The listing vehicle, which is sponsored by IndiaÆs third largest property developer in terms of market capitalisation û Indiabulls Real Estate û will be structured largely as a real estate investment trust (Reit) but will be listed as a business trust to give it greater flexibility with regard to how much of its portfolio can be made up of properties still under development.
Its initial portfolio will consist of two commercial property developments in the up-and-coming business district of Lower Parel in Mumbai û a former industrial region that used to house numerous textile mills but is now a micro-market with Grade-A commercial and residential developments that stands out because of its low vacancy levels, high rental values and quality tenants, including banks, financial institutions and large corporations. Credit Suisse and Lehman Brothers both have offices in the area.
IPITÆs developments û One Indiabulls Centre (which was formerly known as Jupiter Mills) and Elphinstone Mills û are located within two IT parks in the area and when completed will have a combined 2.97 million square foot of lettable office space, 438,000 sq ft of retail space and 119,000 sq ft of residential housing.
If successful, IPIT will become only the second property trust in Singapore to be backed by Indian assets after Ascendas India Trust (a-iTrust) that listed in July last year, beating DLF and Unitech to the punch. The latter two and Indiabulls were all considering spinning off part of their property assets through a Reit or business trust in Singapore earlier this year, but the plans were postponed as the selling pressure on global equities intensified. At the time, DLF and Unitech were both aiming for significantly larger IPOs at up to $1.5 billion and $700 million, respectively, so it is perhaps logical that it is Indiabulls that has decided to be the first to take on the still challenging market. And while this could be a risky move û after all, while off its lows, a-iTrust is still down 30% from its highs from November and yesterday closed only 1 cent above its IPO price of S$1.18 û it could also prove to be a smart one as the market is showing signs of recovering.
ôThis gives Indiabulls a first-mover advantage. If they were all to come at the same time it could be difficult,ö one source says, adding that Indiabulls is also a reputable name in India meaning it is the sort of company that at least in theory has the ability to re-open a market that has been shut for a while.
Sources close to the offering say the Indian exposure should make IPIT more attractive than if it was just another Reit focused on the Singapore property market, while the small size of the deal reduces the risk that there wonÆt be enough demand. The offer to institutional and retail investors will account for only 11.1% of the total trust pre-greenshoe, but in addition to that, the sponsor together with joint bookrunners Deutsche Bank and Merrill Lynch have lined up a cornerstone investor in the form of an investment company owned by billionaire Lakshmi Niwas Mittal.
According to a preliminary prospectus filed with the Singapore regulators, LN Mittal who is also an investor in Indiabulls and several of its affiliates, has committed to buy 3.9% of the total trust or about 91 million units, which at the assumed offering price puts his investment at S$91 million ($66.5 million). Together with the public offering, this means IPIT may raise close to $260 million from external investors and have a market cap of about $2.6 billion at the time of listing.
The trust is offering 262.5 million units plus a greenshoe of up to 20% of the total offering, representing an additional 52.5 million units that will come out of the sponsorÆs holdings. Pre-shoe Indiabulls Real Estate will hold about 42.8% of the trust. The remaining 42.2% of the units will be held by the sellers of the two property projects that will be included in IPITÆs portfolio at the time of listing.
The prospectus states that the ôassumedö offering price will be S$1 per unit, although the sponsor will set a price range before the launch of the institutional bookbuilding that is likely to straddle the assumed price. This means the IPO price may be slightly above or below S$1 and the final deal size could vary from the estimated S$262.5 million.
Based on the assumed price though, IPIT is offering a dividend yield of about 9.8% for the fiscal year ending in March 2010, which compares with about 8.6% for a-iTrust and 6% for the average Singapore Reit. The dividend yield for fiscal 2009 is estimated at 5.1%. The sources say fiscal 2010 is considered the best valuation indicator since by then the majority of IPITÆs property projects will be completed, resulting in a sharp pickup in rental income. According to the prospectus, the net property income will increase from a projected S$103 million in fiscal 2009 to S$367 million in 2010.
The trust has committed to pay out 100% of its distributable income until March 2010 and 90% thereafter.
However, like a-iTrust and several of the Singapore-listed Reits that are investing in properties outside the Lion City, IPIT is also offering investors the prospect of growth through acquisitions. It has the right of first refusal to properties owned by its sponsor and affiliated entities that meet certain criteria and that are at least 75% completed. At the time of listing, Indiabulls has a portfolio of such potential developments amounting to a total 12 million square feet. On top of that, IPIT will also be pursuing acquisitions from third parties.
The fact that it will have a gearing of less than 5% at the time of listing should ensure that it will be able to complete a number of acquisitions before having to return to the equity markets for additional cash. IPIT has committed to adhere to the same regulations regarding leverage that apply to Singapore Reits, which means the gearing can be a maximum 35%, or 60% if it obtains a credit rating.
While business trusts donÆt have any constraints as to the proportion of their portfolios that can be still under development - as opposed to Reits that can have a maximum of 10% in uncompleted properties û IPIT says it will limit its exposure to 25%. That level should allow for a positive impact on its returns, while at the same time keep the development risks at a reasonable level, notes an observer. However, it is slightly higher than the 20% limit that a-iTrust has imposed on itself.
The most recent Reit or property-focused business trust to list in Singapore was Saizen Reit, which invests in residential properties in Japan and began trading in early November after raising $134 million with the help of Credit Suisse and Morgan Stanley. Coming to market at a time when other Reits were already struggling, Saizen fell 14% on the first day and has never managed to return to its S$1 offering price since. Yesterday it closed at S$0.75.
A second Japan-focused vehicle, APL Japan Trust, was also in the market in early November but chose to withdraw its offering before pricing due to the jittery overall market and weak sentiment for the sector. The trust, which focuses on commercial properties, was aiming to raise up to $355 million through JPMorgan and Lehman Brothers.
Since then there has been only one other equity deal by a Singapore Reit in the form of a $132 million follow-on offering for CapitaRetail China Trust in January. Last month CapitaCommercial Trust also sold $203 million worth of convertible bonds.