Is BHG Retail REIT Attractive Enough For Investors?

BHG Retail REIT (SGX: BMGU), the only initial public offering (IPO) on the mainboard of the Singapore Exchange this year so far, started trading last Friday. The China-focused REIT had raised S$394.2 million from its IPO and offers a forecast yield of 6.3% in 2016 based on its listing price of S$0.80.

BHG Retail REIT is backed by Beijing Hualian Department Store, a Chinese-based retail group. The REIT currently has five retail properties that are located in Beijing, Chengdu, Dalian, Hefei, and Xining.

Chan Iz Lynn, the chief executive of BHG Retail Trust’s Manager, is upbeat about the trust’s future. According to a recent interview with Channel News Asia, Chan said that:

“…China is still growing and is still a strong economy that’s important to note. The middle class is also growing, so with that, consumerism and domestic consumption is actually on the increase so which means that there is a very strong need for a product that is a community mall.

(In) Singapore we call it a suburban mall, located near where they work, live, and play. These are the malls which actually serve them, they go there to watch movies, go supermarketing, buy their food, go for English classes, entertainment, you name it. This is a one-stop shop and that is the positioning we have for all our malls in the IPO portfolio.”

But with a rise in interest rates in the U.S. looking increasingly likely, and a slowdown in the growth of China’s economy, it might be an uphill battle for the REIT to promote itself to investors.

Indeed, investor interest in the REIT appears to have subsided after some initial excitement. Close to 24 million units of BHG Retail REIT were traded last Friday, but less than 1 million units had exchanged hands on Monday.

Currently, Mapletree Greater China Commercial Trust (SGX: RW0U) and CapitaRetail China Trust (SGX: AU8U) are both offering distribution yields of 6.7%, which are higher than BHG Retail Trust’s expected yield of 6.3% in 2016 based on its latest price of S$0.80 per unit. The three REITs are similar in that they are focused on Chinese retail properties.

But, as discussed previously by my colleague Chong Ser Jing, BHG Retail REIT is benefitting from a form of income support from now till year 2021. As such, its current distribution yield of 6.3% can be seen as an artificially inflated figure. Of course, BHG Retail REIT could grow to such an extent in the future that the removal of the income support will still result in the REIT having a very healthy yield.

But, the presence of the income support does raise a question: Should investors even be interested in BHG Retail REIT when there are other similar REITs available in the market with higher and, possibly, more sustainable distribution yields?

For more insights on investing and important updates about the stock market, sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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