Sasseur REIT is set to become the latest REIT to be listed in Singapore. Many investors might be keen on getting in on the action but might find the 700-plus page prospectus just too long. To help investors, I have done the dirty work and have summarised my findings over a series of articles.
In my previous articles (here and here) on Sasser REIT, I discussed key issues such as its rental income projections, rental contracts, balance sheet and macroeconomic data. In this article, I will focus on three risks that I have picked up on during my research.
As a quick recap, Sasseur REIT owns a portfolio of four outlet malls in China. As of 30 September 2017, the total portfolio has been independently valued at S$1.5 billion. With that, let’s look at the risks that I have identified.
As mentioned earlier, Sasseur REIT has a relatively concentrated portfolio of just four properties. Worse still, all of its properties are located in China, exposing it to geographical concentration. Below is the breakdown of its property income by assets.
Source: Sasseur REIT IPO Prospectus
Furthermore, as you can see from the chart, Chongqing outlet accounts for 71.4% of the total portfolio property income. If the anchor asset were to undergo a period of underperformance, there would be a significant loss of income for the REIT.
Highly dependent on entrusted manager
Unlike other retail REITs that lease out their space directly to tenants, Sasseur REIT has appointed an entrusted manager to manage and operate the assets. The REIT will collect the rental income through the appointed entrusted manager.
Because of this agreement, Sasseur REIT is highly dependent on the entrusted manager’s ability to meet its obligations. If the entrusted manager’s financial position is compromised for whatever reason and is unable to fulfil its obligations, the REIT may be in a danger of losing income.
Foreign currency risks
Like the other China REITs listed in Singapore, Sasseur REITs earns its rental income in the renminbi, but has to convert it to Singapore dollars for distributions. As a result, an appreciation of the Singapore dollar against the renminbi will lead to foreign exchange losses and lower distributable income.
The REIT will also be liable for a repatriation tax when transferring the money from China to Singapore, which will further eat into the distributable income of the REIT.
High borrowing cost, leading to low-interest coverage ratio, may limit growth opportunities
The effective interest rates on the onshore loans and offshore loans for Sasseur REIT are 5.9% and 4.0% respectively. This is a relatively high cost of borrowing, especially when considering that the REIT is achieving a rental yield of 6.45% on its properties, which is just marginally higher than its borrowing cost. The high finance costs have resulted in a low-interest coverage ratio of just 3.96 times, putting the REIT at risk if interest rates rise further.
The Foolish bottom line
Besides identifying the growth prospects of an IPO company, it is important that investors also know the potential downside risks. In my opinion, Sasseur REIT, despite operating in a high-growth space, may have too many potential pitfalls that can have adverse effects on its profitability and distributions. Taking everything into consideration, I suggest investors should stay on the sidelines, for now, to see how the story develops before making an investment decision.
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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 Jeremy Chia doesn’t own shares in any companies mentioned.