China and India look set to see their first real estate investment trusts (Reits) launched this year, but will they be missed opportunities?
Some market participants say the Asian Reit sector’s appeal is waning and that it is unlikely to see swift growth for some time. This is despite the fact that global investors, such as Dutch pension fund APG and German insurer Allianz, are raising their allocations to property in the region. They increasingly see Asia as a core part of their real estate portfolio.
“There’s potentially still plenty of room for growth for Reits, but … I am not seeing this on my radar screen as an area which is likely to show fast-paced growth in Asia in the next 12 to 24 months,” said John Saunders, head of Asia-Pacific real estate at US fund house BlackRock.
“The ones that are well established are doing well, and the others are still looking at possibilities for development,” he told AsianInvestor.
A Reit is a company that owns, and in most cases operates, income-producing real estate and is publicly traded on an exchange.
The fact that interest rates—most notably in the US—are now in a rising cycle looks to be deterring investors from Reits at present. The recent performance of Asian Reits seems to reflect that. The MSCI All-Country Asia-Pacific Reit index dropped 3.57% in the first quarter of this year and returned just 4.43% in the 12 months to March 31. That compared to a 20.65% return from the MCSI All-Country Asia-Pacific Index over the same time period.
Consultancy PwC said in a report in November last year: “With base rates seemingly set for a long period of incremental increases, Reits in the Asia Pacific region (apart from Japan) have continued to show surprising resilience.
“At the same time, signs are emerging that Reits’ appeal may be weakening, as global equity markets continue to rally on better growth prospects and the likelihood of higher interest rates dims the attraction of an asset class that tends to trade in line with fixed-income assets,” added the report.
Australia, Japan and Singapore are the most established Reit markets in the region (see figure below). Some markets such as Hong Kong have not achieved such swift growth or market depth, while others do not have yet have a framework for Reits.
Certain Asian markets “could do with further development of their Reit market”, said Graeme Torre, Asia-Pacific head of private real estate at Dutch pension fund manager APG.
“The main Reit markets are Japan, Korea, Hong Kong, Singapore and Australia,” he told AsianInvestor. “There are a number of notable omissions from that list which could offer growth.”
The two most obvious examples would be China and India. The former is reportedly looking to launch its first authentic Reit this year, while in India US private equity giant Blackstone and local developer Embassy Group are working on the country’s debut trust.
Separately, sector-specific Reits, most notably those focused on data centres, are also seen to have a lot of potential in Asia. Property services firm CBRE has forecast that the region will become the world's biggest data centre market by 2020.
A key issue for Reits in the region is that they have a relatively small stock of property to invest into. Quality buildings in the region tend to be very tightly held, and as a result real estate markets are less liquid than in Europe or the US.
One upshot of this is growing speculation about consolidation in Asia's Reit market, in the form of larger trusts merging with—or asset managers or owners buying—smaller, poorly-performing ones.
Reits can offer scale that deep-pocketed investors want at a time when assets have become increasingly hard to source, said PwC in its report. In addition, many regional Reits are overleveraged, which is not an ideal situation with interest rates rising, as rolling over the debt will be more expensive. This has led them to trade at a discount to net asset value, which in turn boosts their appeal as a break-up play, noted the consultancy.
APG has done deals of this type, said Torre, whereby it takes a Reit private. “It doesn’t happen that often, but when you see some Reit markets that contain poorly sponsored vehicles, that can offer an interesting opportunity.”
Private equity firms such as Blackstone and KKR are also typical investors in such transactions. Blackstone, for instance, last year sold off assets from the US-based Equity Office Properties Trust that it acquired in 2007.