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“Singapore’s done it better than anywhere else in terms of putting the full gamut together: listing rules, regulatory framework, but more importantly the tax treatment” Michael Smith, Goldman Sachs |
THE ASIAN REAL estate investment trust (Reit) market already has its clear front runners: Singapore, Japan and Hong Kong. But they’re not the whole story. Several other Asian countries have Reit markets in varying states of development, and others should join them in time. For all the fanfare of Hong Kong’s entry into the listed real estate world, when CBRE Research surveyed the region at the end of 2006, there were twice as many Reits in South Korea as in Hong Kong. The same was true in Malaysia, Thailand and (almost) Taiwan. The difference, though, is market capitalization: the 32 Reits of those four markets combined are worth far less than the four Reits that had made it to the public markets in Hong Kong by then.
Bankers in Asia say all these markets have to measure themselves against the benchmark set by Singapore.
“The major issue with Reits anywhere is the guidelines that get put in place,” says Michael Smith, managing director and head of Goldman Sachs’ real estate investment banking business for ex-Japan Asia. “Singapore’s done it better than anywhere else in terms of putting the full gamut together: listing rules, regulatory framework, but more importantly the tax treatment.”
The effect of the tax framework is demonstrable: Singapore had the legislation to support Reits in 1999, but the first one was not launched until three years later, when the tax regime was established. “That inspired the whole market,” says Smith. “Now there’s 15, with another five or 10 to come this year.”
It is often said that Hong Kong’s disappointing performance to date has been due to its failure to provide a useful tax structure. “There’s a lack of tax transparency, which has been one of the challenges to that market. They effectively have to pay corporate tax like any other vehicle,” says Smith, whereas in a Singapore Reit no tax is paid at the Reit level.
All rival markets have to some degree lacked one of these elements. Malaysia comes the closest, but only at the second time of asking, having attempted to launch a Reit market in the late 1980s and early 1990s without building in any of these structures, and consequently without success. Since then, it has revamped its approaches and is doing better.
It’s not perfect, though. “The biggest challenge Malaysia has got is capital controls, and controls on foreign investment in real estate,” says Mark Ebbinghaus, joint head of real estate at UBS. (Specifically, there is withholding tax on dividends, which creates a problem for international investors.) “So yes, you’ve got a number of Reits there, but they’re all small and illiquid. They’ve got large sponsor shareholding positions in them, so they don’t trade much and have very limited international support.”
Eye-catching Malaysia
Malaysia does have plenty of reasons to catch the eye as 2006 saw the first Islamic Reit, Al-Aqar KPJ Reit, with a portfolio of hospital buildings. Malaysia has also been home to the first Reit made up of plantation assets. But it also reflects a problem that regulation cannot address: the attitude of sponsors. “The key reason that has hindered the development of a large Reit market is twofold,” says George Pavey, head of equity capital markets for Asia at HSBC. “On one hand, property ownership is highly fragmented and there are few companies or individuals that have portfolios of assets of sufficient critical mass to inject them into a Reit. On the other hand, real estate is frequently controlled by tycoons in Malaysia or Thailand, and they hate to part with these assets.”
Smith agrees. “Malaysia continues to transform, but the next step beyond the regulator is the mindset of the sponsors themselves. Singapore was quite fortunate because it had a confluence of the regulators, investors who were looking for this type of product, but also the sponsors who really understood it from inception: CapitaLand, MapleTree, Ascendas.”
Smith says it’s common in some markets for “the sponsors to look at this market as somewhere they can just offload assets. If you go in with that approach it’s not what investors want: overselling assets, no matter how you structure it, is not going to be popular.”
What about Thailand? In the CBRE survey Thailand had more Reits – nine – than any other market bar Japan and Singapore. Thanks largely to the Samui Airport Property Fund listing in November, the total market cap of listed property funds grew by 42.4% between May and November.
But Thailand’s biggest problem is an oddity in its code. “You can’t gear a Reit in Thailand,” says Smith. “Real estate is a great asset class to put some debt against, and most investors expect that.” The listing process is also complex, and into that mix has now been added Thailand’s increasingly onerous and unclear foreign ownership rules.
