The W430bn (US$369m) IPO of Lotte REIT, South Korea’s largest real estate investment trust listing, was a much-needed boost to the country’s REIT market.
South Korea first introduced REIT rules in 2001, but the market has been languishing far behind its Asian peers. Before the Lotte listing, only six REITs were trading on the country’s stock exchange, out of 2,264 listed companies. Most listed K-REITs are relatively small with a single investment property and a market capitalisation of less than W50bn.
Low interest rates drove demand for yield stocks in 2019, including REITs, but Lotte’s deal was far from straightforward.
In March, local hypermarket chain Homeplus withdrew its up to W1.7trn IPO due to weak investor demand. The Korea Retail Home Plus REIT would have been by far the nation’s biggest deal of its kind, but people involved in the transaction said the size was a step too far.
Department store chain Lotte Shopping had also looked to list a property portfolio in a Singapore REIT in 2014.
Convincing investors to look beyond the failed Homeplus listing was certainly a challenge, but Lotte Shopping remained convinced that a Korea listing was possible at the right size and with the right assets.
After Korean government bond yields tumbled to a multi-year low in August, Lotte Shopping launched the REIT in October, targeting a more modest W430bn.
The low rate environment, together with the familiarity of the Lotte brand, helped draw strong interest from both domestic and international investors. The institutional portion accounted for 65% of the deal, and about 47% of that was allocated to international investors, including high-quality global long-only funds, REIT specialists, regional multi-strategy funds and South Korea-focused funds. Retail buyers took 35% of the deal. Both tranches were heavily oversubscribed.
The IPO priced at the top of the range with a 2020 forecast dividend yield of 6.37%, valuing Lotte REIT at W860bn and making it comfortably the largest listed REIT in the country.
Lotte Shopping has committed to holding the remaining 50% stake in Lotte REIT, which has a portfolio of four department stores, four discount stores and two retail outlets and has the rights to make a first offer for around 80 more stores.
Investors bought into the idea that the vehicle would become a long-term funding source for the group, with the potential for additional acquisitions pointing to future asset growth.
Lotte REIT traded well in the secondary market, even though Korean rates rose after the pricing date. The shares ended their first day of trading on October 30 up 30% to W6,500, and hit an all-time high of W7,100 a day later, 42% above the issue price. The counter finished IFR’s review period at W6,530, consolidating those first-day gains.
HSBC, Korea Investment & Securities and Nomura led the float.