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Ken Lo

As the rolling thunder of the reits boom echoes through the investment community, normally stalwart bricks-and-mortar developers such as Henderson Land and Sun Hung Kai Properties (SHKP) are seeing the potential for spinning off their non-core investment portfolios through real estate investment trusts.

And it is not difficult to see why, looking at the recent stellar gains of Hong Kong's reits.

While reits have done well in Japan and Singapore, few could have anticipated the Link Reit - the first to launch and currently trading at $14.75 per share - could have  surged to a 40 per cent premium  to its net asset value of $10.

Analysts, however, say it is a special case. While its  performance owes much to the regional appetite for a high-yield investment, the fact that British  hedge fund The Children's Investment Fund Management (TCI) snapped up an 18 per cent stake stimulated strong buying momentum in the stock.

With such a large stake, there has been speculation that TCI may even fiddle with the Link's  management structure, seldom seen in other reits and exciting further interest in the stock.

Reits, it seems, are in an asset class of their own, injecting liquidity into illiquid property assets by straddling the world of fixed-income investments and the potential volatilities of the property  market.

It is a perfect mix for many investors and developers are starting  to see the benefits of spinning off as the gap narrows between market valuation and net asset value.

'GZI Reit's share price has risen at least 10 per cent above its book value as if the investment properties had remained within the parent group. Prosperity Reit has been traded at not less than its original net asset value,' said a banker involved in one of the reit deals. He added  that it made commercial sense to spin off particularly when non-core property assets are traded at a deep discount to their net asset value.

C.K. Lau, regional director of Jones Lang LaSalle, said developers with mixed portfolios  that wanted to improve their cash-flow positions had the greatest incentive to divest their mature non-core assets through reit vehicles.

'Hongkong Land and Hysan Development are principally engaged in property investment and they are essentially reits already. But for others like Wharf Holdings [or Wheelock], they may come up with some non-core assets available for a reits listing,'  Mr Lau said.

Henderson and SHKP are two leading property developers with a mixed portfolio that have expressed  interest in a reit listing, although both companies stress that the plan may not materialise in the short term.

From a business point of view, there is no point in landlords relinquishing control of their groups' crown jewels, which explains why Wharf, one of the city's  landlords, dismissed speculation it wanted to divest  the Gateway Towers complex, valued at $19 billion and contributing more than half the $31 billion  the developer holds in assets  in Tsim Sha Tsui.

'The International Finance Centre  is offering about 3 per cent yield,'  a banker involved in the Link deal said. 'Property developers fall into the dilemma of whether to enhance their dividend yield or dispose of the relevant assets at a book loss into reit vehicles.'

For instance, Gateway's office segment, placed into a reit basket, contributed about 4 per cent of  Wharf's gross asset value,  making a marginal enhancement of about  1 per cent in net asset value when the gap between that  and market valuation narrowed, according to a report by Morgan Stanley.

Wharf has still not ruled out the possibility of listing a reit in the future with its share price trading at a discount of 30 per cent to its net asset value, of which 70 per cent is related to investment property assets.

Its  non-core assets are worth $8.35 billion in net asset value - or 8 per cent of the firm's  gross asset value.

Mr Lau said a reit was  a platform for property developers to expand from being assets-based  into services-based companies.

'Developers still leverage the control of the property portfolio through holding  certain percentages of stakes. They also receive  recurring income from the management fee, which is usually equal  to 3 per cent of rentals,'  Mr Lau said.

'It is scalable and thus convenient for future asset injections once a company sets up the right platform,' he said.

'Cheung Kong reallocates its property assets into Fortune, a platform for retail properties, and Prosperity, for industrial and commercial buildings. These methods of divestment may set a good precedent for other developers to follow.'



Success puts developers in reit frame of mind