Korea is a curious market because it came about for quite different reasons than others in Asia. “The Korean Reit market was developed as a result of distress,” says Pavey. “Companies with extended balance sheets were forced to sell real estate and faced a choice: entering into sale and leaseback transactions or creating Reits.”
Ebbinghaus adds: “A lot of property is still caught up in the major corporates, and they have yet to focus on clearing out those assets. It will happen slowly.” But the structure also differs from international norms. “Most of them tend to be finite life funds so wind up at some point in time. It’s not a very sophisticated securitized real estate market. You would have thought there’s an opportunity there, but there is not a conducive regulatory framework to have securities in a permanent fund structure.”
Taiwan? Of the four peripheral markets, Taiwan’s Reit market has the largest market cap, with its $1.756 billion capitalization at the end of November equal to Korea and Thailand’s combined, and nearly three times that of Malaysia. But it doesn’t attract international attention. “It’s a very domestic market,” says Smith. Some argue that they just don’t fit the needs of Taiwanese investors anyway. “They would much rather speculate on tech stocks and things that might double in value rather than a steady-as-it-comes Reit,” says one observer.
Malaysia looks like it might yet be a notable force, but otherwise it’s markets without Reit markets that attract particular attention. The Philippines is interesting in that the country punches above its weight in terms of the quality of its listed developers, Ayala Land, SM Prime and Megaworld, but has no domestic framework for Reits and does not appear advanced in developing one. Rumours persist that a Reit of Philippine assets will appear in Singapore.
In India, there is talk of a sort of intermediate stage product called a Real Estate Mutual Fund, although long-awaited guidelines on its format are elusive. Macquarie Research Equities says: “We believe REMFs will be limited life, listed real estate vehicles that will invest in a mix of direct property, unlisted real estate funds and listed real estate companies. They seem to us a little like Australian listed investment companies.” Macquarie predicts they will be valued on a net asset value basis, pay a dividend above the market level but below what one would expect from a Reit, and have a mechanism for renewal at the end of a fixed term.
Favouritism
Not everyone is a fan of halfway house ideas that look like Reits without actually being one. “All these governments have really good intentions but when it gets down to the crunch of providing a tax-transparent vehicle that’s different to everything else, it can be construed politically as giving the real estate sector favouritism,” says Smith. “That’s where things get unstuck. Because as we’ve seen in other markets, if you don’t provide the full basket, it generally doesn’t work.”
Ebbinghaus sees activity among Indian developers – carving out development assets, putting them into limited life funds and listing them on places like AIM – but considers that “a short-term game. As the capital market develops maybe you will get a Reit market evolving but at the moment they have bigger fish to fry than to focus on Reits”.
That’s also the problem with any sense of a domestic market in China: there is so much else to worry about in developing that economy and financial market that building a tax-advantaged structure for listed real estate is hardly a priority (or even desirable in a country which has actively tried to cool its real estate markets).
China’s domestic challenges have never been perceived as much of a problem to investors, because it was widely assumed that as Hong Kong’s Reit market got under way, Chinese assets would appear in a whole host of new structures. But strangely, it has not happened. Hong Kong has hosted only one mainland Reit, called GZI, while another has appeared in Singapore, holding the Chinese shopping mall assets of Singaporean developer CapitaLand.
Where are they all? “There is a large pool of attractive properties – high-quality real estate, offering compelling yields – that could be injected into Reits,” says Pavey. “However, recent changes brought about by the austerity measures have adversely impacted the development of Chinese Reits. The key stumbling blocks are taxation rules and ownership of the properties in the Reit.”
GZI was an exception because its properties were already held offshore, and therefore cannot serve as a template.
Nevertheless, HSBC expects to list another Chinese Reit in the first half of 2007, and is not alone. The success of the CapitaLand China product – which is trading at an absurdly low yield of 2, such is its popularity and share price appreciation – will have caught the eyes of many other developers. And as more China Reits come to market, they are likely to be joined by similar Indian Reits listed in Singapore, where Goldman is said to be working on the first one. Increasingly, it will be the well-ordered hub markets that attract the property from the markets that cannot or will not find the right way to list it.
