Roadshows began last week for an S$1.049 billion ($680 million) IPO by Macquarie International Real Estate Fund. The DBS and Macquarie led deal employs the fund of fund concept to the Reit sector and complements the Australian bank's existing infrastructure fund of funds - Macquarie International Infrastructure Fund, which was floated in Singapore earlier this year.
The group appears to have picked a particularly auspicious moment to launch the deal, following remarks last week by outgoing US Federal Reserve head Alan Greenspan about the interest rate cycle. His belief that the Fed may be coming to the end of a rising interest rate cycle has prompted a re-bound in property stocks and Reits that the IPO will seek to capitalise on.
Macquarie International Real Estate will have a fixed offer price of S$1 per unit and has four main allocation components. There will be a placement tranche of 700 million units (including the greenshoe) and a public offer tranche of 20 million units.
On top of this, six cornerstone investors have agreed to take up 22.7% of the IPO, or 228.5 million units. These six comprise: Capital Research and Management; Fidelity Investments; Gandhara Master Fund; Henderson Investors; Tamweelview Listed Securities and Winsor Air Cargo.
Finally, the fund manager MIREL - part of Macquarie Property - will subscribe to the remaining 100.5 million units.
The main variable will be the dividend yield, which is being marketed on a range of 6% to 6.85% to the June 2006 year-end. Final pricing will depend on the trading performance of the Reits underlying assets over the course of roadshows.
The underlying portfolio is a mix of listed and unlisted Reit assets. About 57.4% of the Fund will comprise listed trust or Reit units and the remaining 36.4% will be unlisted assets.
The unlisted assets comprise: a Hong Kong portfolio of three industrial properties (20.8% of the fund); a UK portfolio of two office parks (6.7%), a Chinese portfolio of nine retail malls (5.7%) and a Japanese portfolio of residential properties (3.2%).
The listed portfolio is split between:
- Macquarie CountryWide Trust (19.6%), which has a global portfolio of supermarkets.
- Macquarie Office Trust (14.9%), which has a global portfolio of commercial offices.
- Macquarie DDR Trust (4.2%), which has a US portfolio of community shopping centres.
- Macquarie Goodman Group (6%), which has a portfolio of industrial properties in Australasia, Singapore and Hong Kong.
- Macquarie ProLogis Trust (3.2%), which has a portfolio of industrial assets in the US and Mexico.
- Macquarie Leisure Trust (2.7%), which invests in Australian leisure assets.
- Prime Reit (5.4%), which owns two retail properties in Singapore.
- Korean Reit (1.4%) also known as Macquarie Central Office CR Reit, which owns an office building in Seoul.
The overall portfolio of listed and unlisted assets has a sectoral split of: office (24.6%), industrial (31.9%), retail (37.2%), residential (3.4%) and other (2.9%).
By geography it has a split of: US (33.1%), Hong Kong (22.1%) Australia (20.2%), UK (7.1%), China (6%), Singapore (5.7%), Japan (3.4%) Korea (1.5%) and New Zealand (0.9%).
In terms of currency, the split is: Australian dollars (54.2%), Hong Kong dollars (22.1%), sterling (7.1%), Singapore dollar (5.7%), Japanese yen (3.4%), China renminbi (6%), and Korean Won (1.5%). There is no US dollar component because the listed Australian Reits generally convert their non-Australian dollar income to Australian dollars.
Because the new listco is a Bermuda incorporated vehicle, Singapore tax residents are exempt from dividend taxes. The new fund also represents a way to gain exposure to the Australian Reits without being subject to Australian witholding taxes. This is because the fund's ownership of the individual Australian Reits has been structured via total return swaps with a second Macquarie group member. This further allows the fund to indirectly participate in entitlement issues to fund new investments by the Australian Reits.
Over the past 10-years, the Australian Reits have averaged an annual return of 16.91%, with volatility of 9.53%. Year-to-date, they have not shown much capital appreciation in an environment of rising interests, although there have been signs of a re-bound over the past month.
Year-to-date, Macquarie CountryWide is down 1.92%, although it has risen from A$1.9 to A$2.04 since mid-November. Likewise Macquarie Office Trust is down 0.78% year-to-date, but has risen from A$1.21 to A$1.28 over the past month.
Over the same period, Macquarie DDR has risen from A$1.1 to A$1.18 and is now up 4.48% year-to-date. Macquarie ProLogis has similarly risen from A$1.14 to A$1.19 and is up 6.7% year-to-date.
The best performer has been Macqarie Leisure, which has risen 24.1% year-to-date, although it has dropped from A$2.32 to A$2.16 over the past few weeks. Finally, Macquarie Goodman (formed in February 2005 from two listed entities) has risen from A$4.015 to A$4.32.
Where the new Reit of Reits is concerned, investors' total return will be dictated by a number of different factors. Similar to other listed Reits, investors will be looking for growth as a result of increasing dividend income and new acquisitions.
However, the Reit of Reits is also being pitched as a Reit incubator. This means investors should also realise further gains via the listing of new Reits using the fund's unlisted Reit portfolio. For example, the UK is currently implementing Reit legislation, which should pave the way for the listing of the fund's portfolio of British office parks.
Specialists say that Macquarie chose to list the fund in Singapore as the country has been proactive about attracting new asset classes and now has the most developed Reit market in Asia. In Australia, by contrast, the sector is considered mature, although local institutional Reit investors are only just starting to broaden their investments overseas.
Pending final regulatory approval, the deal is scheduled to price and list in mid-December. Sub-underwriters are Citigroup and JPMorgan.
