RREEF China Commercial Trust fell as much as 10% in its Hong Kong debut on Friday as many fund managers believed its US$288 million IPO overpriced

RREEF China Commercial Trust fell as much as 10% in its Hong Kong debut on Friday as many fund managers believed its US$288 million IPO overpriced the trust's only asset - a Beijing office complex.

But the property trust's manager said its planned acquisitions of more Chinese office buildings would keep investors happy.

Managed by Deutsche Bank's property investment unit RREEF, the trust offers rare exposure to rental income in China's booming property market.

The trust's manager, Paul Keogh, said a core group of institutional investors were backing a long-term policy of asset growth to lift returns.

The trust aims to buy office blocks, typically worth more than $200 million, in major cities such as Beijing, Shanghai, Guangzhou and Shenzhen. It will also look at assets in up-and-coming provincial capitals.

"The response today doesn't concern us," Keogh, executive director of RREEF China REIT Management, told Reuters in an interview.

"When we finished the investor roadshow we had a strong contingent of institutional support," he said, adding that top-grade Chinese buildings were expected to give total returns of above 10%.

The Government of Singapore Investment Corp. (GIC), is among the main investors in the trust, saying it would buy a stake worth up to US$34.6 million in the IPO.

In a week when Hong Kong's benchmark index scaled a series of record highs, units in RREEF China traded as low as HK$4.63 on Friday and closed at HK$4.73, down from an IPO price of HK$5.15 -- giving a forecast 2007 dividend yield of 6.73%.

That gives a spread of around 190 basis points over Hong Kong 10-year bonds. The only Chinese property trust already listed in Hong Kong, GZI REIT, is trading at a yield of about 6.4%, while Singapore REITs are trading at an average 140 basis points above local bonds.

Pipeline

REITs try to buy buildings with higher rental yields than their own dividend yield in order to lift investor returns. So when its unit price falls it becomes more difficult to find good acquisition targets.

Keogh said the share price fall would not block the property trust's plans to buy more Chinese buildings.

He added RREEF China will return to the stock market to raise funds for any acquisition, although its gearing of 34 percent is far below Hong Kong's limit
of 45% for REITs. RREEF will source deals for the trust.

"We have various acquisitions at different stages in the pipeline," said Brian Chinappi, a managing director at RREEF. "We haven't intended this as a single-asset REIT."

Many fund managers looking at the trust were wary of a glut of office supply in Beijing, where office yields of around 9 percent in the physical market far
outstrip the 6.2% offered by RREEF China on its IPO price.

But Keogh said it was wrong to generalise about Beijing's fragmented office market. Top-notch offices such as the trust's twin 25-storey Beijing Gateway Plaza, sold by the Gateway Group, were rare and in high demand, he said.

"This is one of nine in the whole market," Keogh said. "And premium grade-A supply in the coming years is equal to average absorption in the market in the previous period."

The lukewarm response to RREEF China IPO does not bode well for Hong Kong's real estate investment trust (REIT) market. The securities, which pay most of their income as dividends, have failed to catch on in the city as they have in Japan and Singapore, where investors like their mix of bond-like steady income and potential for capital gain if rents rise.

In Hong Kong, some REITs have used financial engineering to boost their near-term yield at the expense of future income growth, provoking criticism that they have tried to hoodwink investors into paying high prices for second-grade buildings.

The RREEF China trust did not employ any financial engineering, and Keogh said it was a good play on expected appreciation in China's yuan currency as well as rising rents and property values.