First Japan Reit in Singapore offers high yield

Saizen Reit, which is backed by Japanese residential properties, is aiming to raise up to $144 million from its IPO.
Singapore is about to get its first real estate investment trust backed by Japanese assets with Saizen Reit due to launch the roadshow for its initial public offering next Monday (October 15). To make the offering even more unique, it will also be the first Singapore Reit that focuses on residential properties. The 17 Reits that have listed so far are primarily backed by commercial properties, such as offices, retail space, hotels or industrial buildings.

According to sources, there is expected to be good demand for the newcomer as investors see it as a way to play the economic upswing in Japan. Residential properties also have a more stable income stream and are typically referred to as being lower risk. However, SaizenÆs properties are located across 13 regional cities where rental yields are higher than on similar properties in Tokyo or Osaka. Add in a fairly aggressive acquisition strategy and the deal should at least attract some curiosity from investors who want to diversify their property exposure.

According to a listing prospectus filed with the Singapore regulators, the Reit is aiming to raise between S$196.7 million and S$212.5 million ($134 million to $144 million). The price per unit has been set at S$1 to S$1.08, which translates into a yield of 6.09% to 6.51% for the period from November 1 this year to the end of SaizenÆs current fiscal year on June 30, 2008.

One source notes that this compares well with both with the Singapore Reits and other Japanese Reits (J-Reits), which currently trade at a yield of around 5.2% before tax. However, Saizen will be paying tax at the holding company level, which means the dividends will be tax free for investors. On an adjusted basis (to make the yields comparable), SaizenÆs gross yield would be 7.16% to 7.66% for the same forecast period.

The yield is based on a forecast dividend of 4.67 to 4.71 Singapore cents per unit for the remainder of fiscal 2008. In fiscal 2009, the Reit plans to pay out between 5.65 and 5.72 Singapore cents per unit, which equals a net yield of 5.29% to 5.65%.

Saizen is offering 196.74 million new units, or 43.7% of the total Reit with about 90%-95% expected to go to institutional investors. The rest will be set aside for retail investors and for directors, management, employees and business associates of the sponsor. The remaining 53.6% of the units will be transferred to three funds as payment for the properties that will be injected into the Reit on the listing date. In case the 15% greenshoe is exercised, it will come out of the stake held by these three funds. If the latter is exercised in full, the total deal size will increase to $166 million and 50.3% of the trust will be in public hands.

Credit Suisse and Morgan Stanley are joint bookrunners for the offering.

At the time of listing, the Reit will hold 148 residential apartment buildings with a total appraised value of about Ñ47.7 billion (S$626.8 million or $408 million) and an aggregate net asset value of Ñ20.9 billion (S$275.3 million). Based on the top end of the price range, Saizen will buy these properties at a 0.6% discount to NAV. The properties have a let lettable area of 197,743 square metres, an occupancy rate of about 90.6% and a default rate of only 0.23% in fiscal 2006.

Given their track record of managing and growing this portfolio û it acquired 41 properties worth about $134 million from January to August 2007 û it should be a positive for investors that the existing management team will become responsible for managing the Reit. The team is based around Richard Lo and Yutaka Matsunaga, who started investing in residential real estate in regional Japanese cities as early as 1999, and has since expanded to six individuals.

The rental growth for the Japanese residential market grew at an average annual rate of 1.0% throughout the 15-year period from 1991 to 2006, including during the severe economic downturn of the 1990s and the manager of the properties expects this to continue as demand for rental properties across Japan remains high. According to the listing document, the growth should be supported by the fact that the average residential owner-occupancy in Japan is only 60%, compared with 91% in Singapore and 76% in Hong Kong.

This may not sound too exciting to investors who are used to double digit growth in the rest of Asia, but the aim of the trust is really to grow through acquisitions. In the words of the prospectus: ôThe Manager intends to identify, evaluate and pursue acquisition opportunities with attractive cash flow growth and yield profile as well as the potential to achieve an attractive rate of return on invested capital.ö

It doesnÆt explain further what that desired rate of return may be, however.

One observer notes that the fact that the funds that are feeding the initial properties into the Reit is selling all their existing assets in one go may be of a concern to some investors, as it will leave Saizen without a natural pipeline of assets to acquire. In the past Singapore investors have shown that they like that kind of growth visibility.

However, Saizen already has a right of first refusal to by another 15 properties at an indicative purchase price of Ñ5.4 billion (S$71.4 million). These additional properties have a net lettable area of 19,780 sqm and will bring the trustÆs appraised value plus the indicative purchase price to a total of Ñ53.1 billion (S$698 million).

The management team is also currently considering the acquisition of more than 40 other properties worth approximately Ñ20 billion (S$263 million).

Interestingly, SaizenÆs status as the only Japanese Reit in the Singapore market wonÆt last very long, as Asia Pacific Land Group is also expected to start the roadshow for its IPO sometime next week. The trust, which owns retail properties across Japan, is expected to raise about twice the amount of Saizen, or $350 million to $400 million. However, the larger size is partly due to the fact that it will have a 95% free-float.

JPMorgan and Lehman Brothers are arranging this deal, which is currently in the midst of pre-marketing.
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