News analysis

A question of value for BHG Retail Reit's listing

Sensible valuation, growth potential may be required to make up for relatively low yield

The Beijing Wanliu Mall is one of five initial portfolio assets for the listing of BHG Retail Reit.

The planned listing of BHG Retail real estate investment trust (Reit), raising a proposed $394.2 million in gross proceeds, would break a one-year S-Reit drought here.

In a difficult year, Manulife US Reit shelved its listing in July owing to weak market conditions, while Kailong Reit is yet to be listed despite talk of it earlier this year.

Reit prices have fallen about 11.7 per cent so far this year, a little shy of the Straits Times Index's 14.2 per cent slide over the same period.

Given all this, can BHG Retail Reit pull off its planned Dec 11 listing? The word on the street is that the deal is fully covered by investors and should go through, but is there value for them?

Looking at its expected yields, the units seem quite pricey. The Reit has a projected dividend yield of 6.3 per cent for the 2016 financial year if strategic investors do not take their share. If they do, this drops to 4.5 per cent.

The Beijing Wanliu Mall is one of five initial portfolio assets for the listing of BHG Retail Reit. PHOTO: BHG WEBSITE

In contrast, CapitaRetail China Trust (CRCT), which also focuses on China malls only, is trading at a 7.7 per cent yield.

In fact, the BHG Retail Reit yield level looks close to a Singapore retail play, usually seen as more stable. Singapore-focused CapitaLand Mall Trust is trading at 6 per cent forward yields, noted Mr Wong Yew Kiang, senior research analyst at CLSA.

"Historically, overseas exposure Reits trade at 75-100 basis points over those that are Singapore-centric... BHG valuations need to be priced very sensibly if they want the listing to be successful and CRCT's 7.7 per cent yield will serve as a good benchmark," he said.

While it is likely that strategic investors will not take their dividends for now, in order to support unit prices, a 4.5 per cent yield for the Reit would be perilously close to the Chinese government's 10-year bond yield, which was at about 3.18 per cent yesterday.

With that in mind, investors would be getting barely any risk premium for holding equities.

But if yields are relatively low, can the Reit manager make up for that in terms of growth potential, for example?

The Reit's sponsor has identified 12 properties under its voluntary right of first refusal, as potential additions to the initial listing portfolio of five properties.

Just how these assets could be injected into the trust is an open question but there appears to be some debt headroom.

The Reit's aggregate leverage is expected to be about 33.5 per cent at its listing date, well below the 45 per cent leverage limit set by the Monetary Authority of Singapore.

Another issue stems from foreign exchange. While the yuan has appreciated 3.1 per cent so far this year against the Singapore dollar, it remains volatile, with some expecting further devaluation.

According to the Reit's preliminary prospectus lodged on Monday, the manager does not intend to adopt any currency hedging, given its positive outlook on the yuan against the Sing dollar.

However, it will use currency risk management strategies when appropriate, it added.

Still, hedging methods such as forward currency contracts may not be very useful if forex markets are very volatile, Mr Wong said.

On balance, though, how sound is the mall business in China?

Significant retail development is taking place in the country, posing challenges for some malls, noted Mr James Macdonald, head of Savills research for China.

BHG Group - which, in addition to its retail properties, operates department stores, supermarkets and hypermarkets - generally targets the mass market retail segment in China, save for a luxury department store in Beijing's Central Business District, said Ms Mireille Wan, founder of MDW Consultancy. Its competitors include Dalian Wanda, Lianhua Supermarket Holdings Company and CapitaMalls Asia.

"Tenant mix for this segment tends to include more food and beverage, services and supermarkets... It is a mainstream segment that can withstand any major headwinds in the retail market," she said.

The Reit's five initial portfolio properties are generally not in areas facing oversupply risks, and their occupancy levels are good relative to peer properties, said Mr Steven McCord, head of research for North China and head of retail research for Asia at JLL.

While they may not be the most central, they have largely positioned themselves well, he added.

For example, its Beijing Wanliu mall is "one of the key destinations for the north-west part of the city, where the IT industry is booming and the number of white-collar workers is rising rapidly".

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A version of this article appeared in the print edition of The Straits Times on November 26, 2015, with the headline A question of value for BHG Retail Reit's listing. Subscribe