Asian Real Estate Investment Trust

In the period before 2001, Asia had merely 4 property trust funds listed on the Bursa Malaysia, and now, a mere six years later, Asia has a total of 68 REITs or REIT-like vehicles have been listed.

Japan continues to account for the preponderance of REIT listings in Asia to date, with 32 having already been listed on the Tokyo Stock Exchange or the Osaka Securities Exchange, representing 64% of the total REIT market capitalization in Asia; followed by Singapore with 9 S-REITs listed as of March 2006.

It is noteworthy that, with only 5 months after the listing of The Link, Hong Kong has caught up at a remarkable pace and become the third largest real estate investment trust market in Asia, surpassing the early movers such as South Korea, Thailand and Malaysia.

Also, while Asian real estate investment trust presently have a capitalization of only US 44.9 billion as compared with the market capitalization of US 379.1 billion of the 181 publicly traded REITs (including mortgage and hybrid) which are presently listed in various stock exchanges in the United States, it has taken Asia's markets a mere six years to achieve this scale of capitalization as compared to the 46 years in which the Real estate investment trust markets of the United States have had to gestate.

Hong Kong REIT Market - After a four-month lapse, Hong Kong's nascent market is poised to received a major boost along with another flurry of listings which are expected to occur from the second quarter onwards. Local developers reportedly seeking to raise funds in the stock market in the near term include Great Eagle, Henderson Land, Sun Hung Kai Properties and Wharf.

The future prospects in Hong Kong for a number of reasons. Although the forthcoming REITs will remain predominately comprised of non-core properties, some Grade A properties may be also included in this second batch of IPOs, a development that is favourable to investors and will help to sustain their interest in this new investment concept.

The three listed H-REITs in Hong Kong have thus far relied on active asset management to grow their bottom line by a combination of initiatives such as improving occupancy, restructuring tenant mix and increasing lettable space.

However, from the experience of the more mature market in Singapore, the main growth driver is generally property acquisition, which have a direct knock-on effect on dividend per unit and have contributed to the substantial share price increases witnessed by the leading S-REITs to date, such as the CapitalMall Trust and the Ascendas REIT.

Property acquisition drives growth is a phenomenon yet to be witnessed by Hong Kong listed REITs. However, as more Hong Kong developers now gearing up to pursue property development opportunities in China, coupled with the lifting of the leverage restriction from 35% to 45% by the regulators last year, it is believed that more H-REITs will consider this growth option in the future.

Along with the rapid emergence of Asia real estate investment trust, the regulatory environment is also evolving continuously to provide greater support to market development, a process that is driven by demand as well as competition between countries to attract institutional investors and sponsors.

For example, in Hong Kong, whose regulations were criticized as too rigid and unattractive due to the absence of tax incentives, the Securities and Futures Commission in June 2005 amended its real estate investment trust code, whereby the restrictions on overseas investments were lifted and the gearing limit was relaxed.

These measures were introduced in addition to the waiver of stamp duty for transfer of Singapore immovable properties and reduction of withholding tax for overseas non-individual investors from 20% to 10%, already introduced in early 2005.

The gradual improvement of legal infrastructure of will undoubtedly contribute to further development of Asian REITs and stimulate more for cross border capital flow, but at the same time investors should be aware that an increased level of risk may eventuate in spite of the higher return that also may result.