Investor’s Guide to REITs in APAC and China
On August 31, 2016, Equity REITs and other real estate companies listed in the S&P Dow Jones Indices and MSCI were moved to the newly-added Real Estate Sector of the Global Industry Classification Standard (GICS), separate from the Financial Sector to which they belonged previously.
This landmark event highlighted the growing importance of real estate in the global economy. Data from S&P Dow Jones Indices, MSCI, and FactSet show that the Real Estate Sector has an equity market capitalization of $814 billion USD, ranking it higher than the Utilities, Materials, and Telecom Services sectors.
The creation of a new Headline-Level Sector, the first one in almost two decades, also gives greater visibility to real estate investment trusts (REITs), which played a crucial role during the subprime mortgage crisis by buying foreclosed properties at a steep discount, thus softening the impact of the crisis on house prices.
What are REITs?
Investing in real estate traditionally required an investor to buy property, which involves having access to large capital and the time to manage and sell the said property. A significant investment also comes with huge risks.
This traditional model also presents barriers to smaller investors who do not have the time and money to do what their bigger and better-heeled counterparts can do.
Enter REITs: companies that own or finance real estate allow small investors to purchase a share in REITs in the stock market and invest in real estate with a smaller capital and less exposure to risk.
REITs generally acquire funds to purchase properties through an IPO. A portion of these funds also go to the management, development, and sale of their real estate assets.
The majority of REITs are publicly traded, which means they are listed in the stock exchange where their shares are traded. There are also non-traded REITs, which investors can only purchase through a broker. There are also options to buy shares through a REIT mutual fund or REIT exchange-traded fund (ETF).
REITs are generally classified as either a mortgage REIT (one that buys existing mortgage or mortgage-backed securities, or lends money to property owners, and makes a profit from the interest) or an equity REIT (the type that acquires real estate assets and makes a profit from the rent, lease, or sale of these assets). Of the two, equity REITs are more common. There are also REITs that combine these two common types, called hybrid REITs.
Investors earn income from REITs through dividends and the sale of their shares. Dividends come from the REIT’s income derived from renting and selling its equities, or the interest payment of borrowers. These trusts are also required to distribute 90 percent of their income to shareholders, giving shareholders a recurring and fairly stable income stream.
Why Invest in REITs?
Buying a share in REITs offers investors a number of advantages compared to investing directly in real estate.
First is the ease of investing in one. As mentioned earlier, one can invest in REITs even with a small capital, since they are only buying a share of the property.
A small capital means less exposure to risk. This can be especially important during cyclical downturns in the market. The investor will only lose money if they decide to sell their share at a loss.
Historically, REITs have performed well in the market. It has even outperformed the S&P 500, Dow Jones Industrial, and NASDAQ Composite indices, proof of its status as a stable and profitable form of investment.
Investing in REITs also provides investors with a recurring income stream in the form of dividends. This can be an ideal complement to their other income streams.
Diversification is another strength of REITs, since they buy a wide range of property types, including offices, apartments, and warehouses spread across different countries. This is an important advantage because it exposes the REIT to lesser risk, which in turn protects the investor’s own assets. Investors can also diversify their own portfolio by buying shares of different REITs, which is much easier than diversifying a portfolio of actual properties.
Shares in a publicly-traded REIT are highly liquid. This means that one can easily trade these in the stock market where a transaction can be completed in a matter of minutes. In contrast, buying or selling a property directly is considerably more complicated, expensive, and time-consuming.
There is also lesser risk in investing in REITs, as they are governed by the same rules as other public companies. Thus, investors know the people behind it, the properties they choose to invest in, and how much money they are making, just to name a few.
Things to Consider When Investing in a REIT
It pays to be a smart investor, and investing in REITs is not an exception. Thus, investors must perform due diligence when choosing REITs in which to invest, including knowing the organization, the people behind it, and its investments. Naturally, investors must choose one that has a history of profitability, a highly diversified portfolio, and a positive record of completing developments on time and within budget.
