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Capital Markets

REITs: Reality bites Champion

Too much of a good thing can be harmful, and so it is proving with Asia’s fledgling real estate investment trust sector. Given Asian markets’ passion for property, Reits were always going to be popular. Now one of the latest offerings suggests that investors are becoming more discerning.

Champion Reit is the vehicle of Hong Kong developer Great Eagle Holdings. Despite a strong new issues market and continued demand for the Reit concept, Champion’s $810 million IPO, sponsored by Citigroup, JPMorgan and Merrill Lynch, was poorly received even after the deal was priced at near the bottom of its original valuation range.

Is this a sign of the end of investors’ love affair with Reits? No, but it is a healthy signal, say bankers, that investors are becoming more choosy.

“The smart Reit money and the investors I’ve spoken to are all staying away from this one,” says a banker.

The reason for that, he says, is that Champion is a single-property Reit: the trust’s only asset is Citibank Plaza, a grade A, if ageing, office complex in Hong Kong’s central business district. There is nothing wrong with that per se, but because of the high valuation at which Great Eagle has sold the asset to the Reit and the high level of debt assumed to fund the purchase, the deal has been carefully engineered to enhance the initial yield for investors to entice them to buy the units.

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