IPO...Sunway REIT

Sunway REIT Management Sdn Bhd (SunREIT) has told institutional investors that its dividend yield range would be between 6.8% and 7.5%.

A source familiar with the matter said the dividend yield was not fixed as yet, but the REIT manager was able to provide the institutional investors a range that it was confident of achieving, based on the track record and forecast net profits of the properties injected into the REIT.

SunREIT had also earmarked a dividend yield of 6.86% for its cornerstone investors. SunREIT’s cornerstone investors are the Government of Singapore Investment Corp Pte Ltd (GIC), the Employees Provident Fund (EPF), Permodalan Nasional Bhd (PNB) and Great Eastern Assurance (Malaysia) Bhd, which have a collective 14% stake in the REIT.

SunREIT’s dividend yield for the financial year ending June 30, 2011 would be 6.9%. At 7.5% dividend yield, this would put SunREIT as among the higher yield-REITs listed on Bursa Malaysia Securities.

There are several Malaysian REITs that have dividend yield of more than 8%, but interest among foreign and institutional investors was low as these REITs were small in size and liquidity.

Although REITs were known as defensive stocks, the 10% withholding tax had also dampened interest in REITs. Singapore does not impose a withholding tax on REITs.

If SunREIT’s listing could stir strong foreign interest, it would spearhead some of the efforts to look at ways in making the sector more attractive.

Inestors would also be looking for growth stories and liquidity when it came to investing in REITs, and hence, the withholding tax should not be too much of a concern.

Upon listing, SunREIT would be the largest initial public offering (IPO) to date for 2010, with about RM1.65 billion expected to be raised from the flotation exercise. It would also be the largest and most liquid REIT listed on Bursa Securities.

However, industry observers said SunREIT was expected to face heated competition with another REIT — CapitaMalls Malaysia Trust (CMMT) — that had recently received regulatory approval to float its three mature Malaysian assets on Bursa Securities. The REIT is expected to list on July 16 2010.

SunREIT had more and better assets compared to CMMT. SunREIT’s jewel in the crown, the Sunway Pyramid Shopping Mall, would enjoy higher rental pricing power, given that it was the prime shopping mall in the Sunway/Subang Jaya area.

Sunway Pyramid’s average monthly rental per square foot had increased to RM8.99 for the eight months ended Feb 28, 2010 from RM7.93 for the year ended June 30, 2007. Sunway Pyramid also boasts an average occupancy rate of 99.3%.

In contrast, CMMT’s jewel in the crown, Sungei Wang Plaza in Kuala Lumpur, was 62.8%-owned by CapitalMalls Asia Ltd (CMA) and thus, it would be more challenging for CMA to dictate rental pricing.

However, CMMT should not be underestimated as it had a strong parent in CMA, which is one of Asia’s largest mall owners and managers, with more than 70 malls in Singapore, China, India, Japan and Malaysia. CapitaMalls Asia may have only three properties injected into its Malaysian REIT currently. But given its track record and aggressiveness in acquiring and running retail malls across Asia, it is possible that more properties would be injected into the REIT in the future.

Up to 1.35 billion units would be listed, while a total of 786.52 million units would be offered for sale under the IPO.

CMA would retain a 41.7% stake in CMMT, but there is an over-allotment option of up to 15% of the total units amounting to 117.98 million units, which would mean CMA could retain only a 33% stake in CMMT.