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REITs rise in Asia

  • What is REIT?
  • The growth of REIT in Asia from 2001 to 2017
  • Factors for the growth 

 

REIT is a real estate investment trust which owns revenue-generating real estate properties. These properties may be operated by the trust itself or leased to tenants, hence generating revenue from operations or rental revenue from tenants. REITs generally invest in different type of properties like retail, residential, healthcare, offices, etc. On the basis of investment in different categories, REITs can be classified as speciality REITs or diversified REITs. Further, based on the method of investment, REITs can be categorised into equity, mortgage, public non-listed and private REITs.

Currently, in Asia 11 countries have listed REITs. The concept came to the region in 1971 with the listing of first REIT in Australia, this was followed by Malaysia after almost two decades in the year 1989. Thereafter, eight other Asian countries came up with the REIT structure between 1999 and 2005.

Among all, Japan, Australia, Singapore and Hong Kong are holding more than 70% of Asia’s REITs in terms of a number of listed trusts. In 2001, the REIT concept came to Japan with the listing of two companies and within a span of 16 years, Japan has become a leader in the Asian market and surpassed the pioneer; Australia, both in terms of the highest number of listed REITs and highest market capitalisation.

The effects of the economic downturn in 2008 weighed heavily on the number of REITs and market capitalisation of companies. The global recession in 2008-09 wiped out more than 50% of the market capitalisation for listed REITs in the Asian countries, though the effect on the number of REITs was not much as the number of REITs were down only by 5%. But, REIT industry recouped well after the downturn and in fact, is presently rising in terms of the number of REITs, the number of properties under REITs and the market capitalisation in Asia.

There are multiple reasons involved in the growth of the industry, but the growth in the real estate market globally and in Asia is the prime factor for flourishing of the sector. The global real estate market has seen a capital inflow at 17.7% CAGR and the Asian real estate market has seen a capital flow of 10.9% CAGR between 2007-2017.

Investing in real estate is not that easy as prices have surged many times during the past years. If a small investor wants to invest in the real estate, then there are limited options for investment as the amount required to invest is huge and many a times out of the budget. Moreover, the process of owning a real estate is also time-consuming due to rules and regulations in respective countries. Here comes the role of REITs as these are listed on the stock exchange of a respective country like shares of a company, hence it becomes easy to invest in REITs with lesser time and efforts as compared to owning a real estate physically. Furthermore, the amount required for investment is as low as $3,000-$5,000 in some countries. REIT units are more liquid and gives a greater diversification to investors as compared to investing the whole amount of money in one type of real estate class.

In Asia, the above-mentioned four countries are holding 70% of the REIT market, which has seen the real estate growth of more than ~5% in terms of CAGR in the past 5 years. The growth in the real estate market has lured investors to invest more in the market in the region, while the availability of options for investment in the sector through REIT has further elicited their interest. 

In addition, the other factor driving the growth is the rise of the middle class in Asian countries, which has fueled the demand for all the types of real estate. Each year, 140 million people are joining the middle class. According to a 2017 report by the Brookings Institution, a trend has been noticed that whenever the middle class starts to grow strongly, there is a greater demand for consumer goods. It means more growth for different types of real estate such as warehouses, offices, hospitals and housing as well. In order to meet this demand from the middle class population sponsors will need all the financing they can get and REIT is one of the mediums.

Investment returns on REIT come in two ways: a continuous stream of dividend and capital appreciation. REITs are surrounded by a number of laws and legislation under which a trust must pass on 90% of its income to investors in the form of a dividend.

A high and steady stream of dividends between 3% to 6% from REIT (for countries under analysis) make it more lucrative investment vehicle than other mediums. A comparison of dividend yields of REITs with 1-year government bond yields and bank deposit rates of respective countries show that REIT dividend yield is much higher as compared to the other two.

All factors discussed above are the prime factors for the growth of REITs in Asian countries. A number of other Asian countries either have plans to introduce REIT regimes or they are in the process of upgrading to attract more IPOs and investments. The governments of the most populous Asian nations—China and India are now working on appropriate REIT policies that meet the need of sponsors and investors alike.

In the past years, many Asian countries have adopted the REIT structure and are working to identify issues and hindrances which comes in the way while converting a real estate into a REIT. The tax-related to the conversion of real-estate into REIT, a dividend distribution tax and tax on capital appreciation are the main hurdles for the growth of REITs. Hence, countries are trying to curb these tax-related issues, so that the industry becomes more attractive and investors benefit from these developments. REITs revenue depends on occupancy rates and rental income from tenants. A low rental yield during the past years and the lack of professional asset managers are also stumbling blocks. But looking at the advantages over buying a real estate like liquidity, diversification, control, return and low investments, REITs stand as a more attractive investment avenue. In Televisory’s opinion, REITs in Asia will grow with the number of countries entering or passing legislation for the REIT structure and dodging the hurdles coming on their way.

 

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