Asian REITs gain traction

Cerulli – Global Edge, April 2011

How to judge the real estate investment trust (REIT) market in Asia Pacific? One one hand, it had a stellar 2010, with the overall market increasing in market cap by 22.8% over the course of the year to US$158.6 billion, according to the Asia Pacific Real Estate Association (APREA). On the other hand, that’s still 20% less than its size October 2007.

So the overall story is one of revival rather than success. But in truth, it depends where you’re looking.

Once again based on APREA statistics, Australian (43.6%) and Japanese (26.3%) REITs account for by far the largest part of the regional REIT market. But when many investors think of the Asia Pacific market, they’re looking for the emerging market growth story that tends to exclude Australia and Japan, which are more likely to be handled in other portfolios. Looking at the ex-Australia REIT market, that market cap is at an all-time high: US$93.1 billion at the end of December, with Singapore very much the driver. There, the market grew has grown from US$7.8 billion in March 2009 to US$28.9 billion at the end of 2010 – it has more than trebled in size.

And this, really, is the story for real estate fund managers looking for Asian growth exposure. If one sees Japan and Australia as separate, then Singapore has succeeded in making itself the hub for regional REITs. It has done so through a number of measures, some about infrastructure, some market behaviour.

On the infrastructure side, the Monetary Authority of Singapore was very quick to see the opportunity in a regional REIT market and swiftly put in place the tax environment to allow it to flourish. Singapore Exchange, which has always had an eye for a new market opportunity, also made life easier for issuers and has been very supportive of its development.

On top of that, Singapore has been blessed with key issuers – chiefly Capitaland, but also Mapletree, for example – who have understood how to launch REITs that not only work for the company by generating regular cash from their assets, but also keep investors happy. A CapitaLand REIT – and there are now four of them in Singapore, plus two in Malaysia – puts its best assets into the vehicle, and gets its best people to run them. That’s in stark contrast to Hong Kong, whose own REIT market has stumbled and been unpopular, thanks largely to the habits of some early issuers who filled their structures with elaborate financial engineering that made them difficult to understand and often poor performers too.

When one looks at the Singapore REIT market today, it is usefully diversified. Analysts tend not to cover it as a single bloc anymore but a serious of separate sectors within the REIT universe, which is a clear sign of diversification: Nomura, for example, covers office REITs, retail REITs, industrial REITs and non-Singapore landlords in separate categories (and has notably different views for each, currently seeing office as the best opportunity). That last category, non-Singapore landlords, is particularly significant: vehicles such as Global Logistic Properties (not strictly a REIT but nevertheless a powerful real estate play) and CapitaMalls Asia have all of their assets outside of Singapore, increasing the sense of the country as a regional rather than a local hub.

In one significant new deal in 2010, Singapore welcomed an Islamic REIT, the Sabana Shariah Compliant Industrial REIT. While Malaysia had previously launched Islamic compliant REITs (and based on some interesting underlyings, like hospitals and plantations), Sabana was by far the biggest and was notable for attracting non-Islamic money from anchors such as Fidelity, as well as heavy Middle Eastern participation. Other new deals included Mapletree Industrial Trust, cementing Singapore’s position as a hub for logistics and industrial property.

Another encouraging thing about the Asian REIT market is that the number of centres within it is gradually increasing. This has been talked about for years but has always been undermined by either a lack of suitable infrastructure (such as tax rules in Thailand), political delay in getting legislation through (such as the Philippines), or a general lack of enthusiasm for the market’s development (Taiwan, Korea and until recently Malaysia).

APREA says Malaysia’s REIT market cap grew 122.7% in 2010, thanks largely to two new listings, Sunway REIT and CapitaMalls Malaysia Trust (another CapitaLand REIT). Market cap grew by 52.7% in Korea and 37% in Thailand during the same period, albeit from low bases. These markets are sufficiently small to be heavily changed by new listings: Golden Narae Real Estate Development Investment Trust and KOCREF 15 in Korea, Thai Commercial Investment Fund in Thailand. Another interesting trend speaking of regional growth and integration is a dual listing for a REIT: Fortune REIT, from Singapore, started this in 2010 when it received a second listing in Hong Kong.

Set against these promising themes are the uncertainties of the macro environment. Asia, in contrast to most of the world, is replete with liquidity, which has led to a number of Asian regulators seeking to curb speculation in their real estate markets, and to cool down their economies generally in growing fear of inflation. China, in particular, has intervened hard in its real estate market, and these trends are likely to have knock-on effects on REIT performance.

What does all this mean for fund managers looking at real estate in Asia Pacific? For a start, increasingly, there is a properly diversified range of opportunities for a fund manager to consider, and correspondingly increasing numbers of international fund managers are moving investment professionals into Singapore for real estate portfolio management on the ground. If a fund manager wants an Asian office trust, there are now plenty to choose from; likewise retail or industrial. If they want a REIT based on serviced apartments, or palm oil plantations, that can be done. If they want Islamic paper, or something based on Chinese shopping malls, that can be accessed too.

At the same time, the dust is settling on the financial crisis, leaving REITs with prudent risk management and steady income intact, and those with questionable levels of gearing or financial engineering in less good shape, if they have survived at all. That is making it easier to build a portfolio of more traditional, income-generating securities.

Fund researcher Morningstar’s Hong Kong database now lists 25 funds in the “Asia property indirect” category, including products from Aberdeen, First State, Henderson, Invesco, Prudential, Schroders and JF (run by JP Morgan) as well as local names such as Hang Seng and Bank of China Hong Kong.

The next step will be growing maturity of Asian REIT markets outside of Singapore and Hong Kong (not that Hong Kong’s has shown much sophistication as yet). Malaysia is now taking the opportunities of a REIT market seriously; sooner or later China will allow for the development of one there too.

A postscript: at the time of writing Singapore’s largest ever IPO was being launched – for a foreign company, HPH Trust, part of Hong Kong’s vast Hutchison Whampoa empire. Apart from being significant as a large Hong Kong company that has opted for a Singapore listing, HPH Trust stands out because it uses a structure called business trust. This was devised a few years ago in Singapore as a sort of cross between a corporate listing and a REIT; the company’s assets are held in trust structures and pay out a regular yield like a REIT. The business trust structure has not thrived in Singapore since its initial launches, but when the country’s largest ever listing takes that form, it suggests there’s much more to come, and they may well turn up on the radar of REIT asset managers too.