REIT ASIAPAC
approved REIT regulations. However,
the IPO will only be distributed to local
investors, and at US$300 million free-float
with a large percentage of that placed to
local pension funds, will probably have
minimal secondary trading liquidity.
This brings us back to the point we raised
earlier.
“If you have such a large holder
plus the other stable long-
term holders, such as local
pension funds, that REITs
attract, it is unlikely that there
will be sufficient secondary
liquidity to either lure offshore
institutional investors or to
justify a premium valuation”.
The risk this brings is that the share price
will rise initially due to the novelty as well
as the low availability of shares. However,
this normally does not end so well and
could result in excess volatility in the share
price. After the initial squeeze, the REIT
may ultimately trade with an illiquidity
discount, and is therefore unable to grow
accretively.
We applaud Ayala’s decision to move
forward with their first REIT. They
announced this even before the MPO limit
was reduced, and this shows, along with
their long-term involvement with APREA
(The Asia Pacific Real Estate Association),
that Ayala understands the benefits a REIT
can bring to the sponsor when structured
correctly.
REITS AREN’T FOR
TA X AVO I DA N C E
REITs that have the right structure and
are professionally managed (not managed
solely for the benefit of a sponsor) perform
better than other REITs, and therefore
lower the cost of capital for the sponsor
as well as the REIT. There is also built-in
discipline and transparency with the REIT
structure, which leads to better focus and
performance at both the sponsor and REIT
level. The sponsor can focus on what they
do best, sourcing and developing land,
COMPANY PRICE (PHP) MKT CAP
(USD BN) NAV / SHARE
(PHP) P/NAV
SM Prime Holdings 28.65 16.35 42.8 0.67
Ayala Land 28.90 8.41 57.0 0.51
Megaworld 2.59 1.65 7.3 0.35
Robinsons Land 15.50 1.59 31.0 0.50
Vista Land 4.06 1.02 13.0 0.31
Filinvest 0.90 0.43 2.9 0.31
Double Dragon 16.10 0.75 58.0 0.28
Source: Factset, Regis Partners, B&I. Data as of April 24, 2020
while the REIT can focus on incrementally
improving the tenant experience and
thereby increasing rents.
Launching a REIT for Philippine developers
should result in their share price trading
higher. Developers currently trade at
significant discounts to their NAV (Net
Asset Value), see table above. Launching a
REIT would crystallise the market value of
the properties put into the REIT, injecting
the cash proceeds into the developer,
thereby boosting its share price.
However, REITs that are launched purely
as tax-avoidance vehicles will probably
trade on low valuations and therefore
have a higher cost of capital (trade on
high yields), meaning they risk becoming
zombie value traps.
“The set-up that looks likely to
prevail with a 33% MPO is not
a best-in-class solution because
the incentives and multiplier
effects that make REIT regimes
such a success at many levels
are out of balance”.
We hope we are wrong, but it also appears
that some developers’ focus is more on a
one-time NAV uplift and the perpetual
tax benefit, rather than considering the
multiplier effects and lowered cost of
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capital that a well-managed REIT brings.
LAUNCH AND
I M P ROV E L AT E R
We conclude that perhaps the best thing
is to get REITs launched in the Philippines,
even if they are imperfect at the start. It
takes time for the market participants,
including the government and stock
exchange, to get comfortable with REITs
and to understand how beneficial a REIT
regime might be. As the market does get
comfortable, the regime can be tweaked
to improve it, and the well-managed REITs
outperform, encouraging others.
If the developer sponsors can see through
to what the valuations need to be in the
current environment, then they will launch
REITs at yields that reflect the significantly
higher risks that the Philippines currently
offers. Somehow, we doubt this so, if REITs
are introduced, it will be at valuations that
will only be attractive to local pension
funds that are starved for yield.
About the author: Charles Isaac, CFA, is a
Founding Partner of B&I Capital with over 25
years of experience as an Asian equity and
REIT fund manager. The company, which has
offices in Zurich and Singapore, specialises in
managing REIT funds for third parties and has
about US$1.2 billion of AUM.
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