Risk-averse sentiment benefits IGB REIT
In The Edge Financial Daily Today 2012
Written by Insider Asia
Wednesday, 26 September 2012 11:04
IGB Real Estate Investment Trust (REIT) is the latest in a string of large REIT to be listed on the local bourse. Due to prevailing uncertainties, investor interest in the comparatively defensive sector has been robust over the past months. This has resulted in yield compression, especially for the bigger and more liquid trusts.
Case in point, IGB REIT’s IPO was priced at the higher end of its indicative range and at yields that were much lower than Pavilion REIT’s when it was listed late last year.
The trust made a solid debut last Friday at RM1.37 for a 9.6% premium over its IPO price of RM1.25. The listing was one of the largest in the world this year on the heels of successful listings such as Felda Global Ventures Holdings Bhd and IHH Healthcare Bhd and was well over-subscribed.
Setting a benchmark
At the current price of RM1.41, IGB REIT’s yields have narrowed further to roughly 4.5% for the current year (annualised), making it the lowest yielding REIT on Bursa Malaysia. It is now trading at a comparatively pricey 1.42 times its book value of 99.6 sen per unit.
We estimate distributable income at roughly RM230.5 million in the trust’s first full year of operations in 2013, rising to RM246.6 million in 2014. The trust intends to distribute all of its income up to December 2014. That would give unit holders yields of 4.8% to 5.1% for the two years.
Comparable retail-focused REITs such as Sunway REIT, Pavilion REIT and CapitaMalls Malaysia Trust (CMMT) are currently yielding between 5% and 5.4% for 2013 at prevailing prices. In this respect, the strong interest in IGB REIT could trigger a slight upward re-rating for its peers.
Second largest REIT by asset size
IGB REIT’s portfolio consists of just two properties, Mid Valley Megamall and the Gardens Mall, valued at a combined RM4.6 billion, making its portfolio just a shade smaller than Sunway REIT’s.
The two malls have a total net lettable area of nearly 2.54 million sq ft and are well located on the fringe of central Kuala Lumpur near various suburbs such as Bangsar, Taman Seputeh and Petaling Jaya.
Mid Valley Megamall, the larger of the two malls, opened its doors in 1999 and remains one of the most popular shopping malls in the Klang Valley — if traffic congestion around the area, especially during the weekends, is any guide. The mall has near full occupancy and enjoyed positive rental reversions, which averaged over 5% per year in the past three years.
The adjoining Gardens Mall was a later addition, in 2007, as part of the larger Mid Valley City development. The mall has some 817,000 sq ft of net lettable area and is positioned as a premium fashion mall targeting the higher income customer segment.
Though slightly less popular judging by crowd numbers, the mall has also registered steady rental increases over the past three years. Furthermore, it is still in the early stages of its rental cycle — heading into just its second three-year rental cycle — and thus, could see sharper upward reversions.
The bulk of current leases are up for renewal in late 2013 and 2014, together accounting for nearly 86% of total net lettable area.
IGB REIT plans to acquire more properties going forward. The trust currently has gearing of about 26%, well below the guideline maximum of 50%, suggesting room for further leverage and quite substantial purchasing power.
It has a right of first refusal on all retail properties and mixed use developments with a retail component undertaken by its sponsor, IGB Corp. Among the properties mentioned for potential acquisition are Mid Valley Southpoint and Southkey Megamall being developed in Johor Baru. On the other hand, suggestions of potential acquisitions abroad, including in the US and Europe, could add an additional element of risk to the trust.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.