Tuesday, 25 June 2019

Looking abroad

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Croesus Retail Trust broke new ground when it listed a portfolio of Japanese shopping malls in Singapore, catching huge demand for Japan’s new growth story.

A woman walks past a ticket shop displaying prices in Tokyo.

Source: REUTERS/Yuya Shino

A woman walks past a ticket shop displaying prices in Tokyo.

As Japanese real estate investment trusts, or REITs, have been on a rampant equity spree this year, it raised some eyebrows when Croesus Retail Trust, a business trust of Japanese shopping malls, took in S$365.3m (US$294m) from a Singapore IPO, instead.

Some questioned why CRT chose to list in Singapore, given the trust will focus on an entirely Japanese portfolio for at least the medium term after listing. However, the issuer expects the Singapore market to put in place an efficient and competitive payout structure for the trust, and it found it easy to work with the Singapore Exchange.

“Singapore’s real estate and REIT environment has grown exponentially in the past decade,” said Jeremy Yong, co-founder and managing director of Croesus Group. “The SGX was very engaging with us. They worked around the clock, turned things around very quickly and we engaged with them on a regular basis, addressing all their questions.”

The growth of the real-estate sector has made Singapore home to a strong and knowledgeable pool of investors.

“Singapore has attracted an investor base, not only of foreign investors domiciling themselves here, but local investors have become extremely savvy and sophisticated,” Yong said. “Our top three shareholders are Singaporeans and I am very proud of that.”

The trust raised equity in Singapore dollars even though all of the initial assets it owns are denominated in yen. All of CRT’s loans are denominated in yen, however, through sole lender Mizuho Corporate Bank, which, according to Yong, agreed to lock in attractive terms.

“We have no refinancing risk or interest-rate risk for five years,” Yong said.

CRT paid a forecast dividend yield of about 8%, based on its IPO price of S$0.93 per share. Some market participants considered that generous considering Japanese REITs yielded 3%-4% at the time. DBS was sole financial adviser on the IPO, as well as joint global co-ordinator and bookrunner with Citigroup.

However, the pricing took account of Singaporean investors’ traditional caution towards overseas assets, with many trust IPOs, based on foreign assets, either struggling in the secondary market or closing undersubscribed in recent years.

CRT had secured its initial portfolio of investments at attractive prices a couple of years ago, before Japanese property began its hot streak, and was aware that it needed to build an investor base in its first visit to the market, Yong said.

“CRT is not fly-by-night [operation]. We are here for the long term, so if we come back to the market for the second or third time, we want you to come back with us,” he said. “We left enough meat on the bone.”

Investors flocked to the deal, which hit the market shortly after Abenomics had given a huge boost to Japan’s equity and property markets. The deal was covered 45 minutes after launch. The institutional tranche was approximately 20x covered after the Hong Kong leg, and the retail book closed around 50x covered.

The IPO benefited from commitments from high-quality cornerstone investors that subscribed to about 40% of the deal. In all, 11 cornerstones signed up, including Eastspring Investments, Citadel and Myriad Asset Management.

The stock gained an impressive 23% on its debut, lowering its yield to around 6%, although a subsequent spike in US Treasuries in late May brought the yield back to around the IPO level. Retail J-REITs now yield around 4%.

In retrospect, CRT’s timing looked perfect, but planning for the IPO began in the autumn of 2011 and the original plan was to list by summer 2012.

“In Q12012, Japan was not in vogue,” said Yong. “There was deflation and no growth.” An attempt to complete an IPO in November 2012 was cut short after other trust deals struggled in Singapore.

In a way, CRT was lucky not to have completed its IPO then as the yen subsequently began to depreciate rapidly against the Singapore dollar. “Our book value would have dropped 20% if we had listed in late 2012,” Yong said.

CRT’s immediate plan is to remain focused on Japan, but the trust may buy properties elsewhere later. Listing overseas property assets in J-REITs is difficult due to different tax treatment and has never been done before, which is another reason the trust launched its IPO in Singapore.

The non-Japanese properties may be acquired from Japanese heavyweights Marubeni and Daiwa House. In fact, CRT has secured the right of first refusal to several properties outside Japan, giving it a strong potential pipeline.

CRT’s right of first refusal from Marubeni includes two predominantly retail development projects in China, while

Daiwa House has granted the trust first look in respect to any sale of its future retail-focused real-estate assets in Asia Pacific outside Japan.

There is no obligation for CRT to acquire these properties, and the REIT is independent from any developer. However, the strategic partnership with two giants of the Japanese property sector has been viewed as an endorsement of CRT.

To see the digital version of this report, please click here.

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