FUNDAMENTAL ECONOMIC DRIVER: The global REIT market has grown to a total market capitalisation of US$568 billion, growing by US$138 billion last year alone.
SINGAPORE: The potential for further growth in the Asian REIT (Real Estate Investment Trust) market is significant as it should continue to benefit from powerful cyclical and long-term trends that should drive future growth.
Asia Pacific Real Estate Association (APREA) chief executive officer Peter Mitchell said the REIT structure continues to be a fundamental driver of the securitisation of real estate holdings around the globe.
“It has proved remarkably resilient in the face of the global financial crisis, particularly in Asia.
“Because of their transparent and liquid characteristics. REITs in the US, Asia and Australia have recovered and performed much more strongly than other real estate asset classes since the crisis,” he told Bernama.
According to Ernst & Young, he said, the global REIT market had grown to a total market capitalisation of US$568 billion, growing by US$138 billion last year alone.
“Much of this growth has been in Asia, where REITs have made a stunning introduction (in referring to ‘Asia’ we exclude Australia),” he said.
In June 2001, Mitchell said, just before the launch of the first Japanese REIT (J-REIT), the market capitalisation of REITs in Asia was around US$2 billion. Five years later it was in the order of US$50 billion.
“Today there are about 144 Asian-based REITs with a market capitalisation of approximately US$127.7 billion,” he said.
On a total return basis, Mitchell said Asian REITs in most countries have outperformed equities regularly, particularly since the global financial crisis, and they have been superior performers on a risk and risk-adjusted return basis.
He noted the growth had been phenomenal, but the Asian REIT industry was only in its infancy, accounting for only 11.5 per cent of all global REITs.
Mitchell said major investment banks confidently predicted that in the near future, market capitalisation would comfortably exceeded US$100 billion and continue to grow exponentially.
He said there were a number of compelling underlying factors for this.
This include a significant portion of real estate in Asia is still held in private hands and weigh heavily on company balance sheets.
“This is not sustainable long term.
The REIT format is a much more efficient way for companies to hold real estate assets,” he said Regardless of when India and China introduce their own REIT markets, their strong growth alone will have cascading effects on the regional economies.
Other factors, he noted that more countries are introducing REIT regimes (for example, the Philippines) and more investment grade stock will come into the market in the wake of strong economic growth throughout the region.
“Asia has the lowest level of securitised real estate in the world.
It is estimated that only about 4 per cent of investment grade real estate in Asia is held in REIT-type structures.
“Taking that last point, assuming an ultimate level of securitisation of investment grade real estate of 25 per cent suggests a market that could grow to well over US$500 billion.
“The growth has not been even however.
Currently Japan accounts for around 39 per cent of the market, followed by Singapore at around 31 per cent,” he said.
According to Mitchell, there were a number of reasons for this.
Amongst others, Japan and Singapore, with Hong Kong, are the more mature markets in the region and possess the general economic conditions that contribute to the low risk characteristicsthat, in turn, make REITs so attractive to institutional investors.
Importantly though, he noted for REIT markets to flourish they must be built on solid regulatory foundations.
He said Japan and Singapore enjoyed these conditions but the same cannot necessarily be said of other jurisdictions.
In most major Asian markets, Mitchell said the property market cycle was generally in a recovery phase (and in some cases expansion), with rents growing (or about to grow) and occupancies improving.
He said economies were recovering and are poised for long-term growth, and demographic trends point to expanding demand for real estate and yield-oriented investments such as REITs.
“Government authorities in many countries in Asia have shown a keen interest in seeing REITs succeed and, in some countries, are actively encouraging their growth.
“Continued refinements to the S-REIT structure and current efforts by the Japanese and Hong Kong regulatory authorities to improve their REIT structures in particular, should encourage more developers, property firms, and corporate and government owners to consider using REITs to move some of their stabilised real estate holdings off their balance sheets.
“Thereby freeing up capital that can be reinvested into core activities or used to reduce debt,” he said.
Mitchell noted that Government interest stems at least in part from the positive effects that REITs have provided to investors and to the real estate industry as a whole in countries such as Australia and the US.
He said REITs have also provided investors with an attractive opportunity that satisfies their demand for yield and security, yet allows them to participate in the ongoing recovery and long-term growth of the Asian economy and property markets.
“The expected growth and urbanisation of the populations in emerging Asian countries will create tremendous demand for real estate, particularly in urban centres.
Between 2000 and 2005, for example, China’s urban population increased by about 75 million, or by an amount equal to roughly one-quarter of the entire US population and three times the size of Australia.
“Such large-scale urbanisation demands more and better quality office space, shops and homeswhich, directly or indirectly, provide a potential source of income (rent) for investors that, increasingly, can be accessed through REITs,” he said.
In addition, he said, through the creative use of the REIT vehicle, governments could encouraged private investment in much needed infrastructure development.
By specifically enabling a REIT to own particular types of real estate, governments can promote the development of affordable housing, schools, roads, power plants and other socially needed infrastructure.
“The inescapable message based on historic performance as well as future growth projections, is that those Asian countries that have or develop REIT models that are based upon industry best practices and strong regulatory oversight, will have an increasing share of an increasing economic pie,” he added. — Bernama