Since its birth 16 years ago, Asia-Pacific real estate investment trusts (REITs) have consistently generated an annual dividend of 4.5 to 7 percent.
The sector’s total return is about 12 percent a year, outperforming equities, bonds and REITs in other regions.
The sector, with about one-third of its exposure in Australia, one-third in Japan and the remaining third in Singapore and Hong Kong, represents many of the region’s most developed economies, which typically have deeper commercial real estate markets.
This geographically diversified portfolio has shown resilient performance through the 2008 global financial crisis and last year’s stock market weakness in various Greater China markets.
At its core, a REIT is simply a government-regulated trust that owns mainly commercial properties that generate rental income.
Government regulation also typically mandates a minimum level of dividend payout, creating a cash flow profile that is similar to owning the underlying commercial properties directly.
However, without any tax benefits, a REIT may need to pay income tax at the REIT level and its investors will pay dividend tax once they receive the income, resulting in double taxation that reduces the attractiveness of REITs.
Thus, most jurisdictions provide tax neutralization treatment to put REITs and other alternatives on equal footing.
Before 2000, Australia and New Zealand are the only countries in the Asia-Pacific that have REIT legislation, and the total market capitalization was only about US$6 billion.
Since Japan formed its first REIT in 2001, REITs have gradually been introduced in Hong Kong, Singapore, Taiwan, and other Southeast Asian economies.
Additionally, several REITS listed in Hong Kong and Singapore own assets exclusively located in China, India, and Indonesia, providing international investors an avenue to gain exposure in these large, developing economies.
As of the end of June 2016, total market capitalization of Asia-Pacific REITs has reached over US$300 billion, creating a sector with deep enough volume to serve even the largest institutional investors.
There are now about 180 REITs listed in the Asia-Pacific. The top five names only represent about a quarter of the REIT index.
Investors, thus, have a large degree of freedom in constructing a REIT portfolio.
For smaller institutions and private investors, REITs are perhaps the easiest vehicle to gain exposure into foreign real estate markets.
Owning a real estate property directly will involve multiple operational details – property tax and levies, insurance payments, tenant acquisition, and rental collection are just the major items.
However, since REITs are listed vehicles, managing a portfolio of REITs is as simple as managing a portfolio of foreign stocks.
Being a listed instrument, REITs also allow investors to rapidly implement investment decisions.
For example, once an investment decision is made, an investor can often acquire the desired REITs over several trading days, while a real estate transaction will take months to complete.
This investment flexibility is also a reason why even the largest institutional investors will use REITs to balance out their overall real estate exposure.
REITs also provide diversification over real estate sectors.
Traditionally, office and retail properties are seen as the primary sectors in commercial real estate. But the real estate industry evolves with the economy to serve its needs.
In the 1980s, retailers gradually moved to a just-in-time inventory system, creating strong demand for logistic support.
As a result, logistics properties have developed as the mainstream.
As computers become an increasingly crucial component of our economy and society, data centers are also institutional assets now. In fact, over the last two years, several data center REITs have been formed.
Some analysts and investors also expect healthcare and senior housing properties to become more prominent as society ages.
Thus, a well-diversified REIT portfolio can help investors to diversify risks created by secular shifts in the economy or major advances in technology.
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