Real estate investment trusts, according to real estate executives, are misunderstood in Asia and will require a regulatory reform as well as a change in conduct if they are to achieve widespread acceptance. Cars
According to a study released this month titled "The Effect of REITs on Asian Economies," REITs have yet to gain widespread acceptance in Asia. REITs first appeared in the United States in the 1960s and in Australia in the 1970s, but they were only launched in Japan, South Korea, Singapore, and Hong Kong between 2000 and 2003. China and India, the world's two most populous countries, have yet to pass legislation approving REITs, while Indonesia and the Philippines have laws in place but no REIT listings.
In markets like Taiwan, where 58 percent of property-market executives are neutral about whether the regulatory regime supports REITs, their relative youth has led to some confusion about regulatory regimes. In Thailand, 55 percent are undecided about REIT laws, while 51 percent are undecided in South Korea.
More than 40% of property professionals in Malaysia and New Zealand are undecided on whether their markets have the right rules for REITs.
China is said to have approved the first REIT, the first phase in a decade-long plan to institutionalize real-estate ownership in the world's second-largest economy. According to the South China Morning Post, Citic Securities Co., China's largest brokerage by market capitalization, received approval for the stock from Chinese securities regulators in January, with investors expected to earn dividends from rents on two office buildings owned by Citic, one in Beijing and one in Shenzhen.
However, the REIT, which has yet to be developed, is merely a prototype, and it is unclear how the asset class will be introduced to the general public. Citic's commodity will be listed on the Shenzhen Stock Exchange's block-trading system rather than trading freely. That only runs for about five hours a day and necessitates institutional investors exchanging large amounts of stock.
There has also been no word on when completely liquid REITs would be available to the general public to trade. China has a habit of secretly introducing new investment ideas and testing how well they work before codifying the procedures in securities law.
Since GZI went public in Hong Kong in 2005, foreign investors have had access to REIT exposure to Chinese buildings. Since then, some REITs with assets in China have listed in Hong Kong and Singapore.
Despite the fact that Hong Kong has one of Asia's largest REIT markets, behind only Australia, Japan, and Singapore, liquidity and efficiency have been poor, and new listings have been scarce. The Hong Kong Financial Services Development Council, a securities industry trade association, has urged Hong Kong to change its REIT regulations to enable the funds to develop restricted amounts of land. This would inject a dose of higher-earnings potential into their results, attracting a wider range of investors while also introducing more risk.
The Securities and Futures Commission held a month-long public consultation on the subject earlier this year, but no changes have been made. Allowing REITs to commit 10% of their assets to construction or redevelopment projects, according to shareholder advocate David Webb, is smart, not least because it would encourage them to renovate their current properties instead of being forced to sell them.
The quality of properties sold into Asian REITs is one problem that has deterred some major investors. According to industry experts, some Asian governments see REITs as a way to bail out distressed property assets at the expense of institutional and unsophisticated investors.
One major property fund manager in Hong Kong, who did not want to be named, said he avoids all REITs in Asia because he believes developers sell shoddy assets they no longer want to carry into associated REITs while keeping better-performing properties for their own account.
That was particularly true before the crisis in Japan, where the vast majority of J-REITs are linked to a developer who serves as a sponsor and constructs the majority, if not all, of the REIT's assets. The financial crisis exposed those assets as being sub-par, as many of them saw their value plunge. Now that the J-REIT market has seen a surge in new listings and equity fundraising, some big investors are concerned that the trend will repeat itself.
At a November conference in Hong Kong, Roberto Versace, senior portfolio manager at BNY Mellon Asset Management, said, "I assume J-REITs are becoming a dumping ground and deals are getting junkier." "At this stage, we see more value in developers, which may or may not be backed up by earnings today, but we believe earnings growth is."
"What worries me is that the 'garbage can' days may come back," said Phanuwit Rico Kanthatham, director Asia Pacific Real Estate at Babson Capital Cornerstone Asia Ltd. "They can buy something and make it look good because of their low cost of capital. Those deals may turn out to be catastrophic for them in a few years."
The standard of properties available for purchase by REITs should increase as Asia's real-estate industry becomes more institutionalized. Greater separation between developers and any REITs they sponsor, as well as the creation of entirely independent management and boards of directors, will make the property-selection process more transparent and unbiased. According to the study "The Impact of REITs on Asian Economies," REITs play an important role in attracting international investment to Asian markets.
The study's positive results are unsurprising given that it was funded by APREA, which represents Asia's listed real estate market. However, it did note that REIT benefits are "not yet widely understood in Asia." The general public is unfamiliar with REITs, according to the report, and those in the media and the investment community have confused REITs with conventional corporate equities and growth stocks.