Cityscape Update: While Asian REITs Have Potential, Exit Strategies Can’t Be Overlooked

As the third day of the inaugural Cityscape USA exhibition and conference crystallized at the Jacob K. Javits Convention Center in New York City, an afternoon session explored the state of Asian REITs and their impact on the bottom line. Asian REITs are picking up steam due to several reasons, including their ability to provide a pathway to property ownership coupled with their tax efficiency, low-risk possibility because they are highly regulated and attractive annual returns, according to the session’s presenter, Stewart LaBrooy (pictured), executive director & COO of Axis REIT Managers Bhd. Asia currently holds about 11 percent of the global REIT market, with about $83 billion in securitized assets. “Once the capital markets quiet down and banks get back to lending, you’ll see a huge boom in securitization,” he said. REITs are particularly important in emerging markets because they boost and stabilize capital access and serve as a vital source for attracting long term-investments. “When you have REITs in the market (they help) boost the global economy,” LaBrooy said. The infusion of REITs “brings development (and) increases GDP without the government having to prime the pump every time (there is) a slowdown. These projects start to be self-created.” Of the top 10 Asian REITs, four come from Singapore, four from Japan, and two from Hong Kong. During his presentation, LaBrooy highlighted these markets along with Malaysia. An early player in the Asian REIT competitive landscape, Japan reformed the Investment Trust Law in 2000. Banks, at that time, had about $360 billion in land and property, which had fallen as much as 70 percent in value, according to LaBrooy. “Japan’s banks were giving zero percent interest on deposits,” he said. “When the REITs came in, they were offering 4 to 5 percent. From that time you saw Japan’s growth start to pick up.” However, LaBrooy sees Singapore as the country that has done the most to foster REITs in Asia. While its first REIT didn’t get off to a stellar start, the country is now up to 20, with a market capitalization of US$20 billion, he said. The country, which has developed a set of REIT guidelines, provided incentive to the market and continues to encourage cross-border listing. “Most of these (prime) buildings were owned by companies linked to the Singapore government,” he said. “The Singapore government offered them to the public and foreign investors.” That support enabled Singapore to raise more funds to move into a key market—China. “They were in China I think 20 years ago when no one wanted to touch them. They were there making contacts with the Chinese government, making sure everything went very well for themselves. When the market boomed, they were ready, and they grabbed all the best bids.” In the case of Hong Kong, the Link REIT, established in 2005, has the distinction of being Asia’s most valuable REIT ever, with a US$2.8 billion offering, according to LaBrooy. Despite such success, the country still trails behind Singapore. “All those beautiful buildings in Hong Kong are basically all listed already, so there’s not much left over for putting into a REIT,” he said. Malaysia, although one of the first Asian countries to list a trust, doing so in 1989, didn’t do much with it. Regulation was poorly drafted, but following Singapore’s model, Malaysia issued its own guidelines in 2005. The market currently has 11 REITs with US$1.5 billion in capital in the market, according to LaBrooy. In the last six years, the number of REITs in Asia has ballooned from two to 100, LaBrooy continued, adding that while the current market depends heavily on foreign funds, significant trade is taking place within Asia, lessening the dependence on foreign markets. “Housing bubbles have occurred everywhere except in Asia,” he said. And “China’s growth is driven largely by domestic demand now, not by exports,” he noted, estimating that Asia now comprises about 35 percent of global GDP. “There’s a big shift in where the growth is happening, and what’s happening on a global basis.” It’s important to note, however, that investors must have exit plans. “It’s great saying, ‘I want to invest in China,’ but if you want to take your money out (and you don’t have an exit strategy), at the end of the day you are in real serious trouble.”