Developer bets on higher risk for better returns and may beat the government-backed Link to market
Cheung Kong (Holdings) is expected to gear its first local real estate investment trust (reit) to the maximum allowable 45 per cent of total gross asset value to take advantage of present low real interest rates, banking sources say.
The move by Li Ka-shing's property development flagship, in a rising interest rate environment, would allow it to offer investors a yield of more than 5 per cent in an initial public offering that some analysts say may beat the relaunched, government-backed Link Reit as the first to list on the Hong Kong market.
A banking source said that Cheung Kong had asked retail and investment banks for pre-offer financing proposals which may include loan arrangements, asset-backed securitisation or even a combination of both, depending on the terms offered.
'Gearing up to the full would make the asset valuation of reits more attractive but it makes the investments more risky, too,' said the source. He said interest rates may not remain at their current relatively low levels and may impact on long-term profitability.
The Securities and Futures Commission in June increased the reit borrowing limit from 35 per cent to 45 per cent and decided to allow investment overseas by Hong Kong reits.
It is understood the Hong Kong Housing Authority's Link Reit, whose trading debut is scheduled for November 25, is geared up to 35 per cent, or higher. It had 30 per cent gearing for its initial offer, planned for last Christmas before being derailed by a legal challenge.