Hong Kong Prepares For Biggest REIT IPO

The REIT revolution continues to spread around the globe. Recent proof: the initial public offering (IPO) of The Link REIT, a portfolio of 2.85 million sq. ft. of ground-floor retail space and 59,000 commercial parking spots once owned by the Hong Kong Housing Authority. The IPO — which is expected to debut on Hong Kong's Hang Seng exchange in coming weeks — is valued at almost $2.7 billion, making it the largest REIT offering in history.

The IPO was scheduled for mid-December, but last-minute legal problems delayed the deal. The Hong Kong government, which is selling off the properties, postponed the issue until it could resolve a legal challenge by one Hong Kong housing tenant who objects to the possibility of sharp rent increases post-IPO.

Government officials in late December said they are determined to bring the REIT to market, but refused to say when. Investors close to the deal fully expect the REIT to float early in 2005. Link's underwriters are HSBC, Goldman Sachs and UBS.

This massive offering could open the floodgates for future REIT offerings throughout Asia, says Les Loffman, director of REIT services at Ernst & Young. “We predict that Asia will definitely see many large REITs emerge over the next few years,” he says. “It's already happened in Europe, and Asia is clearly next.”

The European REIT industry was born in the early 1990s, but the phenomenon is relatively new in Asia. Japan's first REIT hit the market in 2000. In December 2004, the Suntec REIT in Singapore raised $441 million on its portfolio of office and retail properties. That made it Singapore's largest REIT offering of the year.

According to the Link prospectus, the REIT's forecast dividend yield will range from 6.65% and 6.85% on an annualized basis by March 2006. The portfolio was 9% vacant as of mid-December.

In late November, people lined up outside a Hong Kong bank branch to sign up for shares of the REIT. Hong Kong retail investors can buy shares at a 3% discount to the final price, and that will give them a higher dividend yield. Global investment firms have also poured a fortune into the REIT. American International Group (AIG) invested $573 million, for an 18.8% stake.

The REIT's appeal may be driven by the scarcity of land in Hong Kong, a city known for its densely packed shopping districts and heavy automobile traffic. Link controls 13.7% of the entire inventory of commercial parking spaces in Hong Kong. The average monthly rent at a Hong Kong shopping mall is the equivalent of roughly $2,367, according to the Hong Kong Housing Authority.

What's more, Hong Kong property prices are finally rebounding after a six-year slump, which was exacerbated by the 2003 outbreak of severe acute respiratory syndrome (SARS). But the Hong Kong economy is expected to expand by 7.5% for 2004, which would be double the rate in 2003.

Ernst & Young's Loffman believes that the REIT structure is a natural fit for the Pacific Rim. “People want yields over here [in the United States] and they also want them over there.”

The Link REIT dwarfs the next largest REIT IPO in history by more than $2 billion.
REIT IPO Date Funds Raised Property Types
Link REIT Jan. '05* $3 billion retail and parking
Boston Properties (BXP) June '97 $902 million office
source: public filings

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