The Right Time And Place For REITs

Trading prices that are lower than their net asset values (NAV) have made REITs in Asia very "sexy” for investors, according to a report released last month by APN Property Group, an Australian real estate investment manager.

"There is no better time than now to take advantage of the buying opportunities, which are likely to generate strong risk-adjusted returns over the medium to long term,” it said.

Before the 2008 global financial crisis, units in Asian REITs were trading at an 8 percent premium to book value. During the crisis they traded at discounts of up to 40 percent to book value. The last time REITs in Asia traded at NAV was in December 2010, according to APN.

The REIT market in Asia, with a capitalisation of around $100 billion, is the second largest in the world after North America. REITs in Asia have delivered a cumulative total return of 47 percent since April 2006, against 8 percent globally.

Urbanisation and growing incomes of middle-class populations are major drivers of new property demand. Economies such as China, India, Indonesia and Vietnam will have huge demand in the coming years for housing, shopping malls and hotels, as well as commercial buildings, offices and hospitals.

APN said the demographic trend would add around 285 million people to major cities in Asia, resulting in demand for around 70 million houses.

One statistic of note is that the number of office-based workers in this region is low, at fewer than 10 percent of total jobs in most developing Asian cities. The number is forecast to rise to 15 percent. Thus, demand for office accommodation will increase as well.

Roy Melick, a partner with Baker & McKenzie in Sydney and head of its Asia Pacific Structured Real Estate Group, said that a return of global economic confidence, coupled with REITs sticking to the fundamentals, would ensure that they remain a viable choice for access to various real estate sectors. Confidence in the global economy is the major challenge for REITs in Asia Pacific.

However, REITs in this region are not very attractive because of the difficulty in obtaining development finance, he said.

Some newcomers such as Thailand and Vietnam are still in the process of amending rules to accommodate REIT markets.

Sorachon Boonsong, a partner with Baker & McKenzie in Bangkok, said Thailand was making the transition from conventional property funds to REITs, which offer much wider scope to investors as well as developers. The Securities and Exchange Commission (SEC) is expected to finalise REIT regulations in the third quarter of this year. However, tax treatment will depend on the Revenue Department.

He said the average tax collected from unitholders globally was around 10 percent. Capital gains from property funds in Thailand are not subject to tax, which is the strength of this asset class. So, if the government has to tax returns on REITs, the method chosen and rate should be considered carefully so that they are not less attractive than property funds.

"Thailand’s property market has many products such as office buildings, shopping malls and hotels. In my opinion, our products are behind just Hong Kong and Singapore. If the regulations are attractive enough, we will be able to draw money from foreign investors into the property market amid the crisis in Europe,” said Sorachon.

Fred Burke, managing partner of Baker & McKenzie in Vietnam, said the Vietnamese government sees REITs mainly as a way to attract more funding to help build much-needed residential stock.

Under amendments to the Securities Law, REIT-like structures can be set up as joint-stock companies or as unincorporated funds. A draft decree spells out the legal and regulatory framework for each of them, but for the time being much will be decided on a case-by-case or discretionary basis.

As well, Burke noted, there are longstanding issues with the underlying property investment market in Vietnam, including foreign ownership limits in listed companies, structuring constraints, and lack of supporting services such as property management companies, title searches and title insurance. There are only a few candidates with critical mass in terms of asset groups with sufficient cash flow to package into a REIT-like structure.

As in other economies, creating a tax structure that avoids double taxation for investors is a key, but in Vietnam there are also more general issues regarding investor protection, market access for property services, and the relative weakness of the judicial system to protect investors.