Will Manulife's $470 million IPO turn the tide?

By Istvan Loh

New share offerings by companies in Southeast Asia have been at a low this year. According to Dealogic, a financial analytics and technology firm, the amount raised in the region in the current year is just US$505 million, a fraction of the US$2.6 billion raised a year ago.

The modest volume of IPOs in Singapore could be due to the volatility of the stock market. The Straits Times Index was hammered down 12.1 percent in January only to rebound in March and April before beginning a downward slide in May.

An important reason for this decline has been the sharp increase in redemptions from funds which have invested heavily in the Singapore stock market. The necessity to pay back investors has led to increased selling pressure in the equity markets.

In these conditions, Manulife's US$470 million IPO is evoking a surprisingly positive response.

Are REITs making a comeback?
Manulife Financial Corp. is Canada's biggest life insurer and its foray into the Singapore stock exchange is its second attempt.

In 2015, the company had planned a US$420 million issue in Singapore. But unfortunately, the timing coincided with the financial crisis in Greece and the stock market crash in China.

When announcing its decision to shelve the issue in July 2015, the Canadian REIT had said, "Depending on market conditions, the IPO is expected to proceed at a later date."

In its May 3 prospectus, Manulife has announced that it is offering 566 million units at a price of 82 cents to 83 cents each. It is expected that all the units will be sold at the top of the price range.

The trust is backed by three office buildings in Atlanta and Los Angeles. Investors will get the chance to put their money into the US commercial real estate sector.

Cornerstone investors include DBS Bank Ltd, Malaysia's Fortress Capital Asset Management, Oman Investment Fund, and Lucille Holdings Pte. The private banking clients of Credit Suisse Group AG and DBS Group Holdings Ltd have also participated in the issue.

Anchor investors and cornerstone investors are expected to take up approximately 80 percent of the issue, virtually guaranteeing its success.

The US commercial real estate sector has recorded substantial gains in the last six years with the Moody/RCA Commercial Property Price Index almost doubling since 2010 when it had reached its nadir. In the past, investors into the US commercial real estate sector have been largely from Canada and Europe.

The trend over the last few years has changed with investors from Asia seeking to take part in the American property market. Last year, over 34 percent of foreign investment in the US commercial real estate was from Asian investors.

REIT market in Singapore
There are about three dozen real estate investment trusts in Singapore, accounting for a total market capitalisation of approximately US$49 billion.

They were first launched in 2002 and have since then grown to make Singapore the sixth largest REIT market in the world and the third largest in the region after Japan and Australia.

In an effort to give a push to the real estate investment trust market, the Monetary Authority of Singapore implemented a number of changes last year. The new rules require greater disclosure and impose higher regulatory costs. They could lead to a wave of consolidation among the existing trusts.

On the positive side, dividend yields from REITs are at a five-year high. A recent Thomson Reuters survey of 14 prominent REITs that used month-end data recorded over the previous five years indicated an average yield of about 6.7 percent in January, the highest level achieved since early 2011.

But REITs with industrial properties could face headwinds. It is expected that occupancy and rental rates could remain depressed in 2016 because of the new supply being added.

The slowdown in the manufacturing sector could also lead to prospective tenants being reluctant to enter into new leases. Consequently, Singapore's REITs are expected to continue their overseas asset acquisition drive.

Positive investor response to Manulife's IPO
The offer from Manulife is generating interest from investors for several reasons. Firstly, the trust's properties are located in the US, where the commercial property market is currently stable.

The second reason for Manulife's offer being attractive is that the trust has said that it will give a dividend yield of 6.6 percent this year and 7.1 percent in the next year. At the time of the aborted offer last year, the trust had said that its yield in 2016 would be 6.3 percent.

The yield of 6.6 percent is 4.3 percent higher than that available on Singapore's 10-year government bonds, a significantly large difference.

This is the biggest offering by far in recent times. In November, BHG Retail REIT raised US$194 million, a substantially smaller sum.

The success of Manulife's IPO may serve to revitalise the Singapore stock market and give it a much-needed boost. Trading activity is expected to start on May 20. Investors will be keeping a close watch on the performance of the trust to see if it lives up to its commitment.

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