REITs in Asia: Really efficient investment track or rapidly
ending investment trend?
Issue 34 - Sept 07

The recent financial market fluctuations have refocused the
spotlight on Real Estate Investment Trusts in Hong Kong and
Singapore. RFP talks to the experts, and investigates how the
two markets compare.

Paul Hart, Executive Director, Knight Frank, on how REITs are
being perceived by the Asian markets.

Last week was a very difficult week because of the whole ‘subprime issue’
in the US. What was interesting was the affect on the REIT sub-sector, including the
Hong Kong and Singapore markets.

Historically, established REIT markets have been a little bit anticyclical, and offered long
term yields because the majority of REITs are supported by long term leases. So generally
REITs would be expected to be a little bit less susceptible to volatility in the markets, and even
attractive to investors wanting to hedge themselves.

However, that has not been the case in Asia. The downturn that occurred mid-august did
not see a rush to REITs, they were also affected along with other equities. That confirms
that REITs are being perceived differently in the Asian markets, and not the way they are
viewed by the more mature markets in Australia and the US.

long or short?
In Asia, investors appear to be seeing REITs more like a typical equity play, a growth play
and not an income play or a longer term hedge against the markets. While this should not
be taken as a recent revelation, there is a realisation that
REITs are a reflection of the Asian real estate markets, which are volatile in
comparison to the more established real estate markets that have seen significant REIT
activity RFP.
__________________________________________________________________________

Hong Kong vs Singapore markets
While the recent credit crunch did affect the REIT markets, it should be noted that
the performance of both Hong Kong and Singapore REITs remained relatively steady.
In Singapore, the margin between the long term bond rate and the average dividend yield
has increased by 0.6 percent since January. If the economic conditions and the perspective
of investors had remained the same, as the bond rate fell and the cost of money in
Singapore reduced, you would expect the dividend yields to have dropped and the net asset
values (NAVs) to have risen.

That hasn’t happened, indicating that the pricing has come off in relative terms to the bond
rate. NAVs fell in un-weighted terms by nine percent since January, and
although the listing of two more REITs means that this is not an exact like-to-like comparison,
it does indicate a significant price adjustment in the markets.

In Hong Kong, there is a very different situation. REIT markets have to justify their
initial hype, and there seems to be a real risk that the Hong Kong REIT market will
fall further behind Singapore’s. Looking at the premium to NAV (the ratio of the value
of the underlying assets to the total capital value of the REIT) for Hong Kong and
Singapore REITs shows a marked difference between the two markets.

As the charts show Singapore REITs are, with a few exceptions, generally trading
above their total NAV. In particular CDL Hospitality REIT and CapitaRetail China
Trust, Ascendas’ A-REIT and CapitalMall Trust all show a significant premium. In
Hong Kong however, only The Link REIT has a similar market value.

This is due to a number of factors. Generally, it seems that investors are acting
on the perceived future value of the assets, and not the current yield. In fact, in
percentage terms, while both markets are in decline since the start of the year, yields
for Hong Kong REITs are outperforming those in Singapore. The large size of the Link
REIT compared to the other Hong Kong REITs means that its performance dominates
the overall market average, but excluding it from calculations still shows Hong Kong
with an average dividend yield of 6.6 percent.

Despite the higher dividend yield explains Paul Hart, Executive Director, Knight
Frank, the Hong Kong markets have not been as accepting as Singapore. “If you
are looking for an income driven return, the Hong Kong market would give you much
greater coverage. However, that comes at a cost, which is the fact the market, excluding
the Link REIT, is trading at minus 34.3 percent of its total net asset value” Hart outlines
a number of factors why Singapore’s REIT market has expanded rapidly while Hong
Kong’s market has been slower off the mark. “The Singapore regulator acts quicker
and is more likely to give approval to new REITs. It also has a much closer relationship
with sponsors. The tax situation is also a lot more amenable in Singapore.” Meanwhile,
in Hong Kong the REIT market has been misunderstood, and some have invested for
the wrong reasons. Even though some Hong Kong REITs have performed as REIT
managers had promised, and they’ve done, in Hart’s words “an excellent job in managing
and reaping value from the asset”, they are still not valued highly by the markets.

As for the future, whether the Hong Kong markets will be sustainable under the
current market whims remains to be seen. With Singapore REITS surviving the turbulence
and a number of new launches in the works, it seems like Singapore is very close to
claiming the crown of primary Asian REIT market.



Sing Tien Foo, Associate Professor and Deputy Head (Academic), Department of
Real Estate, National University of Singapore, on the effects of the financial
markets on REITs.
As the international capital markets are becoming more integrated, the turmoil
caused by the sub-prime crisis in the US has sent shockwaves to many Asian
bourses. REITs, being listed vehicles, are not spared from the ripple. Why are REITs not
insulated against the stock market shocks? It goes back to the fundamental debate
of whether REITs are real estate or stocks. Given the
heavy investment in their portfolio in real estate, the performance of REITs should be
dependent on property market movements. However, as REITs are traded
publicly on the exchanges, REITs are also susceptible to the liquidity risks in the stock
markets.

While REITs are viewed more like a hybrid instrument that combine the bond-like
characteristics, where REIT guidelines require REITs to mandatory distribute more
than 90 percent of their earnings back to investors as dividends, and they also have
the liquidity feature of the stock markets, which are characterised by high volatility.
Unlike other listed firms, REITs with a large proportion of the net assets in real
estate, they are supposedly protected against short-term volatility through the long-term
leases that “lock-in” the cash flows over the lease periods. In most newly developing REIT
markets, we expect REITs to be relatively defensive compared to other growth stocks.
The REITs are more resilient to the stock market turbulence compared to other growth
or more dynamic stocks.

Are there significant correlation between equity stocks and REITs? In the US, some
researchers found that REITs in the post-1990s periods behave more and more like
stocks and the correlation indeed converged in the post- 1990s periods. Many changes
in the tax incentives and REIT structures in the US have made REITs appealing to
institutional investors. The strong institutional demand
has driven the rapid expansion of REITs in the US in 1990s.

In Asia, we could still find good diversification benefits by including REITs in institutional
portfolios alongside other assets like stocks and bonds. REITs have enjoyed attractive
premiums over their net asset values (NAV) in selected Asian markets like Singapore,
and the small market capitalisation of the REIT markets in Asia means that there is
room for further expansion and development. In other words, the premiums to NAV will
continue for sometime, and these would draw interest from institutional investors.
The active asset enhancement and acquisitions by many REITs in Asia have also
provided very strong growth, which is translated into strong and positive capital returns
to many investors. It is unlikely that institutional investors will unload REITs from their
portfolio on a large scale in the short term. RFP

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