An introduction to Asia-Pacific REITs
Asia-Pacific real estate investment trusts (AP-REITs) have become increasingly popular with investors. The asset class can offer a unique, diversified opportunity set across real estate segments: from established grade A office space located in the region’s bustling cities to cutting-edge logistical facilities to the growing number of data centers that power cloud applications.
This is the first of three articles that aims to provide a comprehensive introduction to this emerging asset class. We begin by examining the basic structure and benefits of holding REITs, the benefits of portfolio inclusion, and the fundamentals of AP-REITs, including the main subsectors and their historical performance. In the second article, we’ll move onto an in-depth exploration of how AP-REITs perform in different market environments, focusing on movements in interest rates and inflation. Finally, in the third article, we’ll look at how the asset class is positioned to perform in 2021 and beyond.
Basic structure and benefits of holding REITs
Investors may already be aware of AP-REITs’ unique holding structure. Although this section speaks generally of the structure and benefits of REITs, they’re also applicable to AP-REITs.
Trusts are mandated to pay out a certain percentage of their operating income to investors in the form of dividends.¹ When investing in a REIT portfolio, investors are purchasing a portfolio of real estate assets through equity shares. REITs use the capital raised for acquisitions and management of properties. They aim to pay the proceeds of received rental income to investors in the form of a stable dividend stream.
How does a REIT portfolio work?
For illustrative purposes only.
With that in mind, there are numerous benefits for investors to hold AP-REITs, which include:
- A potential source of income: Traditionally, REITs have provided a long-term source of income to investors through regular dividend payouts. Although potential price appreciation opportunities exist, dividends account for much of the asset class’s total return and can act as a cushion for investors in a downturn.
- An opportunity for portfolio diversification: REITs also offer the potential for portfolio diversification. Over time, REITs have demonstrated a lower correlation with traditional assets such as global equities and bonds and may provide protection in an increasingly turbulent global market.
- Lower minimum investment, liquidity, and preferential tax treatment: Investors often ask about the potential benefits of investing in REITs versus directly investing in more traditional private real estate assets (such as housing or commercial real estate). Relative to private real estate, REITs' appeal may be broader for reasons such as:
- Lower minimum investment: AP-REITs require a lower minimum investment when compared with the significant outlay needed for direct real estate purchases. Therefore, investors can gain access to the sector and—oftentimes—a more diversified array of holdings.
- Liquidity: AP-REITs are traded daily on stock exchanges throughout the region. There’s sufficient liquidity that enables investors to buy and sell their investment and have clarity on the market price that they’ll receive. In contrast, direct investments in private real estate traditionally take a significant amount of time to complete, with final pricing normally subject to negotiation.
- Tax treatment: Finally, AP-REITs have the added appeal of having preferential tax treatment. Due to the trust structure described earlier, they’re not subject to corporate taxation. As such, investors only need to pay tax on income received.
AP-REITs: a diversity of opportunity for investors
Although the first AP-REIT (ex-Japan) was listed in Australia in 1971, the concept is still relatively new to the region. Singapore has since emerged as the leading REITs hub,² while lesser-developed markets in Southeast Asia have gained notable momentum over the past five years.
The relative novelty of the asset class, coupled with a diverse range of opportunities, is proving particularly attractive to investors, in our view. Indeed, the expanding REITs universe gives investors exposure not only to real estate in more developed economies such as Australia and Singapore but also emerging markets, including India and the Philippines (with the latter having launched its first REIT in in 2020³). Indonesia is also currently working to change its REIT laws that should allow for listings.
Main AP-REITs subsectors
The asset class’s diversity extends to real estate segments that include established and newer industries. Office and retail REITs represent traditional real estate plays around the region. Meanwhile, industrial REITs (incorporating data centers and logistics) and healthcare REITs reflect exciting innovations in the asset class. To add value, REIT management teams from these subsectors would renovate properties and reorganize tenant contracts to generate continuous rental income.
Diversified sector exposure of Asia-Pacific REITs
Apart from the traditional retail malls, offices, industrial parks, and hotels, AP-REITs also encompass new industries such as data and logistics warehouses. We believe the emergence of e-commerce and cloud computing would benefit these new industries.
For illustrative purposes only
- Retail REITs: Retail REITs own and manage retail stores and shopping malls. Despite the popularity of online shopping, successful retail centers continue to see growth in customer traffic since contemporary retail centers offer more than just a place for shopping—they create an experience for their consumers that online shopping simply can’t match.
- Office REITs: Office REITs own and operate office properties in commercial areas, offices in industrial areas, or new office parks outside of commercial centers. Office properties are closely related to economic and business cycles, with rentals influenced by supply and demand.
- Industrial REITs: Industrial REITs own and operate industrial buildings, warehouses, or logistics centers for a wide variety of customers. The industrial segment used to encompass light industrial or traditional warehouse properties; however, in the past few years, e-commerce has quickly developed, leading to increased demand for logistics centers and data centers. Some industrial REITs even focus on high-tech properties that play an important role in driving the growing e-commerce trend.
- Hotels and resort REITs: Hotel and resort REITs own and operate hotels and resorts to generate cash flow and profits. In view of changes to the way people travel and more intense price competition and value offerings, hotels no longer provide just basic accommodations. Operators are adding business services and amusement activities to pursue an enhanced guest experience.
- Diversified REITs: Diversified REITs own and operate two or more types of properties—such as offices, retail stores, hotels, and other properties—in their portfolios. Due to the diversification of the properties in their portfolios, the operators of diversified REITs have access to multiple income sources. That said, demands on the management teams are also high given the broader range of underlying properties.
- Healthcare REITs: Healthcare REITs own and operate properties related to healthcare such as hospitals and senior care facilities. Demand for healthcare services is increasing with improvements in the quality of life. The demand for healthcare services is generally price inelastic, and demand remains stable despite higher prices and changing market environments.
AP-REITs performance over the past decade
Despite the tumultuous performance of global equity markets over the past decade, AP-REITs have posted a positive total return on a cumulative basis from 2009 (as of December 31) to 2021 (as of June 30),⁴ and dividend payouts are the main reason. Although the prices of AP-REITs have experienced volatility along with the broader market, the income element of the security has provided a cushion for investors. This defensive nature is a key reason why investors are interested in the asset class. In the next article, we’ll take an in-depth look at how changes in inflation and interest rates affect AP-REITs.
Annual total returns of Asia ex-Japan REITs (2010–YTD 2021)
Source: Bloomberg as of June 30, 2021. Asia ex-Japan REITs are represented by the FTSE EPRA/NAREIT Asia ex Japan REITs Index (capped). Performance is in U.S. dollars. YTD refers to year to date.
1 The percentage of statutory payout varies by jurisdiction, but generally accounts for a significant portion of the trust’s earnings. 2 Bloomberg, February 22, 2020. 3 “1st REIT listing shows PHL market ready to resume business,” Philippine News Agency, August 13, 2020. 4 Bloomberg, as of June 30, 2021. Asia ex-Japan REITs are represented by the FTSE/EPRA Nareit Asia ex Japan Index (capped). For illustrative purposes only. It is not possible to invest directly in an index. Past performance does not guarantee future results.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
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