Reit frenzy cools as Champion falters

PUBLISHED : Monday, 29 May, 2006, 12:00am
UPDATED : Monday, 29 May, 2006, 12:00am

Benefiting from the frenzy over new shares in Hong Kong during the past six months, newly listed real estate investment trusts have rewarded their investors with a decent first-day gain.

But this changed completely when Champion Reit dived more than 16 per cent on its debut.

Analysts said it signalled the end of reit fever in Hong Kong.

They also said the slump was a wake-up call for retail investors who have been treating reits as a tool for speculation.

Shenyin Wanguo Asset Management fund manager Alex Wong said: 'The frenzy is clearly over.'

Mr Wong said reits, like all other stable-yield but low-growth stocks, were not for speculation on short-term gains.

'Of course, they will move up and down to reflect their relative value in reference to other listed companies, but they are unlikely to provide volatility enough for short-term trading.

Champion Reit's sharp decline should have helped investors better understand the nature of this type of trust, which might cool their enthusiasm towards reits, he said.

Sun Hung Kai Properties and Henderson Land Development last week unveiled details of two planned reits.

'Champion Reit's disappointing performance is likely to hurt response to forthcoming reits. The overall sentiment towards reits has cooled,' said Conita Hung, head of research at Delta Asia Financial Group.

'The subscription level may not be comparable with the other initial public offerings.'

Ricky Cheung, a fund manager at Phillip Asset Management, said: 'No matter what the reit is, yield is the key attraction. When the Link Reit went public in November offering a 4 per cent to 5 per cent yield, [it was] much higher than the 2 per cent to 3 per cent bank deposit rate. That is the main reason people rushed to buy.'

Although the Link had rallied as much as 72.33 per cent in the following few months, whipping up reit fever, he said investors should 'understand now that buying reit units is like investing in properties that deliver fixed income but not high growth, like people buying a property and renting it out for a stable rental income.

'If people favour the property outlook in Hong Kong, they can buy landlord stocks or property developers, especially at this level after the current slump. They should deliver more upside potential in a property bull market.'

Morgan Stanley analysts Kenny Tse and Adrian Chui said given the solid balance sheets of most Hong Kong property owners, the main incentive to sell assets into Hong Kong reits is when high valuation can be achieved.

'With interest rates on the rise, we think the window is closing fast,' they said.

Unlike reits, property stock offerings will not be affected as they are a totally different asset type, Mr Cheung said.

Champion Reit lost up to 20 per cent in its first two trading days and touched its lowest point intraday on Thursday at $4.075. The trust closed on Friday at $4.375 - still 14.21 per cent lower than its offer price of $5.10.

It is the first reit in Hong Kong to fall on its debut, although Prosperity Reit and GZI Reit were below their offer price a few months after their debuts and Allco Reit in Singapore fell 2 per cent on its debut.

'As one of the few reits [in the region] to open below its offer price, we were surprised by the magnitude of the pullback and attribute to this to two reasons,' said Morgan Stanley's Kenny Tse and Adrian Chui.

'First, the tiny yield spread over risk-free at the IPO price offers limited cushion in the face of rising rates. Second, the big pullback in stock market valuations since the pricing of the IPO has altered risk/reward expectation.'

After diving so far, Morgan Stanley noted that at $4.30, Champion offered a distributable yield of 6.5 per cent next year, inclusive of financial engineering - one of the highest among its peers.

'With average 2007 yields of Hong Kong reits at 6 per cent or 123 basis points spread over risk-free rates, we see the recent expansion in yield spread as a sign investors are becoming more rational than four to five months ago.

'[But] the yield spread in Hong Kong is still below the average yield spread of 143 per cent in Australia and 230 per cent in Singapore.'

Mr Wong advised investors to buy reits at the current low price for stable income only.

Mr Cheung also suggested investors buy for stable rental income but not speculation.

'For most of the reits in the market, I think the prices are reasonable after the dip below their offer price last year, but for Champion Reit, investors should consider if its current dividend yield is sustainable given the arrangements like the interest rate swap,' he said.

As of Friday's close, the Link Reit delivered a yield of about 4 per cent. Prosperity Reit was trading at a yield of nearly 6 per cent.

The yield of GZI Reit, the only trust that includes mainland properties, is the highest among its peers at 6.81 per cent.

By comparison, Hong Kong's one-year term deposit rate is about 4.78 per cent and the 10-year exchange fund notes rate is 4.9 per cent.