Indiabulls too bullish on prospects

THE latest real estate investment trust (Reit) to list in Singapore, Indiabulls Properties Investment Trust, didn’t do too well when it went public two weeks ago.

The Reit raised $262.5 million from its initial public offer, lower than the maximum $288.8 million it had sought earlier. Shares were priced at $1 each, at the bottom of an indicated price band of $1-$1.10. The units closed at 92 cents yesterday.

The lower IPO pricing came even after an extension of the retail tranche offer.

But weak market sentiment was not the only reason for the poor IPO performance – there are also questions about the Reit’s attractiveness and its ability to deliver.

Let’s start off with the two properties in its portfolio – both uncompleted at the time of listing. One Indiabulls Centre (due for completion by the end of this month) and Elphinstone Mills (expected to be completed by the end of this year) are both located quite some distance from the main central business district in Mumbai.

Moreover, the trust’s advertised yields are quite bullish. At $1 a unit, dividend per unit (DPU) yield is expected to be 4.0 per cent for next year and a rather high 9.4 per cent for 2010.

The financial assumptions behind the numbers are pretty aggressive. For next year, the property income margin is expected to be 88 per cent. For 2010, the projected margin comes to 90 per cent. The projected yields are also dependent on building completion and leasing.

This year’s income delivery, for example, assumes One Indiabulls Centre’s completion and leasing by around end-June and Elphinstone Mills by around end-November.

The Reit also expects occupancies to be in the range of 95 per cent for its office and mall components once it receives the occupancy certificates (India’s equivalent of Singapore’s temporary occupation permits).

But at the time of listing, One Indiabulls Centre had secured leases for some 988,000 sq ft of space out of a total of some 1.87 billion sq ft of office and retail space. This means that just over half – 53 per cent – of the lettable area has been leased.

And over at Elphinstone Mills, no leases had been locked in at the time of the listing.

What all these mean are that while units in the Reit are priced on completed building valuations, they still bear the risks of completion delays, project costs running over, failures to secure the various needed approvals from authorities as well as leasing risks.

In the light of this, investors might be better off adopting a ‘wait-and-see’ approach and buying into the trust once the projects are completed and leased out.

There is also another interesting nugget in the prospectus – some of the Reit’s directors, who are also directors of Indiabulls Financial Services Limited (IBFSL) and its subsidiaries, have been named in legal proceedings initiated by IBFSL’s clients.

The trust says that ‘given the nature of the legal proceedings, the trustee-manager is of the view that the amount claimed by the claimants is not material and that the proceedings are in the ordinary course of business of the Indiabulls Group’.

But more details would be welcome.

With all this in mind, one is left wondering why Indiabulls pushed through a listing at a time when the market is weak, especially since units in the trust are tightly controlled. Most of the major shareholders have agreed to certain lock-up arrangements.

On Monday, Unitech Ltd, India’s second-biggest property firm, scrapped plans for a US$600 million Reit offering in Singapore and, instead, turned to private equity firms to fund its expansion.

Maybe Indiabulls Properties Investment Trust would have been better served taking the same route.