Link Reit ditches anchor investors

Retail players to benefit in relaunch of first property trust offering next month

Link Reit will not be reserving any units in the relaunch of its initial public offering for so-called cornerstone investors, so it can make more room for retail investors.

However, Hong Kong's first real estate investment trust (reit) will retain Singapore-based CapitaLand as a strategic investor, according to a banking source.

The reit, which will invest primarily in income-producing property assets held by the Hong Kong Housing Authority, last year earmarked up to 19.3 per cent of its units for sale to eight institutional investors, including America International Assurance and Fidelity Investments Management, as a way of anchoring the deal and ensuring there would be enough demand.

The decision to eliminate these investors follows criticism from the Hong Kong fund management industry that too much priority had been given to overseas players in the selection of anchor investors, leaving local pension funds and life insurers very little of the offer.

The need for cornerstone investors came into question after more than 500,000 retail investors subscribed to 130 times the units initially available to them last year.

The Link Reit was working towards a listing just before Christmas last year but had to be called off at the last minute because of a legal challenge.

The relaunch being arranged by Goldman Sachs, HSBC and UBS is planned for the middle of next month, between the mega offering by China Construction Bank and a World Trade Organisation meeting in Hong Kong in December.

According to market sources, the current working timetable suggests that the retail subscription period will begin on November 14 and end on November 17. The launch price will be determined two days later and the shares will be listed on November 24.

A spokeswoman for the Housing Authority declined to comment on the schedule.

Retail investors will be entitled to a discount of 3 per cent in subscribing to Link Reit, the same as last year.

Industry sources estimated the reit would raise up to $21.84 billion if 90 per cent of the units were put up for sale. This would be only slightly more than last year's offer of $21.35 billion, which could have increased to $23.72 billion if the Housing Authority had exercised the 11 per cent overallotment option.

Reits have been among the hottest initial public offerings in the region in the past two years because of a combination of growth prospects and high dividend yields they offer. Unless there is a change of policy from last year, Link Reit will pay 100 per cent of its distributable income as dividend.

A source close to bankers handling the deal said a new valuation report prepared by CB Richard Ellis showed that the asset value of the 180 retail and car park properties had risen at least 10 per cent due to an improvement in the property market.

Rental income for the interim period - from April to last month - has increased just 1 per cent to 2 per cent.

'The tricky point is how to strike a balance between making the yield attractive compared with the distribution yield of 6.65 per cent for the financial year to March 31, 2006, predicted in the last prospectus and excusing the government from being criticised of selling assets cheap,' the source said.

In addition, as interest rates inch higher - the three-month interbank rate touched 4 per cent recently - investors may not find the relaunched Link Reit attractive unless it offered a sizeable premium to bank deposits.

Pauline Dan, an executive director for equities at Manulife Asset Management (HK), said the fund might not be interested unless the yield rate was more than 6 per cent.

However, borrowing rates are still relatively cheap and one banking source said there were suggestions the Link Reit might raise its aggregate borrowings from last year's 30 per cent to 40 per cent to leverage on low interest rates.

SECOND CHANCE

Cornerstone investors to be left out in favour of retail investors

CapitaLand will be retained as a strategic investor

Up to $21.8 billion proceeds if 90 per cent of units are sold