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A corporate building in Mumbai. Ascendas is bringing a bit of India to Singapore |
Ascendas India Trust began trading on the Singapore Exchange on August 1, the first of what is expected to be many real estate trusts in the region built around Indian property. Ascendas is well known in Asian real estate, with a reputation as one of the leading providers of what it calls business space solutions – IT, science, business and industrial parks. It manages 34 million square feet of these properties across Asia, and launched its first listed trust, A-Reit, in 2002, the first business and industrial space Reit in Asia. That trust’s portfolio has increased in size more than five times since the initial public offering.
Ascendas’s home base is Singapore but it has been active in India for 14 years. It launched a private real estate fund, the IT Parks Trust, in 2005, seeded by two of its key properties in India, the International Tech Park in Bangalore and The V in Hyderabad.
These assets are the foundation of the new Singapore listing. By the time Ascendas had decided to go to the listed markets, the two properties in the portfolio had been joined by another two, the International Tech Park in Chennai and CyberPearl in Hyderabad. The prospects for these assets are excellent: India’s GDP growth is expected to be 9.2% in fiscal 2007 and real estate absorption levels have grown at a compound annual growth rate of 41% between 2003 and 2006. IT-related property is arguably the most sought after of all, with the knowledge-driven services sector – IT, software and so on – accounting for 55% of the Indian economy.
The listing venue was an important consideration. "We looked at India, we looked at AIM, we looked at Hong Kong, we even considered Australia," says Jonathan Yap, chief executive of Ascendas India Trust. But Singapore has by far the most sophisticated and active Reit market in Asia ex-Japan. "The Reit laws here are well established, and investors are more familiar with India than they might be in, say, Hong Kong," Yap says.
An Indian listing was never really an option. "India does not yet have in place a structure for Reits or business trusts," says Nicholas Johnson, executive director in Asian real estate investment banking at JPMorgan, the sole financial adviser on the deal and a bookrunner alongside Citigroup and DBS. "There is a very strong market in Singapore that has been very supportive of Reits and Reit-like product."
However, bringing India to Singapore did involve challenges. For one thing, this isn’t, strictly speaking, a Reit. That’s because there is a 10% ceiling in Singapore law on the amount of a Reit that can be exposed to development rather than the passive rent-collecting that usually characterizes these trusts. Both because of the assets and because of investor expectations, that wasn’t going to work in this case, where the natural development proportion of the portfolio assets was 20%. "It has always been very clear from investors who want exposure in India that they want more than the 10% development that the Reit code allows," says Yap. "We had the choice of trimming down the development, or doing a new vehicle."
Business trust solution
Singapore has just the structure required: business trusts. First launched in 2006 under new legislation, they are similar to Reits but with a few key differences. Business trusts have a single responsible entity as both trustee and manager; Reits use a separate asset manager, like unit trusts. Business trusts have no limit on gearing, unlike Reits, but do have a higher corporate governance requirement in terms of the level of board independence required. So far, business trusts have been used in such areas as shipping and other infrastructure in Singapore, but there is nothing stopping them being used for property.
The business trust structure gave Ascendas a lot more latitude than a Reit. However, the company decided to impose constraints on itself voluntarily. It applied the 35% cap on gearing that is required for Reits but this can be lifted to 60% if the trust is rated. It also pledges Reit-like distribution obligations, of 100% of distributable income until March 2009 and at least 90% afterwards. Better still, distributions are exempt from Singapore income tax. In essence, these self-imposed restrictions make the trust identical to a Reit in every practical respect except the limit on development exposure.
Although a higher level of development exposure means greater risk, it doesn’t appear to have bothered investors much: the retail tranche was oversubscribed 20.2 times, the institutional side 46.2 times.
"There was overwhelming demand from institutional investors: they saw it as being the best of both worlds," says JPMorgan’s Johnson. "They’re getting 80% of assets giving them income and a cash yield, but with strong capital return potential."
Projections in the prospectus indicate an expected growth rate of 22% in distributions per unit between the 2008 and 2009 fiscal years (that is, starting April 2007), and the initial yield, at a projected 4.75%, is also attractive in Singapore terms. Besides, the development itself is not speculative. "It’s very low development risk," says Johnson. "This is the build-out of proven IT parks," most of it the Bangalore facility.
The trust has three ways to grow. It gets organic growth from the existing leases. It has a development pipeline of 4.2 million sq ft. And there will also be external acquisitions.
Singapore pride
Here, the trust gets a head start. It has the first right of refusal from the sponsor itself, Ascendas, which owns the CyberVale IT Park in Chennai. And it also has the right of refusal over assets from a new unlisted fund, Ascendas India Development Trust, a S$500 million ($330.6 million) development fund that was launched in June with anchor commitments from Bahrain-based asset manager Arcapita and ING Private Banking. The fund has already launched investments in tech parks in Pune and Nagpur and has a target asset size of $1 billion, with hopes to get involved at the greenfield level.
Foreign exchange exposures are hedged for the next two years and gearing at the start is low at 4.1%, although it should rise to 18.9% as trust loan facilities are drawn down.
The trust is important for Ascendas, but is also believed to have been warmly welcomed by Singapore institutions such as the stock exchange and the Monetary Authority of Singapore.
They take particular pride in the development of the Reit markets, especially since in terms of both assets and performance it has so comprehensively outstripped Hong Kong. Singapore already had multinational trusts, Chinese trusts, and trusts holding entirely foreign assets listed on its main board. Now it can add Indian real estate to the list.