The talk of the town this week is the proposed merger between Mapletree Commercial Trust ("MCT") and Mapletree North Asia Commercial Trust ("MNACT") into a combined behemoth known as the Mapletree Pan Asia Commercial Trust with S$17.1 billion worth of assets under management. Through the proposed merger, MCT will gain ready access to footholds in key gateway cities across Asia, tapping on the established network, strong local expertise and on-the ground presence of both MNACT and their Sponsor, Mapletree Investment Group. Wider geographical exposure will also provide the combined entity a new trajectory for overseas growth. While the marketing materials make it seems everything is perfect, I will try to elaborate more on the elephant in the room for the upcoming merger: Yes- my thoughts are that this deal unfortunately does not bode well for certain group of unit-holders.
1. Existing downside risk for unit-holders of MNACT being transferred to MCT
(i) The biggest headache here is that the China and Hong Kong are still pursuing a zero COVID tolerance approach while many other countries have already started opening up and adopting a live with COVID strategy. Furthermore, Sinovac vaccines has been found in a recent Hong Kong study that it does not provide sufficient anti-bodies to neutralise the Omicron variant. It will be some time before things get back to normal before the pre-covid days. We can already see many negative rental reversion in the crown jewel Festival Walk of MNACT. Most Hong Kong retailers have remained conservative and cautious on committing to long-term leases.
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| There were 35 leases at Festival Walk in 1st half of 2021 that were renewed at an average -30% rental rate |
Gateway Plaza at Beijing also have 13 office leases being renewed at an average negative rental reversion of -24% during the most recent results announcement.
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| Beijing office also performed badly with -24% rental reversion |
(ii) Let me explain further here on another blip on the radar. Eventually, China and Hong Kong will have to open up their borders fully. This will lead to a stage whereby their healthcare system will be initially overloaded with many COVID cases and death rate will go up. This is similar to European countries and Singapore which have already went through this initial stage. Hence, there will be enhanced control measures in place which is obviously bad for business. I expect the opening up to be somewhere end of 2022 or even in 2023 which means that MCT will be picking up the tab for this issue while paying NAV price for MNACT.
2. MNACT properties are not in the same league as MCT's Vivocity and Mapletree Business Parks
Compare Festival Walk, the China and Japan commercial office properties to Vivocity and Mapletree Business City- I don't think we need to discuss this further to know that existing MCT unit-holders will be getting the shorter end of the stick here.
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| Vivocity |
3. Should Unit-holders of MNACT sell off their units upon resumption of trading?
Well, this is the fun part which needs some form of mental acrobatics given that once the trading halt is lifted, the market price will fluctuate. Due to point 1 and point 2 as aforesaid mentioned, there is a very high probability that MCT will dip below S$2 as MCT unit-holders will most likely be frowning at being given the shorter end of the stick. As such, MNACT trading price will be below S$1.19 along with the fact that this deal is not done yet.
In short, we can expect MNACT to be trading in the range between S$1.11 per unit (the last traded price) to S$1.19 per unit. My guess is that it will hover around S$1.15 per unit for now. Of course, if the price of MCT suddenly shot up instead to more than S$2.0039 per unit (the offered consideration to MNACT), then one can consider keeping it.
To sell or not for existing MNACT unit-holders will ultimately depend on your own entry price, concentration of your own portfolio and other investment criteria. For me personally, I maybe looking at exiting my MNACT current holdings as my entry price was around S$1.00 per unit for an immediate realization of my profits and re-deploy them to other undervalued commercial REITs.
4. Should Unit-holders of MCT sell off their units upon resumption of trading?
As alluded to the above points, there are some short term downside risks being transferred over to MCT from MNACT. This has no doubt some short term repercussion. But current medical advancements against COVID is picking up pace. The long term picture still bodes well for unit-holders of MCT in terms of assets and geographical diversification.
I plan to carry on holding my units in MCT to maintain sufficient portfolio diversification in my margin investment account portfolio.
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| Mapletree Business City |
Parting thoughts:
There will certainly be some unhappy unit-holders who would have preferred their own plain vanilla REIT focusing entirely on either overseas or Singapore. Another point that I want to bring up to everyone is that from long term perspective, I believe that the merged entity of Mapletree Pan Asia Commercial Trust will have economies of scale and more diversity of assets. Last but not least and most importantly, the sponsor is Mapletree and behind it is the financial might of Temasek supporting it- this is a premium factor in itself.
P.S: I am currently an unit-holder of both MCT and MNACT units.
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