REITs - developments across the Asian region
Japan and Singapore, followed by Hong Kong, continue to dominate the REIT scene in Asia (ex-Australia) and will continue to do so for the foreseeable future. Japan and Singapore account for around 83% of the market capitalisation of Asian REITs. With Hong Kong, they account for around 93%.
However, there is plenty of activity in other parts of the region to reform current legislation or introduce legislation to create REIT markets. APREA has been involved in providing assistance in most of these initiatives.
A number of countries have plans to introduce REIT markets. Of these, Pakistan has already introduced a REIT framework, in February 2008. Schemes can be either developmental or rental and the minimum fund size is PKR5bn (about €50m).
The Philippines introduced a draft REIT Bill into Congress last year. Work is currently going on with regard to supporting studies and negotiating the Bill through the political process. APREA has a seat on a stock exchange task force that is leading this.
The Securities and Exchange Board of India (SEBI) introduced its long-awaited proposal for a REIT law in December 2007. It is now digesting public comments on the law. However, the draft law was a long time in coming and it is likely to be some time before the law becomes a reality. There are a number of reasons for this. First, there continue to be concerns about a consequent flood of new capital (foreign and local) flowing in to the real estate sector at a time when authorities are concerned to avoid further bubbles. In addition, there are other priorities - in Singapore in April this year the chairman of SEBI said REITs would only be introduced after dealing with more pressing financial market liberalisation moves, such as currency futures and a new system for the borrowing and lending of securities.
I also believe that more work needs to be done on the infrastructure required to support a REIT securities market (and the nature of these concerns applies generally to emerging markets looking to introduce REITs) in India. In addition to the law itself, there needs to be a body of supporting regulation that is well administered to give investors the confidence to invest. In particular, there need to be strong and well administered investor protection laws and there needs to be a credible and robust approach to valuation. The Indian property market is essentially a development one and this in itself will present the regulators with challenges as they strive to ensure appropriate underpinning regulations. The need for a robust valuation system is seen as a priority for India.
The draft law itself is rather flawed and one can expect some major revisions as a result of public comment. Some of the concerns include, first, no tax transparency, second, a very low level of permitted gearing, third, asset holding restrictions which would make it very hard for any of the major property companies to sponsor a REIT and, fourth, a limitation to closed-ended fund structures.
There is another development in India that relates to real estate funds. In 2006 SEBI approved guidelines to permit mutual funds to invest in real estate. SEBI stated that the intent behind the relaxation was to ensure that investors who had participated in the long-term growth of the investee company were free to trade their shares immediately on listing. There has not been much further progress since these proposals were put forward, at least until recently.
Perhaps related to SEBI’s recent announcement that there are more pressing priorities, in April this year mutual fund (amendment) regulations were gazetted. There are many drawbacks to these regulations - for example, real estate mutual funds must be closed-ended, they must be listed, there is no tax transparency, the real estate assets must be valued every 90 days, the net asset value of the fund must be calculated and declared daily and gearing is limited in amount and to short periods.
Indonesia has also introduced a draft law. The law itself is curious in that the regulator has elected to graft an English common law-style unit trust approach onto the existing body of law which is in part based on Dutch law (civil code) and where the English concept of a “trust” is absent. It would seem this has been done on the basis that, as Singapore has the most successful REIT market, the same approach to regulation, including structures, should be followed. In addition, it seems that at present there is no buy-in from the tax authorities and so there is a fair way to go before there is something that resembles a REIT system as institutions would understand it.
The one country that comes to everyone’s mind when new Asian REIT markets are mentioned is, of course, China. China currently has an estimated US$680bn of investment grade real estate. The general view is that a national REIT law is still some way off, given the government’s concerns about a real estate bubble and its efforts to curb foreign investment in real estate. There are a number of uncoordinated private projects under way aimed at developing a model REIT law and there is talk of the Shanghai Securities Exchange developing its own REIT system.
However, the kinds of concerns referred to above regarding the need for credible and robust supporting regulatory infrastructure in India apply equally to China. Whenever a REIT law is introduced in China, it is likely to be some time before the market gains acceptance beyond local investors. Issues that need to be dealt with include title assurance/security, availability of information and credibility of valuations. Information and valuations can particularly be issues in non-first-tier cities.
It will be interesting to see how the recent announcement that Chinese insurance firms may be allowed to invest in property and infrastructure (they are currently technically forbidden) will influence the development of a REIT market.
Finally, there are developments in Thailand. There is a hybrid REIT regime in Thailand, based on a set of regulations grafted onto mutual fund laws. The vehicles established under these regulations are not, arguably, REITs and the market is small and illiquid. However, APREA, with RICS, is heading a task force promoting a series of proposals for a vibrant REIT market. The best hope is the introduction of special REIT collective investment scheme regulations pursuant to a new trust law which is being introduced. Our dialogue with the regulators is continuing.
The next couple of years are likely to see the emergence of a number of new REIT markets in Asia which will be of long-term benefit to the region.