Singapore's first China Reit ready to hit the market

The CapitaLand-sponsored Reit will hold seven shopping malls with a total asset value of S$690 million and is expected to raise about $150 million.
CapitaLand has received a conditional approval to list its long-awaited real-estate investment trust (Reit) with China-based retail assets on the Singapore stock exchange and, according to sources, will start pre-marketing of the vehicle today.

The listing vehicle, which will go under the name of CapitaRetail China Trust, will have a total asset value of about S$690 million ($440 million) and will initially comprise seven retail malls located in Beijing, Shanghai and three other Mainland cities, according to a stock exchange announcement yesterday.

CapitaRetail will be the first Reit with China-based assets listed in Singapore and only the second in Asia after GZI Reit which has been listed in Hong Kong since December 2005. GZI is made up of primarily office properties, however, making this new vehicle a unique opportunity to tap into ChinaÆs shopping mall sector through a Reit.

Or as one observer puts it: ôThis Reit will give exposure to a unique sector and it is backed by one of the best parent companies in Asia. IÆd say there will be no shortage of demand.ö

It will also be the first Reit structured to comply with new rules prohibiting foreigners from owning property directly in China, showing that the new rules will not dampen the prospects for overseas listings of China Reits as feared when they were first announced earlier this year.

CapitaRetail China, with be the fourth Reit sponsored by SingaporeÆs largest property developer after CapitaMall Trust, CapitaCommercial Trust and Ascott Residence Trust and the second one to provide exposure to overseas assets after Ascott, which invests in serviced apartments on a Pan-Asian basis.

CapitaMall will be one of the strategic investors in the new Reit after buying a 20% stake for a ôcommitted capitalö of S$93.3 million. Together, CapitaLand and CapitaMall will hold an effective 26.3% interest in CapitaRetail China. Up to 46.7% will be sold to institutional and retail investors, while the remainder will be held by other strategic investors, including Dutch pension fund PGGM and The Great Eastern Life Assurance.

China International Capital Corp, JPMorgan and UBS will be joint arrangers for the initial public offering, which sources say will raise about $150 million and comprise about 200 million units.

The capital committed by CapitaMall for its 20% stake suggests the new Reit will have a net asset value of about S$466.5 million which in turn would imply a gearing ratio of about 32.5%.

Sources say the gearing is expected to be around 35% and note that the listing vehicle will likely be offered at a modest premium (up to low double digits) to its NAV. The latter is based on the fact that other Singapore Reits are trading at an average premium to NAV of 30% with CapitaMall fetching a premium as high as 50% and A-Reit currently valued at about 60% above its NAV.

On a yield basis too, CapitaRetail China can be expected to offer a higher return than the 5% that makes up the average (on a 2007 basis) for its Singapore peers, since retail properties in China typically pay a higher yield to compensate for the greater risks. The yield for individual S-Reits vary greatly, however, depending on which sector they operate in, their geographical exposure and how the market assesses the management.

GZI Reit currently yields about 6.5% and trades virtually flat to its NAV. Given that office properties generally yield a bit less than retail properties, this can be seen as the upper end of a likely yield offering range, the source says.

However, what makes CapitaRetail China attractive is primarily its acquisition pipeline, which suggests the potential for capital growth will be significant. According to the stock exchange announcement, the Reit has the right of first refusal to acquire properties held by two private retail funds that are also sponsored by CapitaLand as well as from CapitaLandÆs wholly-owned property arm, CapitaLand Retail.

The CapitaRetail Development Fund, which invests primarily in greenfield retail mall developments in China has, through a joint venture with Shenzhen International Trust & Investment Co (SZITIC), secured the right to invest in 19 retail mall developments across China. These developments have an aggregate gross floor area (GFA) of over 900,000sqm and an aggregate value of more than $900 million.

Meanwhile, the CapitaRetail China Incubator Fund, which warehouses completed retail malls in China for ôrepositioning, asset enhancement or leasing to increase occupancy ratesö, has raised a committed capital of $425 million and may invest in a potential pipeline of retail malls anchored by the Beijing Hualian Group.

CapitaLand also has the right to invest in 14 retail mall developments in China that will be anchored by Wal-Mart hypermarkets, covering approximately 600,000sqm, as well as up to 70% of future Wal-Mart projects in China that will be developed by SZITIC until the end of 2010.

ôI have never seen a Reit with such a well-defined growth pipeline at the time of listing and this is likely to be well-received by investors looking for total returns,ö one observer says. By comparison, he notes, Hong Kong-listed GZI Reit hasnÆt made a single acquisition since its came to market almost 12 months ago.

ôGiven the quality assets in the initial listing portfolio and the strong proprietary acquisition pipeline, CapitaRetail China Trust is expected to significantly grow its asset size in the years ahead,ö says Liew Mun Leong, CapitaLandÆs president and CEO, in a written statement.

The seven malls that will make up the portfolio at the time of listing, have a gross retail area of 413,000sqm and have been valued at Rmb3.45 billion and Rmb3.79 billion (as of September 1, 2006) by CB Richard Ellis and Knight Frank Petty respectively. Translated into Singapore dollars this gives a valuation range of S$688 million to S$756 million.

All the malls are 100% owned, except for the Xinwu Mall in Wuhu, which is 51%-owned, and the Qibao Mall in Shanghai, which for which the Reit has a Master-Lease.

One observer describes the assets as Grade A, but located outside of the city-centres. Most of them are anchored around supermarkets and are meant to fill ôevery-day needsö rather than to provide high-end fashion brands and accessories.

The official road show will be launched in just over two weeks and the trading debut is expected to take place towards the middle of December.
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