%, the country's strongest quarter in three years.
I-Reit selling points
The deal has been pitched as a play on German economic recovery, although its asset base is likely to exhibit extremely low turnover. This is because three of the four office blocks are rented out to Deutsche Telekom subsidiary GMG.
Heavy reliance on one client could be viewed as a key risk factor but in this case the entire portfolio has a weighted average lease to expiry of 7.8 years. Relative to commercial S-Reits, this key Reit metric places it second to only CapitaCommercial's eight years.
One great strength of I-Reit's portfolio is that it is freehold. Its net leased area stands at 1.3 million square feet, with 656 car parking spaces and a 100% occupancy rate.
GMG rents the Bonn, Munster and Darmstadt offices in their entirety and its lease is subject to an in-built rental escalation pegged to the German consumer inflation rate. Major clients at its fourth block -- Munich Concor Park -- comprise ST Microelectronics and Allianz.
The downside of such a stable roster of clients, combined with Germany's traditionally low inflation rate, means the stock has a lower probability of capital appreciation. Syndicate forecasts are assuming revenue growth of 2.2% between 2014 and 2016.
Another negative for some investors will be the foreign exchange risks associated with the euro/Singapore dollar exchange rate.
On the plus side, the group argues that it has adopted a progressive fee structure, which aligns unitholder and management interests. Whereas other commercial S-Reits structure their base fees as a percentage of asset values (range of 0.1% to 0.5%), I-Reit's base fee amounts to 10% of distributable income. The dividend pay-out rate has been set at 100%.
Meanwhile, the management's performance fee has been set at 25% of dividend per unit growth, the same level adopted by OUE Commercial Trust. CapitaCommercial, Frasers and Keppel are all based on net property income.
I-Reit says it plans to adopt an ABBA investment strategy. This involves searching for A class properties in B grade cities and B tier properties in A grade towns. That's in addition to Germany, the group's initial focus.
The sponsor, Sella Holdings, is already well known in Israel where its CEO, Itzsak Sella, was the man behind one of the country's two Reits, Sella Capital Real Estate Ltd.
