Books open for Singapore’s first IPO with renminbi tranche

Dynasty Real Estate Investment Trust will kick off the institutional bookbuilding today for Singapore’s first initial public offering with a tranche denominated in offshore renminbi. The issuer, which is sponsored by Li Ka-shing-backed ARA Asset Management, is looking to raise up to S$955 million ($777 million), sources said yesterday.

If successful, that will make it the largest new listing in Singapore so far this year ahead of Far East Hospitality Trust, which raised $527 million from an IPO in mid-August. It is questionable if the demand for offshore renminbi assets is that great, but Dynasty Reit doesn’t have to worry about that since investors can also subscribe to the offering using Singapore dollars.

In fact, sources close to the IPO say they expect most of the demand will be in Singapore dollars and will come from the usual Singapore-based investors looking for yield. However, the possibility to use offshore renminbi is an important move and shows that Singapore wants to play a role in the development of the offshore Chinese currency. Hong Kong has taken a huge lead over other markets when it comes to the issuance of offshore renminbi bonds (also referred to as dim sum bonds), but so far there has been only one IPO denominated in offshore renminbi — a $1.6 billion offering by Hui Xian Reit in April last year.

The fact that it too was a Reit is no coincidence. Observers have argued that the first equity products denominated in offshore renminbi are likely to be Reits as they offer a higher-yield alternative to the offshore renminbi bank accounts where most of these assets are currently held. Because of their relatively stable revenue and dividend payments, Reits are also seen as less risky than pure equity products and cater well to buy-and-hold investors — in a sense they can be viewed as a glorified bank account, but with the potential for capital growth beyond the dividends.

And given Singapore’s dominance in the Asia ex-Japan Reit sector, it makes sense for the exchange to give issuers the option to denominate their offerings in offshore renminbi — even if the greatest pool of that currency is currently sitting in bank accounts in Hong Kong.

“It’s a good innovation and it is good to give people a choice, but my guess is that most of the demand will be in Singapore dollars, which is the tried and tested currency when it comes to Singapore Reits,” said one banker. Most of the investors who buy Reits are fairly risk averse, which is why they buy yield products like Reits in the first place, so they are likely to take a fairly conservative approach to innovative products, he added.

In that context it is worth noting that while Hui Xian listed at a time when the renminbi was expected to continue to appreciate against the dollar for the foreseeable future, Dynasty Reit hits the market at a time when the outlook for the renminbi is a lot more uncertain. In fact, it is now viewed largely as a two-way currency with the potential for gains as well as declines in the short- to medium-term. Although, one can argue that this makes a high yield even more important.

The size of the offshore renminbi and Singapore dollar tranches on Dynasty Reit’s IPO are not pre-determined, so the final split will be determined by the demand.

Aside from the possibility to use offshore renminbi and the fact that it is likely to be one of the largest equity deals in Singapore this year, other reasons too to buy Dynasty Reit includes the fact that it gives investors exposure to the commercial real estate sector in China. At the time of the listing, the Reit will have three properties in its portfolio: the Nanjing International Finance Centre (office and retail); the Dalian Tianxing Roosevelt Centre (retail mall); and the Shanghai International Capital Plaza (office and retail).

They have an aggregate gross floor area of approximately 350,500 square metres and a combined asset value of Rmb7.2 billion ($1.14 billion), based on the average of two independent valuers.

According to the preliminary listing prospectus, Dynasty Reit sees a lot of potential for revenue growth from positive rental reversions as existing leases are renewed. Just over 30% of the total lettable area of the three properties is up for renewal this year and next, and excluding the retail portions of Nanjing IFC and Shanghai ICP, the asking headline rents are currently about 20% to 25% above the existing rents.

The fact that ARA Asset Management is one of the most well-known real estate fund management groups in Singapore and one of the largest Reit managers in Asia should give investors some confidence that it will be able to realise its forecasts and expectations. Singapore-listed ARA has a market capitalisation of about S$1.2 billion and as of the end of June it had S$21.8 billion of assets under management – up from just S$600 million in 2003. Dynasty Reit will be managed by a company that is wholly-owned by ARA.

Other Reits managed by the ARA Group include Fortune Reit, Suntec Reit and Cache Logistics Trust, which are all listed in Singapore, and Prosperity Reit and the earlier mentioned Hui Xian Reit, which are listed in Hong Kong.

Another reason to invest is the yield. Based on the indicated price range, Dynasty Reit offers an annualised yield of 6.8% to 7.1% for 2012 and 7% to 7.3% for 2013, which compares well with other Singapore-listed Reits and offers a significant pickup compared to the returns investors can get on their bank deposits.

However, the yield in the first few years will be artificially enhanced partly by a dividend support facility that will use Rmb491 million of the IPO proceeds to increase the total payouts, partly because the sponsor has waived the rights to parts of its dividends until the end of 2017, increasing the amount available for distribution to other unitholders.

Excluding these measures, the dividend would be only about 3.2% in 2012 and between 4.1% and 4.2% in 2013, according to the prospectus.

Dynasty Reit is selling between 1.031 billion and 1.038 billion new units, which correspond to between 89.9% and 90.5% of the total issued share capital. The remaining 9.5% to 10.1% (depending on the final price) of the Reit will be bought by the sponsor.

The units are offered at a price between Rmb4.40 and Rmb4.70 each, or the equivalent S$0.86 to S$0.92 for investors who choose to subscribe using Singapore dollars.

Of the total, 13.2% to 13.3% will be taken up by two cornerstones that have agreed to buy a combined 137.6 million units. And the mid-point of the price range, that translates into an investment of about S$122.5 million ($100 million). The largest of the two, accounting for 76.3% of the combined cornerstone investment, is Credit Suisse’s private banking division, which is buying units on behalf of its clients. The second cornerstone is Amundi, the combined asset management arm of Credit Agricole and Societe Generale.

The final price is expected to be fixed on October 24 and the trading debut is scheduled for October 30.

DBS, Standard Chartered and Macquarie are acting as joint global coordinators, underwriters and issue managers for the IPO.