Largely a developed market phenomenon so far, incremental growth in REITs is likely to come from the emerging Asia markets.
Huge potential for Asian REITs
We see significant potential for real estate investment trusts1 (REITs) across the Asia Pacific region.
In fact, listings have already grown strongly over this decade, with the total number of listed REITs growing from 50 to 792 and the market capitalisation of the S&P Asia Pacific Ex-Japan index growing by 71%.2
These growth rates are made more impressive knowing that some of these countries currently don’t have any REITs, and where they do they remain small.
Whilst REITs have been largely a developed-market phenomenon so far, incremental growth is likely to come from the emerging markets, and the exciting potential of new listings in markets such as the Philippines and India.
Opportunities emerging in the Philippines
Where REIT legislation does exist, we can see quite different rules around a number of areas including gearing levels, tax and the amount of development allowed.
The Philippines is a market with attractive fundamentals and while there has been REIT legislation in place since 2009, there have been no REIT listings to date.
The reasons are twofold. Historically, rules around minimum public ownership levels (67%) were deemed too onerous by developers; and tax (VAT) on asset transfers into the REIT vehicle (12%) was considered too high.
The government is now motivated to develop the REIT market. Taxes on VAT transfers were recently reduced to 0%, and the local securities exchange commission has suggested it may be planning on lowering the minimum public ownership requirement to 33%, should proceeds from REIT listings be invested onshore.
Once these issues are resolved, which will most likely be during this year, we could very well see new REIT listings.
We are excited by the prospect given the Philippines has some of the fastest population growth rates in Asia combined with attractive property assets held by the major developers such as Ayala Land and SM Prime.
India well placed to list first-ever REIT
India is one emerging country which may beat the Philippines to its first-ever REIT listing with all its REIT regulations now in place. An office REIT (“Embassy Parks Office REIT”), backed by Blackstone and Embassy Group, will create the largest listed (by floor space) office REIT in Asia.
Indian office demand is impressive relative to other global markets, underpinned by a strong domestic economy combined with significant growth in its IT and outsourcing sectors. Ascendas India Trust, a Singapore-listed Indian office REIT has quality assets across key IT sub-markets such as Bangalore.
Further, listings could reasonably be expected given the country size, especially if India follows in the footsteps of other markets like Singapore.
Singapore and Australia lead the way
It is interesting to note what has happened in other Asia Pacific REIT markets as an indicator of the potential for emerging countries.
Singapore, which launched its first REIT in 2002, now has 31 listings.3 This is incredible growth for a country without a large land base.
Australia is another good example. Australia saw the REIT concept first introduced in the 1970’s and since then has seen notable growth in the number of listings, with the market now one of the largest REIT markets outside the United States.3
Hong Kong success story
There have also been some notable success stories from REITs in Hong Kong. One of those would no doubt be Link REIT.
Link REIT was spun out of the Hong Kong Housing Authority in 2005 as a vehicle to house a number of its suburban shopping mall and car parking assets. In many cases, the assets had great potential, given their location (on top of rail infrastructure), non-discretionary tenant mix (i.e. stable demand) and high levels of shopper traffic from Hong Kong’s dense population. However, many of these assets, under the ownership of the government, had seen little investment and were notably under-rented (rents low relative to the sales per square metre).
From investing further in asset enhancement and improving the tenant mix, Link REIT was able to notably increase rents, improve customer experience and ultimately grow to become the largest REIT in Asia.3
Attractive examples already in Malaysia
Malaysia is an example of an emerging market which has embraced REITs. While many of the existing listings are still small, we now have several REITs across the office and retail sectors, with attractive assets in each.
An example would be Pavilion REIT, which owns the Pavilion KL Mall in downtown Kuala Lumpur. This asset is one of the most productive malls in Malaysia in terms of sales per square foot and has had consistently high occupancy over time.4
REITs remain an attractive asset class with low volatility, above-market dividend yields and provide exposure to high-quality property assets with steady growth.
We remain positive on the outlook for REITs in Asia given the long-term population and urbanisation-led growth trends across the region.
Additionally, we see significant potential for further REIT listings, especially given the progress being made in markets such as the Philippines and India. These listings will ultimately serve to expand the investable universe for investors, providing access to attractive properties across the region and will ultimately help to develop the capital markets of their respective countries.
Risks typically associated with real estate include but are not limited to local, state, national or international economic conditions, including market disruptions caused by regional concerns, political upheaval, sovereign debt crises and other factors.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
1 A real estate investment trust (“REIT”) is a company that owns income producing real estate ranging from office buildings to shopping centres.
2 Source: Factset; as at 31 December 2018. Benchmark is S&P Asia Pacific Ex- Japan REIT Index.
3 Source: Factset; as at 31 December 2018.
4 Source: Company reports.