Spin-off equity raisings, particularly from the city’s hospitality sector, are helping Hong Kong close the gap on rival Singapore. The recent shift in US yields, however, has cast a shadow over the business trust, the city’s newest equity product.
A spate of proposed spin-off listings of high-quality hospitality assets has raised hopes that Hong Kong is beginning to lure business trust listings away from rival Singapore. The US Federal Reserve’s decision to end its bond-buying programme earlier than expected, however, has changed the landscape for yield plays, and the city may now have to wait longer to achieve its target.
Hong Kong has been lagging behind Singapore as a trust listing centre in Asia. Plans by Hong Kong property developers Great Eagle and New World Development to spin off their hotel assets as business trusts have ignited hopes that Hong Kong is finally building itself into a listing hub for trusts after the success of the 2005 listing of the government’s Link REIT, a portfolio of shopping malls and car parks, proved short-lived.
However, things did not quite work out as expected. Langham Hospitality Investments, the spin off from Great Eagle, managed to complete its IPO of HK$4.26bn (US$549m) but its shares plummeted after listing as markets reacted to expectations that the US would increase interest rates faster than originally thought. Yield-driven investors now expect a higher return from the trust products.
As of June 25, shares of Langham, a business trust containing Hong Kong hotels, have fallen 24% since listing on May 30.
NW Hotel Investments Group, a hotel spin-off from New World Development, has also put its listing of US$600m–$800m on hold. The business trust was originally scheduled to start bookbuilding on June 24.
The end of trusts?
The disappointing aftermarket performance of Langham and the postponement of the listing of NW Hotel have been a heavy blow to Hong Kong’s ambitions.
Bankers, however, believe investors’ appetite for yield products will return sooner or later as US interest rate hikes are unlikely to rise as rapidly as feared.
“There are sell-offs in all asset classes in Asia. Yield plays such as business trusts, REITs, utilities and bonds have all experienced sell-offs. Where is all the money going? I guess it goes into cash for a while and waits for the market to stabilize, and then will probably come back,” said Alexis Adamczyk, co-head of equity capital markets, Asia Pacific, at HSBC.
“If you say that’s the end of the world and that’s the end of yield plays, I think that’s definitely wrong,” said Adamczyk. “Fundamentally, I still think there is appetite for these sorts of products as interest rates are still low. There will be some points at which people will start thinking that’s the entry point.”
The general view is that deals can still be done with the right yields.
“Yield products are not coming to an end. There will continue to be demand, though the market dynamics will evolve,” said Achintya Mangla, co-head of Asia (ex-Japan) ECM at JP Morgan.
Higher and higher
Perhaps the trading of Langham and the recent yields offered by New Century Real Estate Investment Trust, which comprises four hotels in China, can shed some light on what kind of yields investors are currently looking at.
After a deep dive in its share price, the 2013 yield of Langham has been pushed to about 7.8% from the 6% at IPO price.
Carlyle-backed New Century REIT, meanwhile, is offering a maximum 2013 yield of up to 9.14% for its proposed Hong Kong IPO of HK$1.97bn – perhaps the highest yield on record for an Asian REIT.
The deal provides investors with a 2013 clean yield of 6.5%–7.8%. To push up the yield, New Century REIT has included financial engineering – a feature that Hong Kong investors have proven to be uncomfortable with in the past.
The company’s largest shareholder and private equity backer Carlyle have both agreed to waive their distributions for the years ended December 2013 and December 2014. After such a waiver, the 2013 yield will be enhanced to 7.62%–9.14%.
“As the risk-free rate rises, investors will need a higher level of yield for REITs and business trusts. At the same time, issuers will need to re-assess the suitability of this asset class from a valuation perspective. Fundamentally high-quality assets will continue to generate strong interest within this asset class,” said Mangla.
New Century REIT was set to price its offering on June 27. As at the time of writing, the book was not yet covered. NW Hotel, meanwhile, is closely monitoring market conditions and expects to launch the deal once markets stabilise.
Another major Hong Kong property developer, Cheung Kong, has also proposed the spin-off of four extended-stay hotels in a business trust. Bankers are now lobbying hard to bring back the US$600m–$800m deal.
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