more-property-ipos-suffer-from-weak-markets

More property IPOs suffer from weak markets

China-based Yanlord trims deal size by 29% and sets price at bottom, while Cambridge Industrial Trust cancels its equity offer as bookbuilding fails to drum up enough demand.
Two more property sector IPOs were overcome by the volatile market environment yesterday, with Yanlord Land Group forced to cut the number of shares on offer by 29% and Cambridge Industrial Trust pulling its deal altogether. Both listing candidates had already completed their bookbuilding.

Before the downsizing, Yanlord was aiming to raise up to $270 million by selling 20% of the company in an offer arranged by CLSA and HL Bank.

Cambridge, a Singapore-based real estate investment trust which is backed by a group of 17 property owners and focuses on industrial and warehousing properties, targeted total proceeds of S$290.2 million ($180 million) from the sale of 68.8% of its total units. CLSA acted as joint bookrunner and underwriter for this offering too, together with ABN AMRO Rothschild.

ôThere was quite a good reception in terms of people interested in the company, but a lot of them just donÆt want to commit to buying anything right now,ö says one observer with regard to the Yanlord offer. Others, he adds, opted for just a small order.

The decision by the two companies, which were both targeting a Singapore listing, came after another mainland developer - Shui On Land - called off its $989 million Hong Kong IPO late on Wednesday, citing deteriorating market conditions.

Ironically, most Asian stock markets did bounce yesterday after Wall Street rebounded from seven-month lows as investors ignored data showing core consumer prices rose at a greater-than-expected 0.3% last month, focusing instead on reports of positive earnings growth.

However, plenty of market watchers argue that the market recovery is likely to be short-lived as uncertainties still abound. For one, the probability of another US rate increase in August (a June tightening is now viewed as all but certain) jumped to 52% following the CPI data from 21% earlier in the day, as indicated by the interest rate futures market.

ôThe selldown has been so brutal and expectations were so depressed over the past month that when the data wasnÆt spectacularly out of line it was enough to trigger buying,ö says Spencer White, head of regional equity strategy at Merrill Lynch.

He too expects the rebound to be brief, however, as redemptions are likely to continue and as liquidity gets tighter due to rate hikes by central banks globally. ôBuying on dips is not a good strategy at the moment and there are no points for being brave,ö he says.

According to sources, YanlordÆs IPO received just enough subscriptions to cover the original deal size of 342 million new shares, but the bookrunners were not prepared to do the deal unless there was enough demand to allocate the greenshoe as well. Consequently they gave the company the options of either accepting a smaller offering, or to postpone the entire deal until the market improved.

The management was said to have been unwilling to reduce proceeds further - the number of shares had already been cut to 342 million just before the launch of the roadshow from an early plan to sell 456 million shares û but eventually agreed so as not to lose the quality accounts who had decided to invest despite the shaky market environment, the sources say.

The outcome was that the number of shares was trimmed to 242 million, which after the price was fixed right at the bottom of the S$1.08 to S$1.32 range gave a total deal size of only S$261.4 million ($164 million). However, the 20% greenshoe has been allocated in full, which could potentially increase the size to $196 million.

Given the volatile markets though, it could well be the case that the additional shares will have to be repurchased to help stabilise the secondary market performance, or indeed to limit a potential decline.

The offer includes a retail tranche that accounts for no more than 1.2% of the total deal, which will remain open until June 20. The trading debut is scheduled for June 22.

About half the deal was allocated to only six accounts, who were said to have liked the story and wanted to buy in now because of concerns that the stock may become too illiquid in the secondary market to enable them to buy in bulk.

ôWith a market capitalisation after its IPO of S$1.7 billion ($1.06 billion), Yanlord will be the sixth largest property company in Singapore, by market capitalisation, and one of the largest China-focused companies listed on the Singapore Exchange,ö Edward Slade, head of Southeast Asian Equity Capital Markets at CLSA, said in a written statement. ôWe believe this unique market position helped see the company through in these turbulent marketsö

Having started its business in Shanghai and Nanjing in 1993 and 1994, Yanlord now develops upscale residential properties in seven high-growth cities in China. Its projects are typically large-scale, multi-phased apartment projects with an emphasis on construction quality and aesthetically pleasing and efficient designs.

The final price values Yanlord at a 35% discount to net asset value and at 9.8 times its fully diluted 2006 earnings. While still towards the cheap end of where other mainland real estate companies trade, the relative attractiveness of the offer had been significantly eroded by the sharp drop in share prices since it fixed the price range on May 29.

Among the larger players, China Overseas Land has dropped 10.4% in that period to trade at a 2006 PE multiple of 14 times. Agile Property Holdings has fallen 15.8% to a PE of 10.3 times and Guangzhou R&F is down 20.4% for a PE of 10.4 times. Across the border, China VankeÆs B shares are currently valued at 13 times 2006 earnings after falling 16.3%.

Cambridge experienced a similar situation as yields on other Singapore REITs have increased sharply as unit prices have come down, leaving the listing candidate with virtually no edge over the competition when it came to valuations.

The REIT, which included 27 industrial and warehouse properties with a total value of S$519 million ($325 million), offered a 6.5% annualised dividend yield for 2006 and 2007. At the time of launch, this compared with an average yield of about 4.75% for other Singapore REITs, but when the books closed late Wednesday, several of the others were offering yields close to or slightly above 6%, observers say.

About 59% of the total offer was set aside for nine cornerstone investors, who were said to have seen opportunities for yield pick-up as the trust is likely to increase its gearing from the current 22% in connection with future acquisitions of new properties. It was also expected to benefit as a plan by the Singapore government to double annual manufacturing output by 2018 suggests demand for industrial and warehousing space will remain strong.

Such projections mattered little as the market went against it, however, and at the end of the bookbuilding period, the 176.5 million units that were available to primarily institutional investors at a fixed price of S$0.68 had not been fully subscribed, one source says. The REIT may be relaunched at a later date.

All eyes will now be on Shimao Property Holdings, which kicked off the roadshow for a Hong Kong IPO on Wednesday (June 14). The mainland developer is aiming to raise $480 million to $650 million, and has set a price range that values it at a discount to NAV of up to 45%, which seems generous compared with most of its peers.

Whether it is wide enough to convince investors who are currently losing money pretty much across the board, remains to be seen û especially if equity markets were to take another dive over the next few days.

Shimao, which is brought to market by Goldman Sachs and Morgan Stanley, is due to fix the price on June 27 and has scheduled a trading debut for July 5.

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