The appeal of a high dividend yield and equity story combining local knowledge with international expertise helped propel a S$240 million ($136 million) IPO for Ascendas Real Estate Investment Trust (A-REIT) towards five times oversubscription yesterday (Wednesday).
A-REIT's success builds on that of its predecessor CapitaMall Trust (CMT), whose similarly sized S$235 million IPO in late July established a new sector for both Singapore and non-Japan Asia. With a REIT, an investor is buying a trust that holds various buildings and gets paid an annual yield based on the rental incomes of the underlying assets. It is the most transparent property vehicle an investor can own.
The main difference between A-REIT and CMT is that the former has an underlying portfolio of commercial assets and the latter retail assets. Typically investors would demand a risk premium of about 1% to 1.5% to own a commercial REIT. In A-REIT's case, the deal was priced with an 8% dividend yield, representing a 1.3% premium to CMT, yielding 6.7% at the time of pricing.
Under the lead management of DBS, JPMorgan and Salomon Smith Barney, the 272.5 million unit offering was priced at S$0.88, the tight end of its indicative range. Pending the exercise of the greenshoe, 50% of the company's issued share capital will be held by institutional and retail investors and a further 15% by four cornerstone investors. The remaining 35% belongs to A-REIT's sponsors Macquarie Goodman Industrial Management, Australia's largest industrial REIT manager and Ascendas Land, owned by government-held JTC Corp.
A-REIT also differs to CMT in the way the final order book was allocated. Of the total demand generated, institutional demand accounted for 71.5% and retail 28.5%. These ratios are similar to CMT, which then went on to allocate 60% of its book to retail and only 40% to institutions. A-REIT, however, chose the opposite strategy, with 59% allocated to institutions and only 41% to retail.
A more detailed breakdown of the institutional book shows that domestic institutions accounted for roughly 32% of total demand, Singapore-based international funds and six local corporates a further 22.5% of the total, UK based funds 6%, Hong Kong based funds 6% and other (France, Italy and Holland) the remaining 5%.
Observers say the decision to weight the deal towards institutional demand was intentional. "Future growth comes largely through asset injections and these are funded by selling more units through the equity markets," says one. "It's, therefore, important to make sure a deal has a solid institutional base as this will be the first port of call for repeat issuance. The retail investor tends to get broader over time as the product becomes more established."
Virtually all the European funds were said to be new to the product and in this respect having two international banks in the lead management team should have helped. CMT by contrast had DBS as sole bookrunner and had been partially tainted in the eyes of international institutional funds because it has previously failed to access the market in autumn 2001. Since listing in July, however, it has performed well and is now trading at S$1.04, up 6% compared to a 20% decline in Singapore's property index over the same period.
By investor type observers say the book was filled with Singapore specialists, yield funds and hedge funds with underepresentation from regional funds.
In volatile and difficult equity markets, funds have become very focused on dividend yield and virtually no other Singaporean stock offers a higher dividend yield than A-REIT. The deal was able to offer this kind of yield because the underlying assets were injected into the trust at a much steeper discount to NAV than CMT. The latter was able to get away with a relatively slim 4% discount to NAV, whereas A-REIT has paid roughly 6%.
Many Singaporean property companies have been unwilling to crystalize book losses on their property portfolios and the whole sector trades at a huge discount to NAV because investors know portfolios have not been realistically valued. But according to one banker, the key to a REIT is the long-term gains that can be unlocked.
He says, "The sooner companies do it (set up a REIT), they open themselves up to a world where they can provide improved returns for shareholders on their existing capital and even benefit from gaining better access to new capital from the share market. This even ignores the added benefit of potentially creating a funds management business with annuity type income."
And as Philip Lee, JPMorgan's head of South East Asia investment banking explains, A-REIT had a long lead time to market (14 months) because the leads wanted to make sure they got the structure right after CMT's initial difficulties. He concludes. "This deal has been very, very well received don't you know. And it's clear the main reason why is because investors are looking for yield and they want defensive plays."