Investors must be extra diligent when investing in a non-traded REIT, since its share value is harder to assess. While dividends are typically higher in non-traded REITs, some trusts are able to do this by borrowing heavily, which can lower the share value and decrease their ability to purchase more assets. Shares are also more difficult to liquidate in a non-traded REIT, unlike those that are traded publicly. Finally, there is a risk of conflicts of interest in a non-traded REIT, since an external manager handles the acquisition and management of the REIT’s asset, which may result in decisions that are not favorable to the interests of shareholders.
If one trades shares through a mutual fund or an ETF, they must ensure that they work with an advisor that they trust, and one who has considerable experience in the field. The advisor must provide their clients with full disclosure about their investments and recommend only investments that match their client’s goals and risk tolerance.
Overview of Top REITs in APAC
While REITs were first established in 1960, it saw considerable growth in adoption in the 2000s. To date, there are 35 countries with REIT legislation, including Canada, France, the United Kingdom, Japan, Australia, and the United States.
The United States comprises 35 percent of the global real estate securities market valued at $446 billion USD, based on the latest data from U.S.-based organization National Association of Real Estate Investment Trusts. APAC comes at a close second with a 32-percent share worth $402 billion USD.
Some of the biggest REITs in APAC are Hong Kong, Singapore, Australia, and Japan. As of September 2016, there are about 180 REITs listed in the region.
There are currently 29 REITs listed in the Singapore Exchange, including CapitaMall, the first one to be established in 2002. Their investments cover a wide range of assets, including hotels, offices, retail, and residential in different countries in Asia and the local market.
The Securities and Futures Act, the Monetary Authority of Singapore’s Code of Collective Investment Schemes, and the Singapore Exchange govern REITs in the country. They ensure that rules on investments are followed to the letter, including limiting these investments to real estate and real estate-related assets, and investing at least 75 percent of the deposited property in income-producing real estate.
Australia has one of the more mature REITs in the region since the concept was launched in the country in 1971. There are 70 REITs currently listed at the Australian Securities Exchange with more than $100 billion AUD in market capitalization.
Called A-REITs, their investments are mostly focused on the United States, the United Kingdom, and New Zealand. In terms of capital management policies, their approach has become more conservative overall after the global financial crisis, especially with regards to gearing levels and payout ratios.
Among the top countries in the region, Hong Kong has the smallest number of REITs with 11 listed, five of which represent properties in mainland China. The majority of these also hold a highly diverse portfolio, which covers everything from shopping malls, wet markets, car parks, and office blocks.
A surge in its tourism industry is currently driving Japan’s real estate industry, of which J-REITs are one of the many beneficiaries. In particular, hotels and retail spaces have seen significant growth in their revenues. In addition, the expanding e-commerce space in the country has resulted in a bigger demand for logistics facilities.
J-REITs do not develop properties in general, but rather depend mostly on rental income. These currently enjoy a stable income due to the steady office and apartment rental figures brought about by the country’s economic recovery.
Although China already has several REIT-like trusts, none fit the traditional mold due to lack of legislation and challenges, such as hefty taxes.
Probably the most well-known among these quasi-REITs is Penghua-Vanke, which went public in 2015 and raised $500 million USD. However, half of this will be spent on its single asset, an office complex in the Qianhai special economic zone, while the other half will be invested in a range of money market products.
Despite this, all signs indicate that local investors are ready for a U.S.-style REIT. Based on JLL’s latest data, Chinese investors increased their spending on property purchases by 49 percent in 2015, while data from the National Association of Realtors reports that these investors also spent $28.6 billion USD on American homes during a 12 month-period ending in March of 2016.
Kenneth T. writes for The Investor, a real estate blog with a passion for real estate investments and provides real estate investors with insights on the most pertinent issues in the market to help support their investment decisions, wherever they are in the world.