Interest rate swaps will generate more cash in the early years Great Eagle Holdings' Champion Reit expects to earn net income of $18 million this year after raising up to $7.1 billion in an initial public offering later this month, according to a preliminary offering circular. The real estate investment trust, which consists of 91.5 per cent of Citibank Plaza in Central, plans to sell 1.23 billion units at $5 to $5.75 each for a yield of 4.84 to 5.57 per cent. That yield, high for a grade A asset such as Citibank Plaza, comes from a five-year interest rate swap that will see more cash available to investors in the early years of the reit but will leave less down the road. The amount of equity returned to unit holders will drop from $310 million next year to $104 million in five years. Equity returned to investors this year would total $186 million, the circular said. Citibank Plaza's owners - Great Eagle, Kerry Properties and Wing Tai Corp - will see their entitlement to rental income from the trust grow over the same period. This year they have waived all of their rights to rental income from the trust but that will be pared back to 55 per cent next year and 20 per cent the year after. 'It's a good deal for the sellers but it's not so clear if that's true for buyers,' said one source. Bankers affiliated with the deal insist that such financial engineering is required to generate a high enough yield to attract investors because the growth of valuation in Hong Kong's property market is outpacing growth in rental incomes which generated low asset yields. By lowering interest costs, with swaps on the $7.2 billion loan taken out by the reit to acquire Citibank Plaza, a higher initial yield is possible. Merrill Lynch, JP Morgan and Citigroup are arranging the deal. Prosperity Reit, launched at the end of last year, also featured yield-enhancing swaps. Even with the artificial boost, the up to 5.57 per cent yield was not enough for some investors. 'The yield is not attractive,' one fund manager said. 'You can go and buy Chinese property developers and you've got yuan appreciation on top of that.' Champion Reit will be the only single-asset reit in Asia, excluding Japan, after Singapore's Suntec Reit bought two additional properties last year after starting out as a single-asset trust. Reits, which pass along at least 90 per cent of the underlying rental income to investors in the form of dividends, typically hold a large number of assets to ensure the stable returns investors seek. Citibank Plaza's grade A office space, which attracts high-profile investment banking and law firms as tenants, makes it a good candidate for a single-asset trust. The building was valued at $22.67 billion, or $15,194 per square foot, by the company at the end of February. The trust will buy the building for $19 billion, a 16 per cent discount. Citibank Plaza generated $10 billion in profit and had an occupancy rate of 86 per cent last year.