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What Investors Need To Know About BHG Retail REIT

If you haven’t heard yet, well here it is: There is a new real estate investment trust to be listed on the Singapore stock market. BHG Retail REIT will be the second pure-play China retail REIT to IPO here. The first was CapitaLand Retail China Trust (SGX: AU8U).

So, let’s take a look at the prospectus that BHG Retail REIT has submitted to bourse operator Singapore Exchange to get a better understanding of what the REIT has to offer.

BHG Retail REIT’s initial portfolio will consist of five retail malls in China. These are all located in Tier 1, Tier 2, or other cities of significant economic interest in China.

One thing to take note of will be that BHG Retail REIT has good potential to grow as the REIT’s sponsor has given the REIT Right of First Refusal (ROFR) to purchase twelve other malls that it owns.

The sponsor and strategic investor for BHG Retail REIT is Beijing Hualian Department Store and Beijing Hualian Group, respectively. The latter, which owns nearly 30% of the former, is a leading integrated retail group in China with more than 20 years of retailing experience. With that long tenure in managing malls in China, investors may be reassured that BHG Retail REIT is in good hands.

Also the REIT has exposure to the high growth rates that are expected in the China economy. This could in turn mean higher rental revenues and distributions in the future.

Let us now compare BHG Retail REIT against CapitaLand Retail China Trust on three metrics – Distribution Yield, Gearing, and NAV (Net asset value).

BHG REIT will have a forecasted distribution yield of 5.7% and 6.3% for 2015 (based on an annualised forecast figure) and 2016, respectively. But, this is with the strategic investor’s agreement to forego some of its share of distributions from the REIT until 2020; the forgone distributions will become smaller over the years based on a fixed schedule.

Without the forgone distributions, BHG Retail REIT’s forecasted distribution yield for 2015 and 2016 will be just 4% and 4.5%, respectively.

These yield figures from BHG Retail REIT pales in comparison to CapitaLand Retail China Trust, which has an annualized yield of 7.2% for 2015 at its last closing price of S$1.47.

As of its listing date, BHG Retail REIT will have an aggregate leverage of 33.5%. This is higher than CapitaLand Retail China Trust’s gearing, which stands at 28.5% as at end-September 2015.

Based on the prospectus, BHG Retail REIT will have a NAV that is at a 3% discount to its issue price of S$0.80. This means that investors seem to have a small margin of safety. By comparison, CapitaLand Retail China Trust has a NAV of S$1.68 as at end September 2015; this means that investors have a decent 12.5% margin of safety over the NAV (at the price of S$1.47).

After comparing the three metrics from BHG Retail REIT and CapitaLand Retail China Trust, investors might have to give the former a closer look before making a decision.

BHG Retail REIT’s public offer is set to close at 12 noon today. Its units will start trading at 2pm on 11 December 2015.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Esjay does not own shares in any companies mentioned.