REITs in Asia

Knut UNGER, 2006

Only 5 years after the first introduction in Japan the REITs market in Asia doubles each year. Within 5 years REITs controlled 27 billion US$. In 2005 observers expected that until 2010 the REITs could control about 160 $ US in real estates. But this depends on the developments in China and India.

Japan introduced J-REITs in 2001. Within 4 years 15 J-REITS controlling 17 billion $US were brought to the market. In June 2005 17 J-REITs made a market capitalisation of USD 20 bn.

During the period of J-REIT introduction commercial property (office building etc.) was most important while the invasion of J-REITs in housing had to face difficulties because of strict legal regulations on evictions, because of the small scales of Japanese housing units and the limited market for high prize condos¹.

However, during the past years new residential REITs appeared². Since March 2004 six new real estate investment trusts raised 159 billion yen ($1.3 billion) to buy apartment buildings in Japan. Singapore’s CapitaLand Ltd. and Arcapita Bank BSC, a Bahrain-based investment bank, pooled $300 million in May to buy rental housing in Japan.

After falling as much as 80 percent following the crash of 1990 land prizes are increasing again. Japanese are moving back to cities.

Investment banks such as Morgan Stanley have taken advantage of rising prices to sell mortgage-backed bonds. Morgan Stanley sold 299 billion yen of bonds backed by mortgages on commercial properties, including apartments in Tokyo and Osaka.

It is planned to allow J-REITs for foreign investments.

In 2001 Korea introduced Korean Real Estate Investment Trust (K-REIT) and Corporate Restructuring REIT (CR-REIT). CR-REIT segment is USD 5 million. Initially, real estate funds mainly invested in office buildings. However, investments in other types of property, such as apartments, dormitories, overseas properties and foreign REITs are on the way³.

In 2002 Singapore introduced the first REITs in south-eastern Asia. 5 S-REITs are controlling €5.2 bn in 2005.

Singapore-based CapitaLand Group is one of the largest listed property companies in Asia, operating in 28 countries and 90 cities, also owns listed subsidiaries that are leading players in the region, including CapitaMall Trust (Singapore’s first REIT), CapitaCommercial Trust and Australand Property (one of the largest developers in Australia)⁴. Another big REIT, Ascendas Real Estate Investment Trust, owns property throughout Asia and launched Ascendas India IT Parks Fund, which is active in IT parks.

When, in 2003, Honkong introduced REITs financial industries were very interested to observe how this development could open the booming Chinese market. The first listed REITs in Honkong - Link-Reit - was based on the privatisation of public property by the Honkong government’s Housing Authority. The Housing Authority controls 30 % of the housing units of the nearly 7 Mio. Honkong residents. The privatisation plan involved 180 malls, 79 000 car parking spaces, 950 000 square meters commercial land and many housing complexes. Goldman Sachs, HSBC and UBS were the joint global coordinators for the sale. JP Morgan Chase is advising the government. The plan provoked a run on the shares which ware even traded at the black market before the official listing. With 2,54 billion $US shares this REIT was the largest new listing of a REIT in history.

The plan even provoked strong legal reactions by a tenants rights group which feared rent increases, higher prizes in the shops etc. A 67-year-old public housing tenant, Lo, appealed to the court. She and fellow opponents claimed the deal undervalues public assets, short-changes the public and threatens to lead to rent rises for public housing tenants. The proceedings caused a delay of nearly a year for the listing of LINK-REIT. In December 2005 Lo lost the case⁵.

In Sept. 2006 six public housing residents, who have been running stalls at a market have declared a minor legal victory after successfully staving off a Link REIT management company’s bid to evict them for failing to pay higher license fees⁶.

In 2006 Malaysia was the first Islamic country to certify REITs. Shortly after that the real estate investment trusts (REITs) sector asked for a review of its tax structure⁷. They want a reduction in the existing 28% withholding tax imposed on foreign investors’ dividends. They say it should to be lower than neighbouring Singapore’s 10%. The globalisation of REITs of course even leads in a competition on tax dumping between states.

Malaysia even is about to become the first country in Asia where REITs conquer agricultural land (plantation REIT). In Sept. 2006 Boustead Properties Bhd proposed to sell and lease back six estates measuring 6,891ha in Peninsular Malaysia to Al-Hadharah Boustead Real Estate Investment Trust (REIT)⁸. Much like conventional REITs, a plantation REIT’s success will depend largely on the assets injected into the trust. While for conventional REITs the economic success is based on the building and the rental yield, for plantation REITs, it will be the crops planted on the land. It is expected that oil palm may be the favoured product because it’s potential as a feedstock in biodiesel production, which becomes more and more attractive after the rocketing of oil prizes. Press expects that this deal may pave the way for other plantation players to follow. As the towns develop, the estates stand a high chance of being converted into housing or commercial property development. The current average yield of REITs in Malaysia stands at around 7%. The average gross dividend yield of plantation stocks is less than 3%.

In 2007 even India, Pakistan and Dubai plan to introduce REITs.

In India it is planned to except REITs from the stamp duty (tax) if they buy out land⁹. It is expected that REITs will invest in technical infrastructure and offices and housing for the booming service sectors.

Pakistan wants to orientate on the Malaysian model and even plans to reduce the stamp tax. Founding of 6 REITs in Pakistan is expected within the first years. Land prizes are rocketing¹⁰.

By introduction of Islamic REITs the Dubai government hopes to strengthen its “Dubai International Finance Center”, a free trade zone. In Dubai real estate speculation is booming and Dubai REITs will also invest in foreign countries.

However, recent increases in interest rate of issuing banks trace the performance of the Trusts even in Asia. REITs in Japan experienced stock exchange losses of more than 15 per cent, Singapore and Hong Kong had to register over 20 per cent. For international private investors this situation makes the entrance to the stock exchanges easier. Everybody expects that the east Asian and Indian market will grow rapidly.

Israelestablished a REITs legislation in 2006¹¹.