Taking Prime positions

Prime Reit lodges its prospectus with the MAS as Macquarie and two other cornerstone investors make sizeable commitments to the deal.

The management company of Prime Reit in Singapore yesterday lodged the reit's long awaited IPO prospectus with the MAS, with a view to completing the listing by mid September. According to the prospectus, the deal's price range has been set between S$0.93 and S$0.98 a unit.

For the IPO, the management company has appointed Macquarie Securities (Singapore) as the sole global coordinator of the deal. DBS, JPMorgan and Macquarie Securities (Asia) have been appointed joint financial advisors on the deal. And joining those three in the lead underwriting and book running role is Deutsche Bank. OCBC is a sub-underwriter on the deal.

Separately Macquarie Bank has agreed to buy 25% of the reit at the IPO price. Three other cornerstone investors AIA, DBS Bank and Great Eastern Life Insurance have agreed to buy a combined 13.3% of the deal. If the IPO prices at the top of the range then Macquarie will pay S$231 million ($139 million) for its stake while the cornerstone investors will pay a total of S$123 million. Thus the remaining sale of 61.7% of the reit through the IPO should raise around S$570 million if the deal prices at the top of its range.

From a valuation perspective, this price would give Prime Reit a yield of 5.12% if sold at the top of the range. If at the bottom, the yield would move out to 5.4%. Prime Reit is a combined office and retail reit and its nearest comparable in Singapore is Suntec Reit. This is currently trading at a yield of 4.6% on a fully diluted basis and 5.1% on a non-diluted basis.

"Our investment in Prime Reit reflects the confidence we have in the investment potential of the Singapore property market and the strength of the underlying properties," said James Hodgkinson, an executive director in Macquarie's property group in Sydney. "This represents a significant opportunity for Macquarie Property to tap future growth of the rapidly expanding Asian reit market."

Macquarie has also gone one stage further into the deal by agreeing to buy 50% of the reit management company that is running the deal, called Pacific Star Prime Reit Management. The bank has signed a call option to buy the stake one week after the IPO for an undisclosed price. After the sale, Macquarie will own 50% of Pacific Star. Ergo Trust of Germany, which originally owned the two buildings in the reit will own 25% and Investmore Ltd (owned by Jeff Tay) will own the remaining 25%.

Buying into the management company is a big move for Macquarie and makes its involvement in the reit market in Asia deeper than any other banks'. From a margin perspective, the reit management companies offer the highest returns in the reit sector, more than units in the reit or even in underwriting their sale.

It is thought that Macquarie will use Pacific Star Prime to undertake further global reit opportunities, especially in Singapore, Malaysia and in Germany. It will focus on the combined office and retail market and not compete with other Macquarie reit management companies such as Macquarie Goodman which focuses on industrial and logistic properties.

"This is an annuity fee business and it gives us a public platform to grow our assets. That's why we wanted to team up with Macquarie," says Franklin Heng, the CEO of Pacific Star Prime Reit Management, the manager of the reit, who is staying on with the company after the Macquarie investment.

The properties that are going into the Prime Reit are shares of two prime retail and office buildings on Singapore's Orchard Road called Wisma Atria and Ngee Ann City. Prime Reit will own 331 units or 74% of Wisma Atria and 4 strata lots or 27% of Ngee Ann City. The buildings are being bought from ERGO Trust, one of Germany's larger insurance companies.

Investors are said to be questioning how Prime Reit will be able to maximize the rental yields on the properties of it does not own 100% of them. However according to Heng, the reit has the power to do whatever it likes in the areas which it owns, although any changes, refurbishments or refitting to the common areas will need approvals, especially in Ngee Ann city.

The logical first move of the reit, once it is listed, is to buy out all the other shareholders in the two buildings. As a listed vehicle, Prime Reit will certainly have the financial resources to do so.

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