UNDERPRICING OF SINGAPORE REAL ESTATE INVESTMENT TRUSTS INITIAL PUBLIC OFFERINGS

Abstract

Numerous studies have documented the phenomenon of underpricing of Real estate Investment Trust (REIT) Initial Public Offerings (IPOs) where the issue price is below the traded price on the first day of listing. Given the rapid growth of the REIT market and the lack of research on underpricing in Singapore, it is timely and pertinent to examine S-REITs and the factors that affect the IPO pricing of S-REITs. Ten hypotheses are tested using a combination of partitioning tests, correlations and case studies to determine if the evidence is consistent with different pricing models and IPO theories. Yield compression and its link to underpricing were also investigated. The data on fifteen S-REITs was obtained from S-REITs' prospectuses, the Singapore Exchange (SGX) and Thomson's DataStream©. Underpricing seems evident in the S-REIT market. Theoretical explanations like winner's curse, level of uncertainty regarding an issue's value and ex ante uncertainty can provide persuasive justification for it Explanatory factors with regards to underpricing like institutional involvement, issue size, leverage, issue price, developer-related S-REITs and forecast yield are capable of explaining the underpricing phenomenon. Interestingly, the results show that investors do not perceive developer-related S-REITs as dumping ground; medium-size S-REITs instead of the smallest size S-REITs are the most underpriced; and either underpricing or a higher dividend yield is sufficient to compensate the risk undertaken. Lastly, we may see less of the underpricing phenomenon in the future as long as market sentiments are favorable.