Last year, real estate investment trusts (REITs) were all the rage in Asia, as investors sought big yields in a world of near-zero interest rates and volatile stock markets. However, REITs are starting to face headwinds, particularly in Southeast Asia and China, where a bear market in several emerging countries began in late May.
According to the Thomson Reuters/GPR/APREA Composite Index, REITs have lost money in New Zealand (down 0.3 percent), Australia (down 5.2 percent), Hong Kong (down 5.6 percent), Singapore (down 8.0 percent), China (down 10.7 percent), and India (down 22.7 percent) so far this year. to rent
With the exception of India, all of those markets have experienced a significant reversal, with one-year performance well into double digits. The US Federal Reserve's plan to "taper," or gradually reduce, its asset purchases under quantitative easing is wreaking havoc on many Asian markets, with emerging countries bearing the brunt of the pain. Interest rates are rising as a result, and the increasingly visible recovery in the United States is prompting investors to repatriate money from Asia to the West and shift away from yield plays into riskier developed market equities.
"REITs are definitely on the decline, and the rationale is fairly simple," Nicole Wong, CLSA's Asia head of property research, told the World Property Channel. "When there is no risk-free income to be created, REITs provide a small amount of yield. When the deposit rate is 0.001%, a REIT yielding 3 or 4% is a lot; yet, when the risk-free rate [for bank deposits] rises 1.5 percent and the net yield is 4%, the margin over the free rate is 2.5 percent. What's the point?"
"...The margin over the risk-free rate [for bank deposits] is 2.5 percent when the net yield is 4 percent and the risk-free rate is 1.5 percent. What's the point?"
While "Abenomics" and the central bank's pledge to buy REIT shares are likely to help Japan's J-REITs, the market turmoil suggests tough times ahead for REITs in Thailand (15 new REITs since the start of 2010), Singapore (nine new REITs), and Malaysia (four new REITs), which have seen the fastest issuance in this decade.
If stocks are being punished, a 4% return isn't worth much to an investor. The Link REIT, valued at HK$87.7 billion (US$11.3 billion) [by far Hong Kong's largest new REIT, with a staid portfolio of car parks and aging suburban malls], has been assigned a "sell" rating by CLSA. Its stock has dropped 21% since May 16, when the Federal Reserve announced its tapering.
Wong added, "A lot of REITs have very modest growth." "Investors like to invest in assets that are increasing in value. Hong Kong and Singapore are also more vulnerable because they lack their own interest rate system, whereas Australia's interest rates may be decreased, providing some relief."
Hong Kong's currency is tied to the US dollar, thereby meaning the Federal Reserve sets its interest rates, but Singapore's currency is fixed to a basket of the world's major currencies. A rising dollar encourages investment into US shares while lowering returns in other currencies, such as those of most Asian countries.
For example, India's currency has plummeted, falling 6% versus the US dollar in June alone, making it the worst-performing emerging-market currency. Investors have moved out of Indian stocks, fearful of both a probable shift in position from India's dovish central bank and a national deficit, which has wiped away any possibility of REIT yield.
The constant flood of REIT issuance is already reshaping Singapore's transaction landscape. Two REITs that went public last year made their first deals in the second quarter, with Ascendas Hospitality Trust purchasing Park Hotel Clarke Quay for S$300 million (US$235 million) and Far East Hospitality Trust purchasing the Rendezvous Grand Hotel and Rendezvous Gallery for S$264 million (US$207 million), respectively.
Due to poor market conditions, Overseas Union Enterprise wants to spin off its Mandarin Orchard and Mandarin Gallery hotels into a hospitality trust, while Singapore Press Holdings wants to spin off its retail malls Paragon and Clementi Mall into SPH REIT, which has pushed back book building to July 10 from June 20. It hopes to generate up to S$554 million (US$434 million) in total.
According to DTZ Debenham Tie Leung, the brokerage, hotel REITs are likely to be the most active due to the new listings. However, with a slew of new REITs vying for deals in an already crowded market, there's a risk of overpaying at a time when the macro Asian economy is slowing, putting downward pressure on room rates and occupancy.
"The stock of assets is pretty limited," DTZ's Singapore research head Lee Lay Keng told the World Property Channel. "As a result, they're looking to expand their portfolio through acquisitions. However, we don't anticipate a frenzy of activity."
According to Jones Lang LaSalle, the number of hotel deals in Asia is up substantially this year, with transaction volumes up 85 percent in the first half of 2013. However, during a time when REITs' stocks are falling, investors should pay close attention to the prices they pay.
CDL Hospitality Trusts, for example, underperformed when it released its first-quarter earnings on April 26.
In a note on the results, Macquarie analysts Min Chow Sai and Paul Lin Zikai stated, "We believe that CDLHT's performance reflects an increasingly competitive SG [Singapore] hotel market and is a reminder that demand remains rather weak on account of the global macro-environment."
They blamed the poor results on a 6.6 percent drop in performance from the Singapore section of the company's portfolio, which was related to reduced revenue per room and reduced occupancy. "Investor caution is still merited, in our opinion," they added, "given that the bearish outlook is expected to persist over the medium term and that tourism data remains quite dismal."