Ayala Land, the property developer for Ayala Corporation, a conglomerate that includes Bank of the Philippine Islands (BPI), Manila Water, and Globe Telecom, will gage investor interests for its P15 billion ($300 million) real estate investment trust (REIT) following the Philippine Stock Exchange’s approval on July 20.
Ayala Land’s REIT (AREIT) is slated to become the Philippine’s first property trust after the REIT law was enacted back in 2009.
AREIT’s listing tests investor appetite for office assets when many Filipinos continue to work from home under the enhanced community quarantine (ECQ).
Property bulls argue that Philippines business process outsourcing (BPO), which supports more than a million domestic jobs, should recover as multinationals stream-line back office support amid a global recession.
Along with new social distancing rules that require more space between individuals, essential services such as healthcare, information technology, and logistical sectors are expected to become key office demand drivers, says Romel Libo-on, an equity analyst at Maybank ATR Kim Eng speaking to FinanceAsia.
However, property bears counter that better internet connectivity and growing familiarity towards work from home arrangements may neutralise office demand. Even as ECQ restrictions are gradually lifted, health officials may work cautiously, anxious that crowded public transportation networks may spark a new coronavirus infection wave.
Adding to the challenging investment outlook include relief policies aligned with tenant interests. The government is asking landlords to carry the initial cost burden by providing more flexible lease arrangements for businesses impacted by the novel coronavirus. As a result, traditional operational metrics could become misleading. For example, high occupancy rates may not necessarily forecast stable earnings or cash flows when rent assistance is put in place.
The Right Time
But amid these operational concerns, Ayala is listing a dividend product when yields globally are depressed. With central banks aggressively keeping monetary policies loose, more than $14 trillion in government paper now trades with negative interest rates. Investors are expected to lose money when they hold these products until maturity.
These conditions result in a carry trade, a strategy where investors borrow at low interest rates to buy assets that provide higher returns. “It’s the right time” for Ayala to ask for money, says Libo-on, who estimates that the AREIT yield should hover above 5% annually.
The offering provides a 100-basis point spread based on the 6-month ten-year bond of around 4% and a 200-basis point spread against the spot yield, which sells for less than 3%.
While AREIT is not a government bond, Ayala’s historical reputation is quintessentially linked to the Philippines. This reputation matters for REIT investors not only focused on dividend yields but also the asset pipeline from the sponsor says Shern-Ling Koh, a portfolio manager at Principal Global Investors. The quality of the sponsor’s pipeline determines the REIT’s future growth opportunity explains Koh.
Property And Tenant Type Matters
Other property developers are expected to closely monitor the market’s response to AREIT’s listing, particularly the take up by domestic and overseas investors. Given the yield spread and strong domestic reputation, AREIT’s demand should be supported by local funds.
This bodes positively for domestic property developers which can then preserve more cash. Even as capital costs remain near depressed levels, owning a REIT allows the sponsor to maintain direct ownership without taking preemptive measures to expand the balance sheet.
“We expect other developers with sizeable rental assets such as SM Prime Holdings, Robinson Land Corporation, and Megaworld Corporation to pursue [REITS] in the future” says Libo-on.
However, investors may not be uniformly keen on all property types. Travel restrictions are preventing overseas Filipino workers (OFWs) going abroad, subsequently lowering foreign remittances which benefit residential projects.
Prior to the pandemic outbreak, retailers struggled against e-commerce and online platforms, which offer shopping at home conveniences. These challenges linger as stores gradually reopen with customer capacity limits put in place, says Marcus Dee, a former general manager of SM Lifestyle Mall in China and currently a smart farm designer and consultant.
Even within the office space, tenant type matters.
While IT-BPO and non-BPO account for most of the take up this year, Philippine Offshore Gaming Operators (POGOs) are the fastest growing tenant type. Despite the government not issuing any new licenses since 2018, POGOs took up more than a third of office space last year.
Although popular with landlords for their ability to pay up to a year’s rent in advance, POGOs are becoming a political liability due to limited spillover benefits for the Philippine economy. The Philippine Amusement and Gaming Corporation (Pagcor) estimates that only a quarter of POGO workers are Filipino, with the rest coming from overseas.
Under ECQ, POGO’s, which account for more than a tenth of total office space in Manila, remain closed. New office supply in recent years had predominantly targeted potential POGO tenants. Given the uncertain outlook, a potential slower than expected take-up rate, or even a market withdrawal, could raise vacancy rates and lower rental yields, says Koh. POGOS are more likely to pause any business-related expansion, making IT-BPO and traditional tenants more desirable for REIT investors.
Ayala Land is working with BPI and UBS on the offering. The initial IPO will contain three grade-A commercial buildings in Makati central business district (CBD) with a total gross leasable area of 153k sqm. Proceeds will be used to acquire property in Cebu to boost Ayala Land’s portfolio.