Real Estate Investment Trusts have a reputation for growing slowly and paying out a high percentage of their earnings in dividends. They earn their money from renting out their shop, office or industrial space, and taking a pre-agreed chunk of their tenants' revenue. Singapore REITS have also grown by continually buying additional properties. Without these acquisitions, their growth would be limited to increasing their tenants' rents. CapitaLand's China Retail REIT, however, may not have this benefit.

Here's the background:

CapitaLand announced before the holiday that it had received conditional approval from the SGX to launch its Chinese Retail REIT, a first on the exchange. This means that they are going to take the Chinese shopping malls which they own through private trusts and sell to investors through a publicly listed REIT.

It will be called CapitaRetail China Trust, and will consist of seven malls: three in Beijing, one in Shanghai, one in Zhengzhou, one in Inner Mongolia and another in Anhui. It has a deal to build 21 malls with Wal-Mart as the anchor tenant, with an option for another 14. The REIT will have the first right of refusal to buy any other properties from CapitaLand's private funds, should they decide to sell them.

There was no other information given about the possible returns on the REIT other than the fact that 'CapitaLand views the retail industry in China as a strategic growth area and intends to participate in the growing retail market in China through CRCT.'

CapitaLand told Reuters that it will raise 'roughly' about S$320 mln but gave no further details.

CapitaMall Trust, one of Singapore's biggest retail landlords, will take a 20% stake in the REIT, saying it 'believes that the investment in CRCT will be yield-accretive in nature, so that Unitholders can expect to enjoy a higher distribution per unit'.

The problem for CapitaLand is that according to the China Economic Net, 'Chinese REITs are difficult to create because of the high taxes involved in transferring Chinese properties into off-shore companies, which are needed to ensure rental income can be packaged regularly into shareholder dividends.'

Higher taxes means unitholders will get a lower yield from the REIT.

Also the retail market in China might not perform as well as what CapitaLand expects, with the Chinese government raising consumption taxes to reduce the gap between the rich and the poor.

On the other hand, CapitaLand has stated that this will be a long term investment, and with the Beijing 2008 Olympics just around the corner, this REIT might have come just in time to cash in on it.

Sofar, CapitaLand has been a pretty good bet on China. The stock has jumped around 220% over the last 3 years, compared to a 50% rise in the Straits Times Index. But trading at 2.25x book value and a PE ratio of 123 times (!!!), the stockprice doesn't have a lot of room for error, if CEO Liew Mun Leong and his team take any missteps.


Desiree Pakiam