Details: The Pricing of Property Trust IPOs in Australia
William Dimovski & Robert Brooks
Springer Science + Business Media, Inc. 2006
Abstract Following Brounen and Eichholtz (2002) this paper adds to the
international literature investigating the underpricing of REIT initial public
offerings (IPOs), with a study into Australian property trusts. This study finds that
initial day returns can in part be explained by forecast profit distributions (or
dividends) and the market sentiment towards property trusts from the date of the
prospectus to the date of listing. There is some support for the Bwinners curse’’
explanation of underpricing with evidence that large investor or institutional
involvement at the outset of the IPO also has some explanatory power.
Keywords Initial Public Offerings (IPOs) . Property trusts . REITs . REIT pricing
The literature into industrial company initial public offerings (IPOs) has consistently
documented the phenomenon of the issue price of a company’s shares being
below the price at which the shares subsequently trade on the first day of listing.
This phenomenon is called initial day underpricing, or simply, underpricing. Some
United States studies (Ibbotson, 1975; Ritter, 1987; Ibbotson et al., 1994) reported
underpricing returns of between 11.4% and 47.8%. Australian studies (Finn and
Higham, 1988; How et al., 1995; Lee et al., 1996), report underpricing returns of
between 16.4% and 29.2%. The magnitude of reported first day returns internationally
is from 4.2% in France (Leleux and Muzyka, 1993) to an amazing 948.6%
for Chinese A-class shares (Su and Fleisher, 1999). A range of international
evidence is reported in Loughran et al. (1994).
Property Trust or Real Estate Investment Trust (REIT) IPOs have not returned
anything like the above industrial company IPOs for their initial subscribers but
they are a very significant sector for public equity capital investment. To help
explain how significant this REIT sector is in the Australian primary capital market,
J Real Estate Finan Econ (2006) 32: 185–199
DOI 10.1007/s11146-006-6014-5
W. Dimovski
School of Accounting, Economics and Finance, Deakin University, Australia
R. Brooks
Department of Econometrics and Business Statistics, Monash University, Australia
this study examines REIT IPOs that sought to raise capital from January 1994 to
December 1999 and subsequently listed on the Australian Stock Exchange. Over
$5.7 billion of public equity capital was raised from 37 equity REIT IPOs. It was
Australia’s second largest industry sector in terms of public equity capital raised
during this period and second only because of the Australian Government’s partial
sale of the telecommunications giant Telstra in 1997 which alone raised over $8.5
billion. Excluding the Telstra IPO, the property trust sector raised at least twice the
public equity capital of any other individual sector and more than twice the equity
capital of all resources IPOs during this period. Again excluding Telstra, the
property trust sector raised around one third of that raised by all industrial and
resource IPOs during this same period. It is also worth noting that a further $1.6
billion of equity capital was contributed by institutions and/or other substantial
investors to these REITs at the outset of the IPO.
Regarding REIT IPO underpricing returns, one of the earliest studies by Wang
et al. (1992) report a 2.82% lower first day trading price than issue price, for 87
United States REIT IPOs for the 1971 to 1988 period. Ling and Ryngaert (1997)
investigate a sample of 85 US REIT IPOs issued during 1991 to 1994 and find that
the average underpricing return is 3.60% for the initial subscribers. In Australia,
James et al. (1995) investigating a small sample of 18 property trusts IPOs during
1982 to 1988 find a mean underpricing return of negative 0.07%.
Given the magnitude of the capital raising and of the small first day underpricing
return averages for the initial investors, we believe further examination into the
characteristics of REITs would be useful. The negative first day returns are difficult
indeed to understand. It is not obvious why the initial investors could not have
waited for secondary market trading. While Ling and Ryngaert (1997) find that
greater institutional involvement and the amount of leverage used by the trust have
explanatory power with regard the level of underpricing of REITs, we argue that
forecast distributions (dividends) also influence valuation uncertainty and hence
underpricing. An important feature of the Australian Property Trust IPO<…

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