Wednesday, 8 May 2013

Croesus Retail Trust

My 4th Semester in NUS was finally over. As it was my first time taking 5 core modules, it had been a challenging semester for me, and it does not help that 2 of the modules are particularly demanding. Anyway, I shall leave the details to my next Academic Updates post.

Back to the main topic of this entry. Croesus Retail Trust (CRT) is a trust which focuses primary on Japan's retail mall and will commence trading this Friday (10 May 2013) at 2:00 pm. 

At first glance of the prospectus, the 8% yield seems to be really attractive given the 5 to 6% average yield of other existing REITs. However, unlike other REITs, Croesus Retail Trust is in fact a Business Trust. Although CRT had claimed to distribute 100% of its distributable income during the first 2 years and at least 90% of it in the subsequent years, they are not obligated to do so. Furthermore, unlike REIT, CRT does not enjoy tax benefits by distributing at least 90% of its distributable income. 

If you had attended any financial investment course, you will learn that returns will always come with a price in the form of risk. Hence, higher the return, higher the risk. There is also a saying that IPOs are seldom underpriced. The seemingly attractive 8% yield should therefore signal the considerable risk associated with CRT. Apart from the typical risks which are also present in REITs, CRT are further subjected to additional risk such as high gearing ratio, exchange rate risk and its properties are geographically concentrated.

Japan, which is located near major tectonic plate boundaries, is frequently strike by earthquakes. This represent a significant risk for CRT as its properties are concentrated in the earthquake prone Japan. Properties damaged by earthquakes will incur heavy cost on the trust and significantly disrupt its operation. An abstract from the prospectus:  

All the Properties are located in Japan, a country with a relatively high risk of earthquakes of high magnitude and frequency. Earthquake insurance will not generally be maintained on the Properties, except where the Probable Maximum Loss (as defined herein) for a Property is in excess of 15% of current building replacement construction cost. Probable Maximum Loss is defined as the probable maximum loss (i.e. repair and reprocurement expenses) that would be incurred if a major earthquake struck. 

This means that damages caused by earthquakes are generally not covered by insurance. Any damages to properties will represent significant cost to the Trust and hence affect its ability to pay dividends. 

Given the low interest, yield hungry environment, investors might be drawn by the attractive 8% yield. However given the potential risk mentioned in this entry, one should exercise due diligence in evaluating the risk-return trade-off before subscribing to this IPO.

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