TESCO PLAN B17BN PROPERTY FUND IPO

Sompong Rungnirattisai (left), Tesco Lotus Property’s director, and Somchai Boonnamsiri, CEO of KTAM, show the Plus Mall Srinakarin, one of the star assets of the TLGF.

Tesco, the UK hypermarket chain, plans to raise 17 billion baht by selling shares in a Thai property fund.

Sompong Rungnirattisai, property director of Ek-Chai Distribution System Co, a Thai unit of Tesco, said the proceeds would be used for its retail business expansion in Thailand.

The property fund will generate revenue from the rent of 17 Thai shopping malls where Tesco Lotus stores are located. Tesco will lease its hypermarkets from the property fund.

The Tesco Lotus Retail Growth Freehold and Leasehold Property Fund (TLGF) will have the largest initial public offering of a property fund in Thailand, Ek-Chai said in its statement yesterday.

"The 17 shopping malls to be transferred to the fund have combined appraisal values of more than 17 billion baht. Our property fund will be listed on the SET next month," the statement said.

The malls are scattered around Thailand, including two branches in Bangkok and its vicinities.

Krung Thai Asset Management (KTAM) is the fund manager while Phatra Securities is the financial adviser for the deal and local underwriter, while Merrill Lynch, Nomura Securities and Royal Bank of Scotland are underwriters for foreign investors.

Local roadshows will be organised for Feb 20, with international ones at the end of this month.

Tesco Lotus will continue to be the main tenant of the retail properties, leasing hypermarkets and food courts in all shopping malls. It will also act as the property manager, leveraging its expertise as a mall operator to manage the 17 assets, said Mr Sompong.

The property fund's shareholder structure will be retail unitholders (50%) and institutions and existing holders (50%). The Securities and Exchange Act prohibits existing shareholders from holding over 33% in a property fund.

"We see strong demand from institutions but don't want them to control a majority stake," Mr Sompong said.

He said Tesco Lotus is considering developing two more outlets to add to the fund this year.

A majority of the funds from the IPO will be used for business expansion as Tesco Lotus allocated 7 billion baht to build 2-3 new branches and renovate existing stores this year. Normally hypermarkets are renovated every five years.

The same-store growth rate at Tesco Lotus is 3-5%, higher than the industry.

Of the total retail space at TLGF, 26% is occupied by Tesco Lotus, 36% for other retail tenants and the rest for other services. "The main revenue of the property fund will come from two parts _ rental space and retail sales revenue from Tesco Lotus," Mr Sompong said.

Somchai Boonnamsiri, CEO of KTAM, said the freehold assets in the property fund constitute 73% of the total with the rest leasehold assets.

Mr Sompong predicts an investment return above 7-8%, on par with the property fund industry, which has grown by 50% in recent years with asset values totalling 99 billion baht.