_The Next Phase of Asia-Pacific REITs

A Trajectory of Growth

Real Estate Investment Trusts (REITs) are an increasingly important piece of the dynamic and complex global real estate sector. While REITs have had a storied history in the US, being first established in 1960, it has only become more prevalent in parts of Asia-Pacific within the last two decades. Markets such as Japan, Singapore, Australia, Malaysia, and Hong Kong have been actively growing their REITs sectors.

Governments have been keen to foster a REIT-friendly environment as it promotes a more liquid and healthy capital market, allowing developers to unlock value hidden behind each real estate holding, while giving investors a greater range of investment vehicles for risk diversification. While APAC REITs have come a long way so far, there is still much room left to grow. Developing markets, particularly those that have a healthy stock of real assets with developers and asset managers eager to offload said stock, are prime candidates for a period of explosive growth in the 2020s.

Very often, however, policy and regulatory factors remain the key issue preventing this. Often, certain segments of investors may be omitted from participation, or high tax and related costs could make the sector far less profitable. Given all that, the soil is fertile for growth in APAC, and governments would only need to ensure that their REITs’ growth do not get hampered by the abovementioned hurdles.

The Next Phase of APAC REITs

Many developing markets such as the Philippines, India, Thailand, and Indonesia are the proverbial fertile ground, where REITs listings on the public markets have been legalised and there is available stock under developers’ holds. However, high tax rates, bureaucratic hurdles and other policy-related issues have stymied their development thus far.

The Philippines, for example, has been loosening regulation on REITs over the past year, with layers of red tape being removed, while the government has been pushing towards easing foreign investment rules. This will help the P-REITs gain momentum, not only in garnering attention from domestic investors, but also foreign investors, who have been very under-represented from its current landscape. Additionally, the Philippines Stock Exchange (PSE), is also planning on loosening its rules to encourage more listing. The bourse has publicly stated in a statement, that the market would see at least four REITs offerings in 2021.

The REITs market in India is also undergoing easing of financial measures to attract more interest from investors. The latest round of their Union Budget, amendments were made to regulations to exempt REITs from being taxed on their dividend gains, as well as allowing foreign portfolio investors to be eligible to provide them with debt financing. The latter of these changes allow REITs to gain a new avenue to debt capital through foreign capital markets, and potentially replace expensive debt with cheaper debt, which should see REITs become more profitable in the long run. The Indian REIT market was established in 2019, and the government is now taking strides to open up regulatory strangleholds to improve liquidity, transparency and governance. In turn, the fruits of its labour are being felt, with major international players such as Blackstone and Brookfield sponsoring REITs in India, and more REITs are  forecasted to be listed in 2021 and beyond.

Going forward, we expect to see growth accelerating in some of these developing markets, including Thailand, Indonesia, and Mainland China, as regulations ease and the market matures. With more momentum and growth in their total market capitalisation, we should see economies of scale kick in and undergo exponential growth in the following decade. According to a research by APREA, the total market capitalisation of REITs in APAC will hit more than US$1 trillion by the end of the decade. This presents exciting opportunities for domestic developers, international investors, and potential sponsors as they look to bring their products to the Asia-Pacific markets for their next rounds of capital raising. We also expect to see more divestment activity by sponsors, which will also act an avenue for price discovery. This could potentially attract more capital interest into the markets which could lead to increase in asset prices or yield compression.