Reits take hold in the Asia-Pacific

From Singapore to Japan, they offer much in the way of investments

REIT structures now exist in all of the Asia-Pacific markets in which we believe institutional investors should consider core property acquisitions. Australia created the Listed Property Trust (LPT) structure in 1971, Japan introduced the J-Reit structure in 2001 and since then South Korea, Singapore, Taiwan and Hong Kong have all adopted their own versions of the Reit - real estate investment trust - structure.

We believe that Reit structures contribute to local property markets in a number of ways, including expanding capital sources, increasing liquidity in the market and adding transparency to the industry through required public disclosure of information and analysts’ increasing focus on the property sector.

The existence of Reits also gives investors another method for adding property to their portfolios, particularly retail investors who generally have fewer practical options for gaining exposure to real estate than institutions. While certain large US Reits are operating globally, Asia-Pacific Reits are also becoming active outside of their domestic markets in some cases where they are not restricted by legislation.

The Australian LPT sector continues to lead other Asia-Pacific countries in terms of total market capitalisation, market capitalisation as a proportion of the value of institutional-quality real estate, and also the trend for domestic Reits to acquire overseas properties.

In October 2006, the equity market capitalisation of the LPT sector was approximately A$119 billion (S$147 billion), or more than 47 per cent of the value of investable Australian real estate, according to estimates by research firm DTZ.

It should be noted that more than 40 per cent of the assets by value that LPTs owned were in foreign countries. Some LPTs, such as the Babcock and Brown Japan Property Trust, which invests exclusively in Japanese real estate but is listed in Australia, own only assets outside Australia, while others started as purely domestic LPTs and have since added foreign properties to their portfolios.

Australian capital plays a significant role in cross-border Asia-Pacific real estate transaction volume, and LPTs are the source of a sizeable share of that capital. The size of the Australian LPT market relative to the Australian economy and value of Australian real estate suggests that other Asia-Pacific Reit markets have ample room to grow substantially.

Growth potential

Japan’s experience is one that reveals the potential for explosive growth in the Reit market. The first J-Reits launched public offerings of shares in 2001 after regulations creating the structure were enacted the previous year. From two J-Reits at the end of 2001, the sector has grown in just over five years to include a total of 41 J-Reits with an aggregate equity market capitalisation of 5.9 trillion yen (S$75 billion) as of February.

Based on average debt levels and appraised values of portfolios, it is estimated that J-Reits owned approximately 6.3 trillion yen of property throughout Japan in March, across all market sectors, including hotels.

J-Reits listed on the Tokyo Stock Exchange are, as of March, prevented from investing outside of Japan by exchange rules, but there are ongoing discussions on a possible change that would allow international investment.

The Singapore Reit (S-Reit) market has also grown rapidly, reaching a size of 13 S-Reits and an equity market capitalisation of more than $14 billion in the four years to August 2006.

The number of S-Reits is expected to increase to at least 15 by end of 2007, including the MacarthurCook Industrial Reit which was announced in March this year.

The first S-Reit, CapitaMall Trust, conducted its initial public offering in a time of economic uncertainty in July 2002. It was well received by investors familiar with the quality retail properties it owned, and effectively gave a boost to the Singapore property market.

Following the trend in Australia, a number of S-Reits own properties outside Singapore. Allco Commercial Reit listed shares in Singapore in 2006 but owns properties in both Singapore and Australia. Ascott Residence Trust, a serviced apartment S-Reit owning properties in various Asian countries, was subsequently launched.

Mapletree Logistics Trust owns industrial properties in Singapore, Hong Kong, Malaysia and China. These cross-border holdings by Reits represent a move towards regional, and even global, flows of capital, adding to market liquidity by increasing the number of market participants and capital sources.

Reits listed in Hong Kong began with The Link Reit in the fourth quarter of 2005, the largest Reit IPO in the world when it issued shares worth US$2.8 billion. Hong Kong Reits now include GZI Reit, with properties in mainland China. Two other IPOs, one in the fourth quarter of 2005 and another in the second quarter of 2006, brought the Hong Kong Reit market capitalisation to HK$49 billion (S$9.5 billion) at the end of June 2006.

Taiwan launched its first Reit with an IPO of Fubon No. 1 Reit in March 2005. As of April 2006, another three Reits had been launched.

South Korea had an earlier start to its Reit market, but the sector was under-utilised due to regulatory hurdles that hindered the formation and operation of Reits. The authorities subsequently amended the regulations and also introduced a new structure in 2004 called the Real Estate Trust Fund (RETF).

By May 2006, the RETF market size had surpassed the Reit market cap in South Korea, although there is no secondary market for RETFs. Thed authorities are expected to make additional changes to the Reit structure, including allowing them to be offered as blind-pool funds, giving the Reits more investment flexibility.

As the various Reit markets continue to grow, they provide an increasingly important source of capital to the real estate sector in the Asia-Pacific region. Rising cross-border investment by Reits also enhances the flow of capital around the region’s real estate markets. Reits are already involved in an increasing share of property transactions in Asia-Pacific markets.

In Japan, Reits are often considered an exit strategy and are targeted by sellers of properties. A study by Japan’s Association for Real Estate Securitisation (ARES) estimates that at the end of 2005, there were 430 private funds in Japan owning property valued at approximately 6.1 trillion yen. Of these funds, an ARES survey found that 53 intended to sell their properties to existing J-Reits as an exit strategy, and another eight intended to place their assets in new J-Reit IPOs.

Key advantage

In another example, in Singapore, four of the six major retail property transactions in the second quarter of 2006 involved acquisitions by Reits.

Another important benefit to Asia-Pacific real estate markets from Reit proliferation in the region is the new information made available to the public. One way this happens is through the disclosure regulations imposed on Reits, although these vary by country.

In mainland China, coordinated official rules and regulations have not been drafted or circulated for comment in the real estate industry. This is not to say that there have not been efforts to advance various initiatives to create the first Reits in the country.

However, several hurdles remain before we will see greater momentum for launching the Reit industry in China. Despite the challenges, we would not be surprised to see development on Reit initiatives continuing in earnest over the coming years, and pilot Reit projects might be implemented in the next two to three years.

Tom Mills is head of Real Estate Research - Asia Pacific and Lijian Chen is global head of Real Estate Research at UBS Global Asset Management

Source : Business Times - 07 Apr 2007