Prime response to Reit IPO

Another strong order book for a Singapore Reit.

Prime Reit is set to become the seventh Reit to list in Singapore following the pricing of a 943.1 million unit deal yesterday (September 13) at S$0.98 per unit. The group is scheduled to raise S$924.24 million ($550.89 million) from the IPO, which was led by Macquarie Securities (global co-ordinator), plus DBS, JPMorgan and Deutsche Bank as joint bookrunners.

Pricing came at the very top of an S$0.93 to S$0.98 indicative range and reflects the strength of an institutional order book, which fund managers say closed about 25 times oversubscribed. Geographically, demand was said to have split 50% Asia, with an equal divide between Hong Kong and Singapore, followed by 35% Europe, 10% the US and 5% Australia.

Strong demand was also reported from the private banking sector, which is said to have accounted for about 35% of the order book. Roughly 330 institutions placed orders and specialists reported no price sensitivity.

Pre greenshoe, institutions will be allocated roughly 55% of the deal (523.9 million units), with Macquarie Property acquiring 25% (235.8 million unit) and three other cornerstone investors (AIA, DBS Bank and Great Eastern Life Assurance), 13.3% or 125.3 million units. The remaining 6% (58 million units) is split between the retail offering, tenants of the Reit's two key properties and employees of the Reit manager, Pacific Star group.

The retail offering opened yesterday and will close on Friday morning ahead of listing next Tuesday. Pricing of the institutional offering had been expected late last week, but was held over the weekend because of a regulatory delay.

In between the publication of the preliminary and final prospectus, the Monetary Authority of Singapore (MAS) withdrew an incentive, which would have allowed a volume discount of 3% for investors that purchased more than 60 million shares in the deal. Such incentives are regularly used in other markets and have also previously been used in Singapore.

However, in this instance specialists say the regulator was concerned the discount was not fair to all investors and particularly as the cornerstone investors it would have encompassed include arms of two of the lead managers.

At pricing, Prime Reit has been valued roughly flat to NAV and will yield 5.12% on a 2005 basis and 5.35% on a 2006 basis. This will make it one of the cheapest Singaporean Reits both in terms of pricing to NAV and dividend yield.

Investors will no doubt be hoping to make similar returns to the last Reit, which listed in Singapore in late July. This saw Mapletree Logistics Trust raise $144 million from an IPO that was priced at S$0.68 per unit on a dividend yield of 6%. Yesterday it closed at S$0.965, an appreciation of just over 40% in the space of a month-and-a-half.

Likewise, Mapletree has witnessed severe yield contraction and is now trading at roughly 4.2% on a forward basis and a premium of over 60% to NAV. At pricing it came at a 20% premium to NAV.

This now makes it one of the most expensive Reits to own in Singapore despite the fact it operates in the logistics sector, which normally entails a cheaper valuation. Prime Reit, by contrast, is a blended Reit of office and retail space, whose closest comparable is Suntec Reit.

Suntec is currently trading on a yield of about 5.2% and at a premium of just over 20% to NAV, subject to different analysts' valuations. It is a much larger Reit than Prime with 1.2 million square feet of office space and 835,000 of retail space. It also owns the entire shopping mall at Suntec City.

Prime Reit's two assets are 331 lots in Wisma Atria shopping mall on Orchard road (165,100 square feet or 74.23% of the development) and four lots in neighbouring Ngee Ann City (116,154 square feet or 27.23% of the development).

Some observers believe Prime should encompass a valuation discount because it does not fully own the two developments and will have concurrently more difficulties maximising rental yields. Others say it should come at a premium because Ngee Ann City is a more upmarket retail development than Suntec.

What it also has in its favour are two very strong backers in the form of Macquarie Property and Ergo Trust. Both have big ambitions in Singapore and Asia at large.

Germany's Ergo Trust is one of principal shareholders of Pacific Star, the Reit manager. Macquarie Property has a six-month option to purchase 50% of Pacific Star and has indicated that it will do so within a week of listing. The remaining 50% will be split between Ergo and Investmore Ltd.

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