Mapletree LogREIT @ 89.5 cents ( Property / Singapore ) 8 comments
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1.Bubbling optimism about REITs and post-IPO price surge
2.Rent cuts by JTC suggests downward pressure on industrial property rents
3.Stagnant distribution yield predicted; current yield is unattractive compared with peers and alternative income instruments
4.Limited geographical diversification of logistics property portfolio
The IPO for Mapletree LogREIT was launched recently, and the price shot up from the IPO price of 68 cents to the region of 90 cents on the same day, thus reaping handsome gains for its subscribers.
The timing of the IPO was impeccable, following on the heels of some favourable news relating to the property sector, such as the government's relaxation on property purchase regulations and the purchase of Raffles Holdings' hotels by a US investor. The red-hot REIT trading theme has also added to the optimism surrounding the Mapletree LogREIT IPO, thus resulting in its over-subscription and 30% price appreciation on its first day of trading.
It is precisely due to this optimism that one should query whether the initial enthusiasm over the IPO might have overpriced the stock at its current price. One has to be careful not to buy high when the price has surged so significantly for what is essentially a defensive investment instrument. There are other reasons that I will list below.
A big concern is in relation to an announcement from JTC also around this time that appears to have been brushed off by the market. JTC has implemented a new round of rent cuts on industrial land by an average of 20%, commencing July 2005. This follows the last round of cuts just 6 months ago in January 2005. This is part of the government's drive to make business costs more competitive in Singapore, and reflects the urgency to keep manufacturing from moving abroad to low-cost countries like China and India. This puts a downward pressure on rental yields, and surely is a negative for industrial land owners like Mapletree.
Those looking for rising unit distributions from the REIT should think twice. The prospectus clearly forecasts that annualised distribution yield is not likely to rise much from FY2005 to FY2006, with gross revenue for FY2005 (if annualised, reasonable since property yield is not seasonal) of S$38M being similar to projected FY06 revenue of S$39M. In fact, I wonder if the FY06 projections might be a tad optimistic given the downward pressure on industrial rent yields mentioned above.
Mapletree promotes itself as a play on the Asia-Pacific logistics sector, which is forecast to grow at more than 10% annually up to 2009. I do not dispute this figure, as I am generally bullish on economic growth in the Asia-Pacific due to outsourcing trends. However, look at Mapletree's initial property portfolio of 15 properties: they are all located in Singapore. This is hardly a regional property portfolio; regional diversification is just not there. The REIT plans to invest regionally following the IPO; perhaps one should buy when there is evidence of such plans being brought into fruition. Furthermore, the current property portfolio is nearly fully occupied; this reduces the potential for increasd revenues accruing from higher occupancy rates and leaves higher rental yields (which is quite unlikely; see above) or further asset acquisitions (needing fresh capital injections) as possible ways to grow revenue.
Finally, the current valuation prices the REIT at 4.5% dividend yield. At 68 cents and rental yield of 6% it was about fairly priced; at its current price the yield looks unattractive compared to a comparable REIT, that of Ascendas', of about 6%. Borrowing costs (interest rates) are on the rise, which (1) going to further reduce the attractiveness of REITs as a play on the spread between REIT yields and bond yields; (2) reduces the capacity for REITs to use debt gearing in new asset acquisitions to increase return on equity.
The price stabilisation exercise for the IPO is ending soon. It will be interesting to see how the REIT performs further on. It is not a long-term buy for me by any means.
(1) JTC's announcement on June 30 2005