Unfortunately, this seems to coincide with a period in which investors prefer not to focus on primary issuance, keeping their eyes instead on the secondary market where stocks have been tumbling for the past couple of sessions amid concerns about credit quality. To be sure, many investors were already a bit hesitant about this new Reit and its exposure to the Japanese retail sector, with some saying they arenÆt sure this is something they really need to own at this particular time, and the sell-off in the broader market has obviously not helped.
There is also lots of paper available in Singapore at the moment as issuers rush to get their deals done before the end of the year. They have also been trying to capture the large amount of liquidity that has flowed into Asia as US investors have sought to diversify out of assets linked to the sinking dollar. In another sign of the competition for funds, Altitude Aircraft Leasing Trust, which is aiming to become the first listed business trust backed by aircraft assets in both Singapore and Asia, has extended its institutional bookbuild period by at least one week to try and tie up another anchor investor.
Altitude Trust, which is backed by a commercial aviation services unit of General Electric, was initially due to close the books on its $400 million IPO yesterday, but will now stay open until next Monday or Tuesday, sources say. The deal is arranged by DBS and Goldman Sachs.
The extension isnÆt all to do with a desire to include this new investor - said to be based in the region and have sector experience - as the trust also has a few issues that it needs to solve with the regulators before it can launch the retail portion of its offering. But with sources saying the order book isnÆt fully covered at this stage, one can only assume that the possibility of another large-sized order played a significant role in the decision to move back the deadline.
ôThe markets arenÆt that stellar at the moment and there is a lot of nervousness around so the extension will be helpful,ö says one source familiar with the offering.
Aside from the competition from other offerings in Singapore, these deals are also competing for funds with the numerous IPOs by Chinese companies, several of which have recently been delivering first day returns of more than 50%. Compared with such gains, a yield of 4.3% to 5.2% as that offered by APL Land Trust can no doubt seem a bit paltry.
However, sources close to APLÆs offering say the trust is actually in a position to offer quite substantial growth, including an estimated 6% organic growth from rental reversions, which will push the total return to about 11%-12%. And on top of that, it also has a lot of scope for acquisitions with a leverage of only 36% at the time of listing and a sponsor that has originated more than 55 real estate transactions in Japan over the past eight years.
ôI would be surprised if they donÆt generate another 20% growth in the first year just from debt funded acquisitions,ö the one source says. ôThey can go out and borrow at little over 2% and buy assets at cap rates of 5% or 6% - all debt funded, so itÆs pretty easy to generate that type of accretion.ö
This large an investment spread û that is, the gap by which property yields exceed borrowing costs - is virtually unique in the major property markets around the world, with Hong Kong, Singapore, New York and London all having negative investment spreads.
According to one source close to the APL offering, this hasnÆt been lost on the managers of the other Singapore Reits with over one third of the assets acquired by the Singapore Reits in the past six months have been Japanese assets. All the ôbig guysö have been doing it, including Mapletree, Ascott Residence Trust and Allcoa, he says.
ôThe difference, I would say, is that all these names donÆt have anyone on the ground in Japan. They are just parachuting in and buying up some products, whereas APL has been building its business for 10 years, have very deep relationships with its tenants and developers and have a real proprietary pipeline of opportunities,ö he adds.
APLÆs sponsor, APL Group International (Holdings), is part of JapanÆs Asia Pacific Land group, which specialises in the origination, development and management of real estate assets throughout Japan and in other parts of the region.
APL, which is being brought to market by joint bookrunners JPMorgan and Lehman Brothers, is offering 411.92 million units at a price between S$1.05 and S$1.25. Unusually for a Singapore Reit, the sponsor will not retain a substantial ownership of the trust, but 95.1% of the units will be sold into the public float. Of the units on offer, 95% will go to institutional investors, while the remaining 5% will be offered to Singapore retail investors.
Based on the estimated cash distribution for the coming two year, the price range will result in a yield of 4.3% to 5.2% in 2008, increasing to 4.6% to 5.5% in 2009. The top end of the price range values APL Trust at a 9% premium to its net asset value and the bottom end at a discount of about 8%. This compares with a weighted average premium of 51.6% for all the S-Reits, although the range varies widely with about a quarter of the Reits trading at a discount to NAV.
Among the concerns expressed by investors is the fact that Asia Pacific Land may be a heavy-hitter in Japan, but in Singapore it is definitely not a household name. And if investors donÆt recognise the name, they are typically less inclined to buy.
The Japanese Reits that are listed in Australia have overcome this by teaming up with a local sponsor to be able to tap into the brand equity of its name. Similarly, the two Singapore Reits that focuses solely on ôriskierö assets from China and India are both launched by local Singapore sponsors (CapitaLand and Ascendas), which made them credible to investors from the start. Both these vehicle have proved very popular with investors since they listed.
At the time of listing, APL Trust will own a nine retail and office properties across Japan with a total appraised value of S$839 million ($579 million).
The offering will close on Wednesday and the final price is expected to be determined on Thursday.
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