More than eight years after Singapore became the first stockmarket in Asia to list a real estate investment trust (Reit), the market has welcomed the city’s first Shar’iah-compliant Reit. While this isn’t the first Shar’iah-compliant Reit in Asia – there are already three smaller trusts listed in Malaysia – it is the first one of size, and shows that Singapore remains open to innovation in the Reit sector. It will also be the largest Shar’iah-compliant Reit by total assets globally.
Under the somewhat bulky name Sabana Shar’iah Compliant Reit, the market newcomer is due to start trading on Friday this week after raising S$636.1 million ($491 million) in an initial public offering that priced on Friday last week. The trust focuses primarily on real estate for industrial use, especially buildings targeted at the high-tech and chemicals industries.
The IPO offers further proof of something that has been argued in the debt market for a long time -- that Shar’iah products are attractive not just for Islamic investors, but for all investors. Indeed, Fidelity, which is probably as traditional an investor as you can get, is participating in the transaction as a cornerstone investor, taking an approximate 4.7% stake in the trust. The move is even more interesting since, according to bankers, it is rare for the global mutual fund operator to come in as a cornerstone in IPOs, both in Asia and globally. Typically it chooses to forego the benefits that this brings in the form of a guaranteed allocation, as it doesn’t want to flag its investments by having its name disclosed in the prospectus, which is a must for cornerstones. However, contrary to the practice in many other markets in the world, cornerstones in Singapore are not subject to a lockup, which means investors retain a lot of flexibility with regard to their investments.
Like the other investors that came into the Sabana deal, Fidelity would have been interested in the high yield. During the marketing, the trust was offered with a 2011 yield between 8.02% and 8.45% and a 2012 yield ranging from 8.05% to 8.48%, which is significantly higher than the risk-free five-year Singapore government bond yield. It is also at the upper end of what other quality Reits in Singapore pay at the moment.
The final price was fixed at S$1.05 per unit, which marked the mid-point of the S$1.00 to S$1.10 range and resulted in a 2011 dividend yield of 8.22%. According to a source, the offering was well covered within the range and Sabana could have priced at the top had it wished to do so. However, the trust chose to leave a few cents on the table for investors.
There was no breakdown available of the split in demand among traditional and Islamic investors (the term used to describe investors who have to buy Shar’iah-compliant products), but geographically about 65% of the demand was generated out of Asia, 25% from the Middle East and 10% from Europe. The Asian orders included a big chunk of Islamic interest from Malaysia, which meant the total Shar’iah-compliant demand was close to 50%, one source said. The final order book included more than 100 investors and the allocation was in line with the demand.
The strong interest among Islamic investors was not surprising as the three bookrunners – HSBC, UOB and Daiwa Capital Markets – spent one week of the one-and-a-half-week roadshow touring the Middle East and also did some extra marketing and investor education in Malaysia in addition to the formal roadshow. But the fact that traditional investors took the time to review Sabana despite there being multiple other IPOs to choose from, should be encouraging for the future of the Shar’iah-compliant Reit product.
This is especially true since Sabana doesn’t have a well-known sponsor behind it. Rather, the management company has gathered together 15 industrial properties from various sources into a portfolio that will be majority owned by the IPO investors. The Freight Links Group, which is selling five assets to the trust that at present contribute about a quarter of the revenue, is buying 27 million units, which will give it close to 4.3% of the listed vehicle. The company is part of the Freight Links Group, which is the third largest international provider of total logistics solutions in Singapore by total assets.
Public investors will own 80.3% and about 15.5% will be in the hands of the four cornerstones, which aside from Fidelity also include Al Salam Bank-Bahrain, Capital Investment & Brokerage/Jordan, and Meren, a wholly-owned subsidiary of Singapore-listed Metro Holdings which is active within property development and investment, and retail with a core focus on China, Indonesia and Singapore.
In terms of the structure, Sabana is not really different from any other Reit. Its business is to invest in income-producing real estate for industrial purposes and to distribute virtually all of its rental income to the unitholders. Sabana has committed to pay out 100% of its distributable income in 2011 and 2012 and at least 90% thereafter.
What makes it Shar’iah-compliant is the fact that the underlying assets comply with the Shar’iah guidelines in the sense that no more than 5% of the gross revenues can come from activities related to things like conventional financial and insurance services, gaming, non-halal production, tobacco-related products, non-permitted entertainment and stockbroking in non-compliant securities. The Reit must also choose Shar’iah-compliant financing, insurance and risk management solutions. According to sources, the cost of adhering to these issues is minimal and does not have an impact on the pricing of the Reit.
The key benefit to the issuer is that it will gain access to a broader investor base including both traditional and Islamic investors. And to maximise these benefits, Sabana has chosen to adopt a very strict interpretation of Shar’iah compliance so as to appeal not just to Islamic investment community in Malaysia, which tend to be more flexible in their interpretation of what is allowed, and the strict Shar’iah followers in Saudi Arabia.
With regard to the attractive yield, it really has nothing to do with the Shar’iah compliance, but rather is a function of the fact that Sabana was able to lock-in an acquisition price for its properties in the first quarter this year. And since property prices and rents have risen since then, the cap rates on these properties are very high at 7.8%, allowing for a yield well above 8% even with a gearing of just 26.5%.
At the time of listing, Sabana will own 15 properties with a combined gross floor area of 3.3 million square feet. All of these properties are in Singapore, although the Reit does have a mandate to invest elsewhere in Asia as well. Most of the properties are located near industrial zones and key transport links such as Changi Airport, shipping ports and major expressways, and they have an average lease term to expiry of 3.8 years.
Sabana offered a total of 605.8 million units, of which 71.4% went to institutional investors other than the cornerstones.