The low-end pricing was widely expected, given the continued negative sentiment both for Singapore-listed real estate investment trusts (Reits) and for Indian stocks. The equity market recovery that began in mid-March and lasted through to early May or so (depending on the market) did, however, create a window of opportunity for new companies to list and, having taken advantage of that, IPIT was able to raise the money it needed to pay for its initial two property projects. And that means it is now in business, even though these projects are still under development and wonÆt provide any substantial rental income until late 2008.
However, once the projects are finished, the rental pickup is expected to be steep. According to the IPO prospectus, the net property income will increase from a projected S$103 million in fiscal 2009 to S$367 million in 2010.
ôSome people have argued that it might have been better to wait and list when the properties were operational, but there is whole host of Indian and international companies looking to list Reits in Singapore and there is some merit in moving early,ö says one source close to the offering. ôIf the markets stabilise we could see a lot of competition for investor funds.ö
Conditions remained challenging while IPIT was in the market though, with the Indian stock market dropping 10% in between the launch of pre-marketing in the second week of May and the close of the deal last Friday. Ascendas India Trust (a-iTrust), which is the only other Singapore real estate trust that is backed by Indian properties, fell 12% in the same period and Indiabulls Real Estate, which is the third largest real estate developer in India and the sponsor of the trust, dropped just over 20%.
The latter was significant as it made the parent company look cheap and some investors preferred to buy that stock instead of the spin-off. Indiabulls Real Estate will own 42.8% of IPIT after the IPO (pre-shoe).
Against that backdrop is was no great surprise that most of the orders came in at the bottom of the S$1.00 to S$1.10 range, or that only 30 to 35 institutional investors came into the book. But, according to the source, the combined order amount was enough to cover the number of units on offer about 1.4 times. Approximately 60% of the demand came from Asia, but interest from US investors was also solid and accounted for about 30% of the total. Contrary to most other Singapore Reits, IPIT was open to onshore US investors, and given the amount of demand from there, it seems this was a good move. In fact it appears the deal may have been in danger of being undersubscribed had it not been for the participation of these US accounts.
The order book was also heavy on long-only accounts, with about 60% coming from such investors. Hedge funds accounted for 20%-30%, while the rest of the demand came from private banking-type investors.
The projected yield of 9.8% for fiscal 2010, which is based on the IPO price of S$1, means IPIT offers some yield pickup versus a-iTrust, which is currently trading at a dividend yield of about 8% for that same period. Based on an asset valuation made by Knight Frank at the beginning of this year, IPIT is also coming to market at a 30% discount to its net asset value. At the time of IPIT's pricing last Friday, a-iTrust was trading at a 1.9% premium versus its March 2008 NAV of S$1.08.
Aside from a more generous valuation and the Indiabulls brand name, the other key selling arguments for IPIT included its strong growth prospects, the unique exposure to the commercial property market in Mumbai, and the backing of billionaire Lakshmi Niwas Mittal, who came in as a cornerstone investor. LN Mittal, who is also an investor in Indiabulls Real Estate and several of its affiliates, bought 3.9% of the total trust or 91 million units, which at the final price puts his investment at S$91 million ($66.5 million). The cornerstone tranche was separate from the 11.1% of the trust that was on offer for institutional and retail investors but allowed IPIT to raise $286 million from external investors in connection with the IPO.
The trust sold 262.5 million units to institutional and retail investors, and may sell up to 52.5 million additional units that will come out of the sponsorÆs holdings if the greenshoe is exercised in full. According to a statement published by the issuer, close to 95.7% of the offering went to institutional investors, while the remainder was allocated to retail investors.
The offer to retail investors was extended by one day as there was some concern that the total number of investors wouldnÆt meet the Singapore listing criteria of having a minimum of 1,000 shareholders. As it was, sources say this requirement was met within the original timetable and, in the end, joint bookrunners Deutsche Bank and Merrill Lynch received more than 1,300 valid applications from retail investors.
IPITÆs initial portfolio consists 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 stand out because of their 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 are located within two IT parks in the area û One Indiabulls Centre (which was formerly known as Jupiter Mills) and Elphinstone Mills û and when completed will have: 2.97 million square foot of lettable office space; 438,000 sq ft of retail space; and 119,000 sq ft of residential housing.
IPIT is structured largely as a Reit, including a commitment to pay out at least 90% of its distributable profit and a cap on its gearing ratio at 35% (or 60% should if it gets a credit rating). But like a-iTrust, it is listing as a business trust in order to have greater flexibility with regard to how much of its portfolio can be made up of properties still under development. Reits can have a maximum of 10% in uncompleted properties, while there are no constraints for business trusts in this regard. IPIT says it will limit its exposure to 25%.
The trust 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 had a portfolio of such potential developments amounting to a total of 12 million square feet and IPITÆs below 5% gearing should allow it to pursue a number of these projects without having to come back to the equity market.