By Chris Reilly

As the recent creation of the Asian Public Real Estate Association (APREA) shows, there is a lot of activity swirling around commercial real estate markets in Asia, particularly in the rapid development of REITs. Japan was the first REIT market to emerge in Asia in a viable form with the Nippon Building Fund and Japan Real Estate Investment Trust listing in September 2001. Right from the start, the sector caught the attention of investors and rapidly gathered momentum. There are now 20 Japanese REITs (or J-REITs) listed on the Tokyo and Osaka exchanges with a total market capitalization in excess of 2 trillion Yen (U.S. $18.2 billion).

Shortly after the debut in Japan, REIT legislation was enacted in other parts of Asia. In 2002, CapitaLand, a major property company in South East Asia, successfully originated the CapitaMall Trust which listed on the Singapore Stock Exchange in July 2002. MGM Macquarie Goodman (an Australian industrial property trust operator) and Ascendas (a subsidiary of Singapore’s largest industrial landlord) teamed up and quickly followed suit listing the Ascendas Real Estate Investment Trust (AREIT) in November 2002. Li Ka-shing, Cheung Kong’s billionaire chairman, swiftly seized the opportunity to list Hong Kong retail on the Singapore Exchange with Fortune REIT in August 2003. CapitaCommercial Trust, another trust from the CapitaLand stable, followed in May 2004. In December 2004, Suntec REIT listed in Singapore, and in July 2005 Mapletree Logistics Trust made its trading debut taking the Singapore REIT tally to six with a market capitalization of more than 9 billion Singapore dollars (U.S. $5.3 billion) in total. Others are expected to come to market this year.

Singapore Market Capitalization (millions of Singapore $)

Source: UBS estimates; DataStream

The success of REITs in both Japan and Singapore has been dramatic. Delivering comparatively high yields and underpinned by stable rental streams and historically low interest rates, retail and institutional investors alike have clamored for REIT shares. Yield compression has fueled double-digit growth in share prices every year since launch, hastening REIT legislation in other Asian markets.

The first Hong Kong REIT code came into force in summer 2003 but was slightly different from other REIT legislation. In its original form, the legislation permitted REITs owning only Hong Kong assets to list on the Hong Kong Exchange. Furthermore, the tax structure in Hong Kong was, and remains, unique to other established REIT markets. Typically, REITs distribute most of their taxable income as dividends and incur no tax on this distributed income. Double taxation is removed as the investor alone becomes liable for tax at the marginal rate. In Hong Kong, dividend income carries no tax in any event, so the legislation provided for the REIT to pay tax at the usual modest corporate rate. As a result, REITs in Hong Kong are not tax efficient in the usual sense although the corporate tax levied is low. Thus, in tax terms, Hong Kong REITs are no different than regular Hong Kong companies although they are likely to be higher yielding.

With a lack of obvious incentives, few property landlords or developers in Hong Kong stepped forward to transfer their assets into a REIT structure. The Hong Kong government, however, running a large budget deficit, planned the sale of the Housing Authority’s assets to the Link REIT in an effort to reduce the fiscal imbalance. Had it succeeded, the Link REIT issue in Hong Kong would have been the largest global REIT offering to date. Incorporating some 150 malls covering almost 19 million square feet within Hong Kong’s public housing network, it alone accounted for nearly 10 percent of Hong Kong’s retail space. Investors flocked to the issue, which was heavily oversubscribed, but a legal challenge from an elderly public housing resident succeeded in postponing the launch.

As yet, no REITs have listed in Hong Kong. However, Link REIT’s legal issues have since been resolved and it is expected to launch by the end of the year. In the interim, the Hong Kong REIT legislation has been fine-tuned, granting REITs owning assets outside of Hong Kong permission to list on the Hong Kong Exchange. It is widely expected that REITs holding mainland Chinese assets will come forward in due course and that REITs such as Fortune REIT in Singapore will seek a domestic listing in Hong Kong.

There are currently six REITs listed in Korea with a market capitalization of around U.S. $500 million. Currently, the Korean REIT market is domestically focused, fairly illiquid and has a relatively small market capitalization. Difficulty associated with making secondary offerings in Korea has hindered growth.

In Taiwan, Fubon No 1 REIT listed at a relatively low yield compared with past Asian standards. Cathay Financial is expected to launch a competing REIT in Taiwan soon. In Malaysia, legislation has been finalized and Axis REIT, investing in office buildings, began trading in July 2005. Malaysia’s YTL Corporation is also planning to launch a REIT imminently. Additionally, Thailand has REIT legislation now in place, and the Central Group has announced intentions to list a retail REIT there in 2005.

Asian REIT Returns

The returns generated by Asian REITs to date have been extraordinary. For Japan and Singapore, which now have an established REIT track record, REITs have generated double-digit returns annually. More impressive is the fact that these returns have been generated at very low levels of volatility, which means they have been less risky than other equities.

Asian REIT Performance

The chart below shows the price performance (excluding dividend return) of the TOPIX REIT index, plus Singapore’s two longest running REITs, CapitaMall Trust and Ascendas REIT, over the last two years. On an annualized basis, Japanese REITs have delivered 19 percent capital growth while CapitaMall has seen its price rise by 42 percent per year on average and Ascendas by 62 percent per year on average.

