Asian property continues to attract attention. According to Jones Lang LaSalle, global investors traded US$43bn (€32.6bn) of Asian real estate during the first half of the year, mainly in Japan. Growth in domestic consumption and business expansion has improved confidence and sentiment in the region and fuelled demand for both commercial and residential assets. Occupancy rates and rentals have improved markedly in some cases which have led to firmer investment demand.
The Asian REIT market has grown steadily over the year with the total number of listed Asian REITs rising from 43 to 77 in the year to October 2006. Asian REIT market capitalisation nearly doubled from $31bn to $57bn as a result. Details of the changes in Asian REITs are shown in figure 1.
In tandem with the growth in securitisation, Asian REITs performed well gaining around 24.1% (see figure 2). There was some volatility however as Asia's REITs were not immune to the equity market sell-off in May and June 2006.
The Japanese REIT (J-REIT) market has grown tremendously since its inception in 2001 after the launch of the Nippon Building Fund and the Japan Real Estate Investment Corporation. There are now 39 listed J-REITs with a market capitalisation of approximately $36bn. As the world's second largest economy has emerged from a decade of recession and deflation the real estate market has improved dramatically. The J-REIT market is the best established and longest running REIT market in Asia outside Australia and in 2006 it continued to attract the most growth with 13 new REIT listings and over $13bn of funds injected into the market. Japanese REITs tend to be lower yielding than other Asian REITs with an average dividend yield of approximately 3.8% which is a function of lower bond yields in Japan.
The Japanese REIT market has become more diverse by size, geographically and by sector as it has grown. J-REITs are now exposed to a broad array of commercial and residential assets as can be seen below. In 2006 more hospitality and residential REITs came to the market.
The Tokyo Stock Exchange REIT Index tracks the performance in Yen of 38 listed J-REITs. Since inception from end March 2003 it has delivered a 76% return which equates to an annualised return of 17%. The return from J-REITs has been impressive particularly considering the low levels of volatility within the sector. Looking ahead rising interest rates in Japan may create headwinds for J-REITs, although this should be mitigated by improving rental growth within J-REIT assets.
Strong economic fundamentals combined with regulatory amendments have made it more attractive for trusts and property funds to set up base in Singapore. As a result the number of listed REITs offered on the Singapore Exchange increased from seven to 13 over the year with total market capitalisation growing from $6.5bn to $11.6bn.
The Singapore REIT market is the second largest REIT market in Asia after Japan. It began in 2002 with the listing of the CapitaMall Trust and has progressed well due to an efficient tax regime and supportive regulatory environment. The sector in Singapore has become more diversified as it has matured. The sector mix currently is shown below.
Performance from S-REITs has been impressive over the years and 2006 was no exception with the sector recording gains of 32.9% according to GPR's Singapore REIT index measured in local currency.
More Singapore REIT listings are anticipated over the next six months bringing greater regional and sector diversification. Imminent arrivals are the CapitaRetail China Trust, a retail mall REIT listed in Singapore offering exposure to Chinese retail malls, First REIT sponsored by Lippo Karawaci group offering exposure to Indonesian hospitals and further down the line a Singapore listed Indian REIT.
Hong Kong REITs
The pace of development in the Hong Kong REIT market has been slower than many observers anticipated. Optimism ran high after the remarkably successful launch of the Link REIT in November 2005, but began to fade as interest rates climbed and heavily engineered product was brought to the market. The rapid price decline of Champion REIT which listed in May 2005, into a weakening equity market, brought investor concerns into sharp focus. In the immediate aftermath a number of similarly structured Hong Kong REIT issues were shelved.
There are currently four REITs in Hong Kong with a market capitalisation of $6.4bn. The Link REIT grants exposure to the retail component within the Hong Kong government's residential housing estates, while Champion REIT owns Citibank Plaza, a major office building in Hong Kong central. Cheung Kong, the flagship property and telecoms company of Li Ka Shing spun off Prosperity REIT with a selection of its office and industrial assets in November 2005 and GZI REIT, the first such vehicle with mainland China commercial assets listed shortly after in December.
Despite the soul searching which has occurred in Hong Kong there continues to be interest in both Hong Kong and China REITs. As interest rates appear to have peaked investor appetite for Hong Kong REITs seems to be returning and the postponed issues look set to return to the market. Sunlight REIT by Henderson Land and Shau Kee Financial Enterprises is a case in point and Regal Real Estate Investment Trust is also seeking investors. Several other potential REITs are anticipated to be in the pipeline.
Taiwan REITs or T-REITs have evolved from two to seven REIT issues, over the last 12 months taking the market capitalisation to $1.4bn with a dividend yield of around 4%. Taiwan, like Korea, has seen limited momentum in the REIT markets due primarily to arcane and restrictive regulation. One of the main problems has been the inability to raise funds via secondary equity offerings which effectively prevents the REIT from engaging in growth via acquisitions beyond that available within the borrowing limits. Consequently REIT sponsors have tended to list a series of small REITs operating in various commercial subsectors. The success of REITs globally and elsewhere in Asia has prompted interest in improving the regulations in both Taiwan and Korea and indeed some important issues are currently under debate in parliament. The sector breakdown for T-REITs is as shown in figure 5.
Malaysia saw the listing of four additional REITs on Bursa Malaysia in 2006, bringing the total number of REITs offered from one to five, and increasing total market capitalisation from $0.1bn to $0.6bn. The Malaysian REIT market has lagged its regional peers with the AME Capital Malaysia REIT Index posting negative returns of -2.3% year to date. The MREIT market has underperformed due to poor liquidity and visibility and because domestic pension funds continue to seek property exposure via the direct property market.
A key determinant of growth in Asian and global REIT markets has been the pace of supportive regulatory change. The Asian Public Real Estate Association (APREA) was established in June 2005 to promote, develop and represent Asia Pacific public real estate companies and trusts in the global property investment marketplace. APREA is the Asian sister association of EPRA in Europe and NAREIT in the US, both of which have proved successful in driving forward the interests of their members. One immediate objective in achieving its overall goal is the harmonisation of the tax and regulatory framework for REITs across Asia.
At Henderson GI we believe the outlook remains positive for Asian REITs over the coming years. The growth and diversification visible in 2006 are likely to hasten in the period ahead. Economic growth in the region is expected to be relatively strong given continued growth in domestic demand in China and India and cyclical recovery in Japan, Singapore and Hong Kong. Domestic consumption remains buoyant and property markets in Asia are benefiting from a cyclical upswing. Some markets like Hong Kong, Taiwan and Malaysia could see major changes if regulatory hurdles are surmounted.
We think the case for REITs is compelling in terms of supply and demand. A large percentage of global real estate assets are in Asia and are ripe for securitisation. Many of these assets are held in private hands, or within companies that do not specialise in property, and are thus inefficient from a management and tax perspective. REITs provide a more efficient alternative for leased assets, and over time ownership should shift from the private to the public sector.
REITs also create liquidity in the property market which allows companies in other industries to lighten their balance sheet and improve return on equity by selling their property assets to REITs.
On the demand side investors want more of these products. The attractive returns delivered with low risk make them extremely competitive from an asset allocation perspective. The risk and return characteristics also make them suitable to generate the kind of inflation hedged income streams required by pensioners and thus they will increasingly be used to match pension liabilities. As pension liabilities are expected to grow exponentially, it seems fair to assume that REITs are going to continue to be in demand.
Chris Reilly is head of property at Henderson's office in Singapore