Al-Salam Reit IPO sets sail amid Malaysia crisis

Malaysia is set to usher in its fourth Islamic Reit but political and economic chaos domestically may make a deal difficult to execute.

Bankers running the $60 million initial public offering for JCorp's real estate investment trust Al-Salam Reit hope a successful deal will give investors something to cheer as Malaysia grapples with political and economic uncertainties.

The listing of Al-Salam Reit, which is sponsored by the Johor state investment arm, is another important milestone for the Malaysian government in its efforts to promote Kuala Lumpur as a global centre for Islamic finance, a source familiar with the offering told FinanceAsia.

The IPO is likely to be highly domestic, though, due to its relatively small size and the Reit's underlying local assets and also because a weaker ringgit currency could put off some overseas investors, the source said.

Sole underwriter RHB started taking institutional and retail orders on Wednesday for the RM252.36 million Al-Salam Reit IPO, which features a total of 252.36 million units at RM1 each. JCorp will retain a 56.5% interest after the listing.
 
Both institutional and retail offerings will end September 9 and listing is set for September 22.

Malaysia is the world’s largest issuer of Islamic bonds, the most popular Shariah-compliant financial instruments also known as sukuk. The nation topped the table last year with total sukuk proceeds of $17.9 billion, more than twice the combined value raised by United Arab Emirates and Indonesia, which came second and third, respectively, according to data provider Dealogic.

Malaysia has also been promoting Shariah-compliant financial instruments linked to real assets such as property. Preparation started as early as 2005 when the Securities Commission issued the world’s first guideline for Islamic Reits.

Shariah-compliant Reits are required to limit their exposure to activities that are non-permissible under Islamic law. Rental income from non-permissible activities such as gaming, entertainment and manufacturing, and sale of tobaccos cannot exceed 20% of its total income. Shariah-compliant Reits are also forbidden to invest in hotels or resorts.

Johor-focused

The Al-Salam Reit’s portfolio will comprise commercial, retail, office, and industrial assets located mainly in Johor Bahru, Malaysia’s third largest city and home of the Legoland theme park.

Komtar JBCC, a four-level shopping mall located in Johor Bahru City Centre, is the largest asset with an appraised value of RM462 million, equivalent to 51% of Al-Salam Reit’s total appraised value of RM903 million.

Other assets include a twenty five-storey office building, a four-storey industrial plant, a hypermarket, and 27 stores under QSR Brands, an operator of KFC and Pizza Hut restaurants in Malaysia. The properties have a combined gross floor area of 1.91 million and a net lettable area of 1.52 million square feet.

At RM1 per unit, the annualised dividend yield is estimated to be 6.41% for the 2016 financial year, assuming a 99% distribution rate. By comparison, Malaysia’s three existing Islamic Reits - Axis Reit, Al-Aqar KPJ Reit and KLCC Reit – are yielding 5.23%, 6.49% and 4.79%, respectively.

Investors subscribing to Al-Salam Reit will enjoy a 218 basis points pick-up over the 10-year Malaysian sovereign sukuk and a spread of 424bps over 10-year US Treasuries. The 10-year Malaysian sukuk tightened 17bps on Tuesday, while the 10-year US Treasuries ended flat to yield 2.17%.

Al-Salam Reit will have a post-IPO market capitalisation of RM580 million.

Troubled nation

While Al-Salam Reit’s pricing is turning relatively cheaper against major government bonds as spreads tighten, overseas investors may be put off the Reg-S Malaysian ringgit-denominated IPO because of the weak local currency.

The Malaysian ringgit is Asia’s worst-performing currency so far this year and has depreciated nearly 20% since the beginning of the year to RM4.19559 per US dollar. The country is crippled by falling oil prices, the weakening of the Chinese yuan, as well as capital outflows amid political scandal surrounding the government and the prime minister.

Asia’s largest oil exporter has suffered severely from weak crude oil prices, which has plummeted since July after a slight rally in the middle of the year. Brent crude oil price for October delivery fell a hefty 8.4% on Monday to $49.56 per barrel, and is already 27% below the highest level this year reached in May.

In addition the country’s prime minister, Najib Razak, is embroiled in a corruption scandal as state fund 1MDB has allegedly deposited $700 million into his personal bank account. Not only did it spark a mass protest last week against the government, it also indirectly led to capital outflows and put the stock market under pressure.

The Kuala Lumpur Composite Index has lost 8.6% year-to-date.

According to Malaysia’s MIDF Amanah Investment Bank, a total of RM11.7 billion of foreign funds has exited the Malaysian bourse since the beginning of this year, compared with RM6.9 billion for the entirety of last year.

Moody’s said continued political uncertainty could dampen business sentiment and economic growth. It expects Malaysia’s economic growth to slow to 4.8% this year from 6.0% last year. 

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