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HK Reits get a new lease of life

Major acquisition, hotel trust listing may help revive investor interest

(HONG KONG) Hong Kong’s neglected real estate investment trust (Reit) market is stirring to life and may finally do what it’s supposed to – give investors stability, a decent yield and, possibly, clear prospects for growth.

A high-profile acquisition by office landlord Champion Reit, and the imminent listing of a hotel Reit by developer Far East Consortium, may help revive investor interest.

The reputation of Hong Kong’s Reits has been sullied by investor perceptions that they were used by wily developers to offload second-rate assets at inflated prices, and marred by the byzantine financial engineering that accompanied their deals.

As new Reit markets emerged across Asia, with investors enjoying fat dividends from rental income and capital gains from rising property prices, Hong Kong Reits were given the cold shoulder.

‘It seems like a lot of Reits are like a second concubine – it’s whatever leftover product you have,’ said Far East Consortium chief executive David Chiu.

‘But we’re saying to the market that we’re putting all the hotels we have in,’ he said about the group’s latest offering, a listing of its hotel Reit. ‘You either like it or not, but it’s all of them.’

After a year’s lull in new Reit listings, Far East has lined up an initial public offering (IPO), packaging all seven of its hotels in the city into the Hong Kong Hotel Trust, and moving away from complex financial engineering.

Earlier this month, Champion Reit said it would dismantle the complicated financial structure linked with its IPO, and also bought a 56-storey block in Hong Kong’s Kowloon district.

Hong Kong’s biggest developer, Sun Hung Kai Properties, is also considering resurrecting a planned office trust, while Swire Pacific wants to spin off its Festival Walk shop and office complex, bankers say.

Hong Kong’s Reit market made an explosive start in late 2005 when investors flocked to a US$2.4 billion IPO by Link Reit, drawn by pledges to revamp and squeeze more profit from 151 government-owned malls.

But the city’s six other Reits, including two with mainland Chinese assets, have fared worse on the secondary market, with their yields pushed up to between 8 and 10 per cent now from 5 to 6 per cent at their IPOs.

However, their share prices stabilised despite turbulent markets in the last six months, while Japanese and Singapore trusts slumped, and they now offer big and steady spreads over the 3.1 per cent yield given by 10-year bonds.

Comparable spreads for Reits in Japan and Singapore are much lower, at around 3.5 percentage points.

But high yields and cost of capital mean Hong Kong Reits often struggle to find acquisitions that are ‘yield accretive’ – or lift investor returns.

However, by using loans, a convertible bond issue, and new equity raising, Champion’s Reit has managed to buy Langham Place from the Reit’s sponsor, Great Eagle (Holdings), for US$1.6 billion.

The deal is getting a belated thumbs-up from analysts after initial suspicions the trust was paying too much.

‘Don’t overreact, this is a positive deal,’ wrote BNP Paribas analyst Andy So, when Champion’s share price slumped 5 per cent a day after the deal was announced.

He said the purchase would lift distribution per unit, despite dilution from the share sale, and praised the unwinding of financial engineering that had been unpopular with investors.

The trust had employed interest rate swaps and a dividend waiver by Great Eagle, that artificially lifted yields at the time of the IPO.

It now wants to unwind and simplify that structure.

With Champion embarking on a global roadshow to raise equity for the deal, a banker who worked on the transaction predicted it would herald a new beginning for Hong Kong Reits.

Source: Reuters (Business Times 28 Feb 08)

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