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Significant potential for Reits in Asia, an 'emerging' asset class
WE see significant potential for real estate investment trusts (Reits) across the Asia-Pacific region. 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 per cent.
These growth rates are the more impressive knowing that some of the countries in the region currently don't have any Reits, and where they do, they remain small.
While 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 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.
In the Philippines, while there has been 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 per cent) were deemed too onerous by developers; and tax (VAT) on asset transfers into the Reit vehicle (12 per cent) was considered too high.
The government is now motivated to develop the Reit market. Taxes on VAT transfers were recently reduced to zero, and the local securities exchange commission has suggested it may be planning on lowering the minimum public ownership requirement to 33 per cent, should proceeds from Reit listings be invested onshore.
These moves have exciting prospects for the market, given that 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 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
What has happened in Singapore and Australia is an indicator of the potential for emerging countries. Singapore, which launched its first Reit in 2002, now has 31 listings. This is incredible growth for a country without a large land base.
Australia, which saw the Reit concept first introduced in the 1970s, is now one of the largest Reit markets outside the United States.
Hong Kong success story
There have also been notable Reit success stories from Hong Kong. One of those is 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 (that is, 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 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 increase rents, improve customer experience and ultimately grow to become the largest Reit in Asia.
Attractive examples in Malaysia
In Malaysia, an emerging market which has embraced Reits, many of the existing listings are still small but 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.
Reits remain an attractive asset class with low volatility, above-market dividend yields and provide exposure to high-quality property assets. We are positive on the outlook for Reits in Asia, given the region's long-term population and urbanisation-led growth trends.
We also see significant potential for further Reit listings, especially given the progress being made in markets such as the Philippines and India.
These listings will 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.
- The writer is portfolio manager at Martin Currie