[This article was originally published on Dow Jones Investment Banker on 23 December 2010 and is reproduced with permission]
HONG KONG (Dow Jones Investment Banker) – Hong Kong’s Real Estate Investment Trust market plays second fiddle to Singapore’s but that could change – if it’s managed properly – with a proposed IPO in the first half of 2011 by Cheung Kong Holdings Ltd.
Some background: The huge gap in REIT investment between the two cities is thanks to a focus by Hong Kong investors on growth and quick capital gains at the expense of dividend payments, a lack of attractive assets earmarked for securitization, as well as excessive financial engineering in Hong Kong that initially put the frighteners on investors there.
Singapore listed its first REIT in 2002. The City State now boasts 23, representing a market capitalization of US$32 billion.
Hong Kong only has eight quoted REITs, capitalized at just over US$13 billion. And more than half of this figure is accounted for by retail and car park manager The Link REIT, which was listed by the Hong Kong Housing Authority five years ago.
– No follow-on capital raisings –
That’s just part of the story. According to Dealogic, since inception, the Singapore-listed S-REITs have been able to raise a combined US$8 billion through 54 follow-on equity transactions to fund their development and acquisitions. The H-REITs, meanwhile, have tapped investors for a paltry US$881 million, spread over four deals only.
REITs in Hong Kong had a difficult birth. The Link’s IPO was at first marred with judicial proceedings before it could finally list in 2005. And Hong Kong investors have been mainly driven by growth stocks and the China story, rather than by yield-focused instruments posting single digit payouts in percentage terms.
Moreover, Hong Kong allows for many other ways to gain exposure to property assets, including investments in stocks of major developers.
– Dumping ground –
In some cases, REITs in Hong Kong have been perceived by investors as a dumping ground for Grade B assets, sometimes at inflated valuations, by local developers. Henderson Land’s Sunlight REIT manages an office portfolio of 11 Grade B buildings out of 12.
They also initially incorporated much financial engineering to boost dividends per unit (DPU). Yield enhancement mechanisms, for example as used by Champion REIT, have included hedging through interest swaps, convertible bonds, DPU waivers on holdings by sponsors, as well as fee waivers, rental guarantees and special distributions. Such manipulation of naked yields has been perceived negatively by the market, as it affects the long-term stability of these instruments.
Above all, despite their yield characteristics, REITs remain equity securities. Growing these vehicles through organic growth and accretive acquisitions remains key, as their success in Singapore makes clear.
– Cheung Kong –
The proposed IPO by Cheung Kong isn’t its first foray in the REIT market. It initially listed Fortune REIT and then Suntec REIT in Singapore in 2003 and 2004, respectively. Prosperity REIT followed in Hong Kong in 2005 and ARA, Cheung Kong’s affiliated REIT manager, manages a number of other funds, including in Malaysia. Fortune REIT comprises retail malls and properties in Kowloon and the New Territories and was also quoted in Hong Kong through a dual-listing earlier this year.
Cheung Kong is believed to have mulled for some time a listing comprising some of its Chinese property assets, including hotels. As the first IPO in Hong Kong to be denominated in Renminbi, the offering should have a head start and find a captive market for its units among the US$33 billion of Renminbi deposits currently managed in the territory, whose growth has been exponential over the last few months.
In addition, should the listing include Cheung Kong’s 33.4% stake in the Oriental Plaza development in Beijing, as has been speculated, this would make for an attractive investment case. The complex, which spans a total floor area of 800,000 square meters, includes eight Grade A office blocks, serviced apartments as well as 120,000 square meters of shopping malls, and the Grand Hyatt hotel.
Provided that the REIT can offer a clean yield, and also be managed to achieve rental reversions, high occupancy rates, prudent financial management and active cost control, in addition to making acquisitions, this should bring a breath of fresh air to the lackluster primary Hong Kong REIT market.
(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at https://www.ipo-book.com. Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).
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