The bottom end of the range is equal to the assumed IPO price in the preliminary prospectus lodged with the Singapore regulators in early May and confirms that the trust could offer an initial dividend yield of up to 9.8% for the fiscal year ending in March 2010 û or more than 200bp above the 7.6% yield offered by Ascendas India Trust (a-iTrust), based on consensus forecasts compiled by Bloomberg. The Singapore real estate investment trusts trade at an average dividend yield of 6%.
a-iTrust is the only other Singapore-listed real estate investment trust (Reit) that is backed by Indian properties and is thus considered the key comparable. The top of the price range translates into a fiscal 2010 yield of 8.9% and corresponds to the maximum price that the cornerstone investor û an investment company owned by billionaire Lakshmi Niwas Mittal û had agreed to pay. Consequently, it would have come as a huge surprise if the top of the range had been set any higher. The final price is expected to be determined towards the end of the week starting June 2, and the listing will take place a week after that.
LN Mittal, who is also an investor in Indiabulls Real Estate (IndiaÆs third largest property developer in terms of market capitalisation and the sponsor of the trust) and several of its affiliates, has committed to buy 3.9% of the total trust or about 91 million units, which at the bottom end of the range puts his investment at S$91 million ($66.5 million). The cornerstone tranche isnÆt included in the 11.1% of the trust that is on offer for institutional and retail investors but means that IPIT could raise up to $286 million from external investors in connection with the IPO.
The trust is offering 262.5 million units plus a greenshoe of up to 20% of the total offering, representing an additional 52.5 million units that will come out of the sponsorÆs holdings. Pre-shoe, Indiabulls Real Estate will hold about 42.8% of the trust. The remaining 42.2% of the units will be held by the sellers of the two property projects that will be included in IPITÆs portfolio at the time of listing. Deutsche Bank and Merrill Lynch are joint bookrunners.
The prospectus indicates there will be a substantial yield pickup between fiscal 2009 and fiscal 2010 as the majority of the IPITÆs property projects will be completed and start to contribute rental revenues towards the end of 2008. The dividend yield for fiscal 2009 is estimated at 4.7% to 5.1% and, to ensure investors will be able to realise this, Indiabulls and the original property owners have waived their rights to a dividend for the current fiscal year. Their portion of the dividend is also subordinated to that of the IPO investors for fiscal 2010 in case the IPIT fails to meet its targeted earnings, although the yield indicated in the prospectus is based on all unitholders receiving their fair share and does not include any other form of structuring, sources say. According to the prospectus, the net property income will increase from a projected S$103 million in fiscal 2009 to S$367 million in 2010.
IPITÆs initial portfolio will consist of two commercial property developments in the up-and-coming business district of Lower Parel in Mumbai û a former industrial region that used to house numerous textile mills but is now a micro-market with Grade-A commercial and residential developments that stands out because of its low vacancy levels, high rental values and quality tenants, including banks, financial institutions and large corporations. Credit Suisse and Lehman Brothers both have offices in the area.
IPITÆs developments are located within two IT parks in the area û One Indiabulls Centre (which was formerly known as Jupiter Mills) and Elphinstone Mills û and when completed will have a combined 2.97 million square foot of office space, 438,000 sq ft of retail space and 119,000 sq ft of residential housing.
IPIT is structured largely as a real estate investment trust (Reit), including a commitment to pay out at least 90% of its distributable profit and a cap on its gearing ratio at 35% (or 60% should if it gets a credit rating). But like a-iTrust it will list as a business trust in order to have greater flexibility with regard to how much of its portfolio can be made up of properties still under development. Reits can have a maximum of 10% in uncompleted properties, while there are no constraints for business trusts in this regard. However, IPIT says it will limit its exposure to 25%.
Sources say the response during the pre-marketing period has been encouraging and investors appear willing to overlook the continued poor sentiment for Singapore Reits and focus instead on the positives related to the trustÆs Indian assets.
ôThis company owns prime office space in Mumbai where there is a demand/supply imbalance. The only prime supply scheduled to be completed over the next couple of years will come from its projects,ö says a source familiar with the offering. ôThis makes it fairly immune to the rest of the Indian outsourcing market.ö
Aside from the high yield, IPIT also has a good growth profile, and the sources expect demand to come from a mixture of yield-focused long-term investors, such as pension funds and insurance companies, and investors looking for total return growth.
The trust has the right of first refusal to properties owned by its sponsor and affiliated entities that meet certain criteria and that are at least 75% completed. At the time of listing, Indiabulls has a portfolio of such potential developments amounting to a total 12 million square feet. On top of that, IPIT will also be pursuing acquisitions from third parties.
The fact that it will have a gearing of less than 5% at the time of listing should ensure that it will be able to complete a number of acquisitions before returning to the equity markets for additional cash. On top of that, the source notes, the trustÆs rental yield assumptions are ôreasonably conservativeö and thus there is a chance that profits will come in above the current estimates.
However, a-iTrust is currently trading 2.5% below its S$1.18 IPO price at S$1.15 after reversing most of the gains it made in late April and, in line with the rest of the S-Reits, it is down 32% from its highs in November. Obviously, this is not the best backdrop for convincing investors to commit money to another play in the same sector.
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