REITs in Asia
Country/Trust	Market Cap (millions of U.S. $)	Sector	Yield
JAPAN
Nippon Building Fund	$3,029	Office	3.5%
Japan Real Estate	2,170	Office	3.5%
Japan Retail Fund	2,700	Retail	3.6%
Orix JREIT	1,087	Office/Other	4.1%
Japan Prime Realty	1,470	Office/Retail	3.9%
Premier Investment Trust	546	Office/Resident	3.9%
Tokyu Real Estate	907	Office/Retail	3.7%
Global One Real Estate	653	Office	4.5%
Nomura Real Estate Office	1,301	Office	3.8%
United Urban Development Corp	1,035	Diversified	4.0%
Mori Trust Sogo REIT	1,367	Diversified	3.8%
Nippon Residential	642	Residential	3.7%
Tokyo Growth REIT	106	Residential	4.7%
Frontier Real Estate	687	Retail	3.3%
New City Residence	415	Residential	3.6%
Crescendo Investment Corp	260	Office/Resi	3.8%
Japan Logistics Fund	400	Distribution	3.0%
Fukuoka REIT Corp	723	Office/Other	4.0%
Prospect Residential Investment	284	Residential	3.8%
Japan Single-Residence REIT	147	Residential	4.0%
SINGAPORE
CapitaMall Trust	$1,695	Retail	4.4%
Ascendas REIT	1,511	Industrial/Office	5.1%
CapitaCommercial Trust	832	Office/Other	4.4%
Fortune REIT	436	Retail	5.7%
Suntec REIT	965	Retail/Office	4.8%
Mapletree Logistics Trust	328	Distribution	4.1%
MALAYSIA
Axis REIT	$90	Office	7%-8%
KOREA
Kyobo Meritz	$94	Residential	6%-7%
KOCREF1	185	Office	6%-7%
KOCREF2	64	Office	6%-7%
KOCREF3	74	Office	6%-7%
Realty Korea CR	82	Office	6%-7%
Ures-Meritz First CR-REIT	54	Office/Leisure	6%-7%
TAIWAN
Fubon 1	$188	Office/Other	3.8%
Source: HGI, NikkoCitiGroup, Bloomberg. Data as of July 2005.

Investors may well question whether such returns are sustainable over the long term. REITs are by their nature relatively low-growth, high-yield vehicles which under normal market conditions could be expected to return between 10 percent and 12 percent per year—about half of this return comes from yield and half from modestly leveraged capital gains.

REITs provide a more efficient ownership alternative for leased assets, AND OVER TIME OWNERSHIP WILL SHIFT from the private to the public sector throughout Asia. — CHRIS REILLY

In Asia, the lack of REIT product, coupled with a high demand for low risk stable returns, have created an unusual scenario where the yield on existing REITs compressed sharply, generating above average capital growth. Such yield compression is a one-time event and cannot be easily repeated. In time, REIT returns in Asia will normalize in line with other more mature markets. At Henderson Global Investors, we believe the sweet spot for REITs will continue for a considerable time as demand continues to outstrip REIT supply. Going forward, an aging demographic profile and the related growing pension burden will add further demand to the REIT market.

Asian REIT Growth Prospects

The future for REITs in Asia is extremely bright. The case is compelling from both the supply and demand side given that a large percentage of global real estate assets are in Asia. A vast amount of these assets are held in private hands, or within companies that do not specialize in property, and are thus inefficient from a management and tax perspective.

REITs provide a more efficient ownership alternative for leased assets, and over time ownership will shift from the private to the public sector throughout Asia. REITs also create liquidity in the property market which allows companies in other industries to lighten their balance sheets and improve returns on equity by selling their property assets to REITs.

On the demand side, investors want more of these products. The attractive returns delivered with low risk makes them extremely competitive from an asset allocation perspective. The risk and return characteristics also make them suitable to generate the kind of inflation-hedged income streams required by pensioners. As pension liabilities are expected to grow exponentially, it seems fair to assume that REITs are going to be increasingly in demand.

It is worth pointing out, however, the Asian listed real estate sector remains very fragmented and is poorly represented as far as global investors are concerned. As all forms of investment are now increasingly based on global strategies, the need to compete on equal terms is vital. Asian real estate requires considerably more structured organisational capacity to properly compete in the area of transparency, research and capital raising.

The Role of the Asian Public Real Estate Association

Europe and the U.S. have powerful, well recognized organizations representing the listed real estate sector in the form of the European Public Real Estate Association (EPRA) and the National Association of Real Estate Investment Trusts (NAREIT). These two organizations have had significant success in driving forward the interests of their members and raising the credibility of the sector among investors. Unfortunately, Asia (the fastest growing and most populous region in the world) has not been represented on the global property stage, and cross-border differences and poor transparency make it appear to be a riskier investment prospect than Europe or the U.S.

To give the region its proper representation, the Asian Public Real Estate Association came into being in June 2005. The response to date has been strong, and the association is already supported by an impressive group of committed founding members including Hong Kong Land, Westfield Group, SM Prime, Ayala Land Inc, ARA Asset Managers, Ascendas REIT, Mitsubishi Corp.—UBS Reality Inc, Henderson Global Investors, UBS, Macquarie Group, YTL Corporation Berhad and Morgan Stanley.

APREA is fully endorsed by EPRA, NAREIT and the Association of Foreign Investors in Real Estate (AFIRE). The Monetary Authority of Singapore, recognizing the contribution an independent industry body like APREA can make to the development of REITs in the region, has offered a great deal of support.

The presence of APREA means the lack of representation for the Asian public real estate sector can now be addressed and completes the picture of the global property investment market. APREA will work with its members to raise standards and awareness in the areas of accounting, reporting, valuation and corporate disclosure; will lobby governments for practical regulations, viable structures and tax harmonisation; and will provide education and training.

APREA’s ultimate aim is to become the pre-eminent independent (not-for-profit) association, collectively representing the interests of the Asian public real estate sector, investors and other key industry participants and thus facilitate the flow of capital into the sector throughout the region.