Korea's fledgling real estate investment trust (Reit) industry took another step forward yesterday with the $73 million IPO of Macquarie Central Office Corporate Restructuring REIT (MCO CR-REIT) on the Korean Stock Exchange.
This represents Korea's seventh CR-REIT since the government legislation enabling REITs was enacted two years ago. It is however, the first one to be issued by a wholly foreign owned manager.
The retail portion of the transaction was 2.25 times oversubscribed, an encouraging sign for the coming of age of the Korean Reit sector. David Schaefer, Macquarie's head of real estate for Asia, says, "This CR-REIT is indicative of the acceptance that new Reit products have achieved in Korea and we continue to predict a strong future for Reits in this market."
About $31 million (over 40% of the offering) was raised from the Korean domestic retail and small institutional investor market. The issue was fully underwritten by joint underwriters Samsung Securities, Daewoo Securities and SK Securities.
Commitments from cornerstone investors made up 54% of the offering. Significantly, a large US life insurance company has invested almost $5 million (6.5%) through the IPO process. "We are very pleased with this as it will hopefully encourage more international institutions of this type to enter the market," says Schaefer.
Approximately $14 million of the cornerstone equity came directly and indirectly from Macquarie Bank, with the balance coming from large Korean institutions such as Samsung Life, Samsung Fire and Marine, LG Insurance and Schroder Asia Properties.
Schaefer emphasises that most investors were interested in the CR-REIT for its attractive yields and are not pricing capital appreciation into the transaction. Macquarie anticipates that they will be able to distribute an average yield of 11.4% per annum to investors over the five-year fixed life span of the CR-REIT.
"This is as good or even better than the yield offered by the other six existing CR-REITs listed in Korea," says Schaefer.
However, Macquarie feels that investors have a good chance of realizing a capital gains 'bonus' in addition to their annual yield as properties were acquired below independent valuations. Moreover, they believe there is significant upside potential for the Korean office sector.
"We have targeted the Seoul central business district market as an opportunity because of the low vacancy rates, the lack of new supply and the anticipated recovery of the Korean economy," says Schaefer.
"We believe there is an opportunity for us to add value through intensive asset management to reposition the building the market by minor refurbishment and reorganising the leases."
Schaefer predicts that at the end of the five-year period the assets will be disposed of either on the open market or through sale to another Reit.
Shares in the MCO CR-REIT were priced at W5,000. Given that most investors are interested in receiving dividend yields, Schaefer does not expect to see much volume trading, although he is pleased with the market performance so far. "At one point our shares traded up to the limit of 15%, which has been the best start of any of the Reit products in Korea."
The MCO CR-REIT purchased the Kukdong Building in Seoul's CBD for $134 million as its initial asset. This purchase represented Korea's largest commercial office transaction in 2003.
Macquarie does not anticipate any follow on offerings adding to their existing CR-REIT. Due to their fixed term nature, Corporate Restructuring REITs in Korea tend to be closed ended and issued on a discreet basis. "We would probably issue a CR-REIT 2 if we wanted to incorporate new buildings as this would be a clearer way of presenting it to investors," says Schaefer.
For Macquarie, the MCO CR-REIT represents their first fully offshore listed property trust and an expansion of their property funds management business in Asia. Macquarie's other offshore listing is Ascendas Real Estate Investment Trust (a JV with Ascendas), which listed on the Singapore stock exchange in November 2002. In early 2002, Macquarie was also appointed senior advisor to Schroder Asian Properties and successfully repositioned their real estate platform in Korea, Japan and Hong Kong.