Known to be a regional Real Estate Investment Trust (REIT) listing hub, the Singapore bourse recently welcomed Sasseur REIT as it made its first appearance on the Mainboard of the Singapore Exchange on 26 March 2018. Touted as the first outlet mall REIT to be listed in Asia, Sasseur REIT opened trading at $0.805, 0.6 percent above its offer price of $0.80 per unit.
In a symbolic move, the China outlet mall operator is the first REIT to IPO this year and it attracted subscriptions that were 3.7 times the number of available units in the public tranche. In addition, the REIT marked the largest IPO to date this year, raising about $396 million in gross proceeds. But while the book building indicated a reasonable level of interest, it was not aptly hot.
So, for retail investors that had “missed” the boat when they were not allotted any units, should they consider buying into Sasseur REIT from the market?
About Sasseur REIT
The REIT’s sponsor – Sasseur Cayman Holdings – is a leading privately-owned premium mall operator in China, operating 9 premium outlet malls in the Chinese Mainland. It adopts a “super outlet” strategy which integrates shopping with lifestyle and activities options, which is – fairly speaking – not entirely uncommon.
In the initial portfolio, Sasseur REIT comprises four retail outlet malls in second tier cities in China, namely Chongqing, Bishan, Hefei and Kunming. The REIT also has right of first refusal to two properties in Xi’an and Guiyang, as well as a pipeline of three properties that would likely be injected in the future. Sasseur Shanghai has been appointed, under a 10-year entrusted manager agreement (EMA), for maintenance, management and operation of the REIT’s assets.
Strong Macro Trends To Ride On
One of the growth stories for premium outlet malls in China is the strong preference for high-quality branded luxury goods of the Chinese. Having witnessed the growing number of Chinese tourists in UK’s Bicester Village and France’s La Vallée Village (both premium retail outlet malls), I can personally attest to the growth potential for Sasseur REIT’s properties.
Driving the Chinese demand for luxury goods is none other than the rising affluence and spending power of its middle class. According to China Insights Consultancy, China’s nominal Gross Domestic Product (GDP) per capita has been rising at compounded annual growth rate (CAGR) of eight percent from 2012 to 2016, and it is still forecasted for an impressive CAGR of 7.4 percent from 2017 to 2021.
Naturally, rising income correlates to higher spending. Boding well for the REIT, consumption expenditure per capita of urban households in second tier cities in China is projected to rise at CAGR of 8.2 percent over the same period. In addition, while online platforms are expected to command a lion’s share of retail sales in China, outlet malls will still see stronger CAGR of 24.2 percent to reach a market value of Rmb144.9 billion by 2021. By 2030, China’s outlet market is projected to become the largest in the world.
To begin with, Sasseur REIT has managed to entice a number of reputable cornerstone investors that include e-commerce giant JD.com, Bangkok Life Assurance and Credit Suisse. The sponsor still withholds more than 50 percent shareholding, even in the event that over-allotment option is exercised in full, giving retail investors more assurance owing to the larger degree of alignment of interest.
Another important aspect to consider for an income-generating asset class, Sasseur REIT’s yield is also rather attractive. For Sasseur REIT, the sponsor is promising 7.5 percent yield (based on offer price of $0.80 per unit) for the forecast period of FY18 and 7.8 percent for FY19. Investors also do not need to wait long to see the first distribution which is expected to come in by 30 September 2018, in respect of the period from the listing date to 30 June 2018. Thereafter, distributions will be made on a semi-annual basis.
The more interesting part lies in the EMA with Sasseur Shanghai. Under the EMA, the entrusted manager will ensure that Sasseur REIT will receive rental payments comprising a fixed component and a variable component, unlike the typical lease-for-fixed-rent model. The fixed component has a three percent annual escalation rate, which ensures rental stability while the variable component is pegged to the respective sales of each tenant. This is similar to what some retail malls in Singapore are doing.
To provide more income support, the entrusted manager will also ensure that the REIT receive a minimum rent of Rmb472.9 million for FY18 and Rmb611.4 million for FY19. Should the resultant rent fall below the threshold, Sasseur REIT would be entitled to claim for the shortfall from the manager.
While the symbiotic relationship under the EMA creates some sort of income protection, the shortfall lies in the corresponding hefty management fees. For its service, Sasseur Shanghai will be paid a base fee which can be up to 30 percent of gross revenue or gross revenue less EMA resultant rent (whichever lower). On top of which, the entrusted manager is also entitled to a variable performance fee, though this component also helps to motivate the manager to deliver.
Notwithstanding that, the four initial properties in the portfolio have lease tenure balances of between 29 years to 36 years. This means that there are risks where the REIT is not able to renew or extend the land lease with the government in the foreseeable horizon.
In addition, Sasseur REIT’s portfolio occupancy rate is less than ideal for retail REITs, at just about 91.8 percent. In comparison, CapitaLand Retail China Trusts achieved an occupancy rate of 95.4 percent in the latest FY17. The problem gets compounded if we are to consider the REIT’s short weighted average lease expiry (WALE) of its tenancy leases of just 1.2 years. While the management opines that shorter WALE offers more opportunities for positive rental reversions during renewal as well as to replace poor-performing tenants, the risks of losing tenants are exponentially amplified especially during a downturn.
But the most worrisome concern that should be highlighted with utmost emphasis is the risk of the potential liability and/or forfeiture which the REIT’s Hefei and Kunming properties are exposed to. In the prospectus, it was disclosed that the two properties have breached non-compliance terms detailed under the Land Use Right Grant Contracts. That said, the sponsor has agreed to indemnify Sasseur REIT against any penalties, should the sponsor fail to complete any development, operation or management of the properties to reconcile with the Land Use Rights.
No Conviction For A Buy Case
Last but not least, while Sasseur REIT offers an attractive yield of about 7.5 percent and an interesting growth story, its debt-to-total assets ratio of about 34.4 percent is also higher than its peers’ average of 33.2 percent.
More importantly, its current unit price of $0.805 is slightly higher than its book value of $0.773, translating to a small premium of 4.1 percent. For property or REIT counters, buying at a discount to book value tend to give investors a larger margin of safety, because banks normally formulate financing rates based on a discount to book value. Compared to its local-listed peers, the newly listed REIT has more to prove than command a premium.