PCRT – BT

Perennial China play should take Reit route

Malls slated for acquisition can be injected into a private fund for time being

PERENNIAL Real Estate’s recent decision to defer the initial public offering of its Perennial China Retail Trust (PCRT) following international roadshows last week is reminiscent of the time in November 2001 when CapitaLand had to scrap the IPO for its SingMall Property Trust (SPT) because of poor demand.

Coincidentally, the CEO of the manager of SPT and the CEO of PCRT’s trustee-manager Perennial China Retail Trust Management are the same person – Pua Seck Guan.

Mr Pua said recently that Perennial plans to tweak the PCRT deal to current market conditions and bring it to market ‘soonest possible’.

First, let’s recap the offer that has been shelved. The business trust was to have offered 1.09 billion units comprising an international placement of 610.2 million units, a public tranche of 50 million units and cornerstone units of 432 million units. Priced at $1 per unit, the offer would have raised about $1.1 billion in gross proceeds to be used mostly for the acquisition of four properties in China costing about $1.1 billion.

Only one of the four assets – a mall in Shenyang – is completed and leased out while the rest are in pre-leasing stage or under development and due for completion between 2012 and 2014. The trust’s distribution yield was to be 3.02 per cent for financial year 2011, rising to 3.08 per cent for FY2012. Post-listing, gearing was to be around 1.8 per cent.

PCRT had pledged to pay at least 90 per cent of distributable income to unitholders for the first two years and pegged its leverage limit at 60 per cent of the value of its properties.

Perennial is now expected to raise less equity, reduce the offer price of its units to below $1 apiece and assume some gearing.

Discount sought

Talk in the market is that investors indicated during the roadshows that they would like a discount of 5-10 per cent on the purchase price of the assets. The equity to be raised is also expected to fall to $700-800 million, assuming the cornerstone investors stay on.

Cutting the assets’ purchase price, floating a smaller equity portion and raising more debt should boost yields to investors. However, it makes sense for the trust to increase borrowings only if the cost of debt is lower than the property yield. The problem is, borrowing costs in China are high, at 6-7 per cent or more; even if PCRT were to borrow in Singapore, costs could be 4-6 per cent. So raising debt may reduce the yield to investors .

Mr Pua is in a hurry to finetune his offer and relaunch PCRT’s IPO ‘soonest possible’, understood to mean in 4-6 weeks’ time. That’s not surprising as the sellers of the assets would not want to be locked into an arrangement with PCRT for too long. They would want to be free to sell their respective assets to other potential buyers. After all, the vendors are not the sponsors of PCRT, unlike the arrangement between many real estate investment trusts (Reits) and their sponsors who are committed to providing an acquisition pipeline. Also, some cornerstone investors may lose interest in PCRT if a relaunch of the IPO takes too long.

But even if PCRT tweaks some financials of its offer, nagging concerns which are said to have been highlighted during the roadshows may remain. One is the strength of the trustee-manager’s management team; other than Mr Pua, who built a name for himself in the local mall management business.

There is also the question of whether Mr Pua has too much on his plate. In addition to PCRT, he is involved with Katong Mall, Chinatown Point and the landmark Capitol redevelopment site in Singapore, each with different sets of investors.

Some observers also wonder what PCRT’s niche as an investment product is. It’s not a Reit, which must hold at least 90 per cent of the value of its properties in completed, income-generating assets. So, in some ways, PCRT can be seen as more of a property developer.

But there are already so many China property developers for investors to choose from. There may be more interest for another Reit, given the steady income they distribute to unitholders.

Perhaps Perennial could take a leaf from the SPT episode when in late 2001, after SPT’s listing was shelved, CapitaLand kept it on its balance sheet while it enhanced the assets.

Then, in July 2002, the trust was rebranded CapitaMall Trust (CMT) and launched successfully, with a more attractive price and yield, improved asset performance, leaner management fee structure and with sponsor CapitaLand retaining a bigger stake. CMT arguably remains Singapore’s most successful Reit.

Maybe Perennial could consider a similar approach and inject the malls slated for acquisition by PCRT into a private fund. It could persuade the cornerstone investors secured for PCRT as well as other parties to invest in this fund, which will hold the assets until their development is completed and they are leased and their earnings stabilised and any asset enhancement done. At that point, Perennial could consider floating a China mall Reit.

Local touch

Some think that Mr Pua’s track record is more applicable to Singapore, where he built up CMT, rather than China. Investors may be more enthused if he were to float, for instance, a vehicle containing the three Singapore properties that he’s involved in. Then there’s also the IPO of Mapletree Commercial Trust, holding Vivocity mall, Merrill Lynch Harbourfront, and PSA Building – valued at $2.7-2.8 billion in total – expected to be launched soon. Slightly over $1 billion equity may be raised, analysts estimate. Some investors may be more keen on parking their monies in that vehicle, for now.