The amount of new equity raised by real estate investment trusts (REITs) across Asia dropped to just US$7 billion in 2015.
However, it rose again in 2016 as interest rates in the three main Asian REIT markets – Japan, Singapore and Australia – fell, according to the Emerging Trends in Real Estate 2017 – Asia Pacific survey report by the Urban Land Institute (ULI) and PwC.
Lower interest rates are beneficial because REITs provide bond-like revenue streams and trade in line with fixed-income assets.
In addition, they reduce the cost of borrowing used to finance new purchases and also filter through directly to the bottom line by increasing dividend yields.
Throughout the Asia Pacific region, listed REITs currently account for approximately 25% of all commercial property transactions, according to Real Capital Analytics.
Japan’s J-REITs have benefited from the ongoing quantitative easing policies of the Bank of Japan (BOJ). At the start of 2016, the J-REIT index surged following the announcement of negative interest rate policies.
The industry continues to thrive from a government campaign mandating purchases of some US$865 million worth of J-REIT shares annually.
While the BOJ’s regular purchasing exercises has long been an easy source of profit for some, J-REITs have now become richly-priced, with shares trading at a premium to NAV of around 25%. In contrast, share prices of local developers currently trade at an average 30% discount to NAV.
Distribution yields of just over 3% make J-REITs among the priciest in the world, even though they offer a decent yield spread given the negative interest rates payable on government bonds. However, finding accretive acquisitions at that level has become problematic.
As a result, J-REIT asset purchases – a mainstay of the Tokyo core sector – have fallen, although some J-REITs continue to buy assets from their sponsors.
J-REITs are also issuing less equity, with follow-on capital falling 42% year-on-year in the first half of 2016, according to CBRE. There are talks about the possibility of larger J-REITs buying our smaller competitors whose share prices have lagged the market.
Despite the ongoing downturn in Singapore commercial real estate, local REITs have taken precautionary measures and look to be ready to ride out the storm.
In particular, most Singapore REITs (S-REITs) have locked in cheap financing by issuing longer-duration bonds (up to 15 years), which provides protection against future interest rate increases.
Meanwhile, office REITs have moved proactively to negotiate with tenants to renew expiring leases, sidestepping a looming glut of office space.
However, retail-related S-REITs are suffering amid a glut of retail assets. Renovation work at some REIT-ed malls have also disrupted earnings. In the industrial sector, vacancies have risen and rents continue to decline.
In 2015, the Singapore government introduced rules capping REIT leverage at 45% of total assets. While all S-REITs currently operate well below that limit, any significant increase in interest rates or decline in asset values might function to raise their gearing above current levels.
With S-REITs carrying hefty average distribution yields of some 6.5%, finding accretive acquisitions locally would be problematic. It is for this reason that many REITs, especially industrial REITs, are looking abroad. Currently, the focus seems to be on Australia, which offers yields “north of 7%.”
Supported by declining base rates, share prices in Australia REITs (A-REITs) rose steadily in 2016, gaining some 6.5% year-on-year by the third quarter. Yields average around 4 to 5%.
A-REITs pricing has also been supported by good rental growth that averages some 3% per annum. At the same time, strong demand for core assets is allowing REITs to sell off noncore assets at high prices and then reinvest the proceeds in higher-earning projects. Share prices have also been supported by an overall lack of follow-on offerings, with A-REITs instead relying on bank debt or ongoing disposal programmes to fund purchases.
Looking ahead, the current shortage of investable assets in Australia could provide opportunities for institutional buyers to buy up smaller REITs as platform deals.
In addition, a strong pipeline of new A-REIT listings is now in place, with at least A$3 billion in new shares coming to market amid strong buyer interest for assets offering 5 to 6% dividend yields.
Emerging Trends provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area.
It is based on the opinions of 604 internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.