During the Hong Kong Book Fair this year, we published a new book on REIT strategy in association with HKEJ’s [Chinese] publishing department. The book was written with REIT investors in mind, as we hope to guide them through the analysis process of how to evaluate REIT management teams. Curiously, however, we have also been invited to speak with real-estate operators to discuss how the concepts in my book can help existing operators.
The major issue revolves around finding growth opportunities as REITs. REITs are required by law to distribute substantially all of their net income as dividends, and thus, REITs in general do not accrue capital for additional investment. This means that major investments typically require secondary placement to raise equity. The precise mechanics differ from market to market. In some markets, for instance Singapore, investors prefer larger placements that would sustain several acquisitions. Other markets such as Australia would prefer REITs to come to the market for major acquisitions.
However, no matter what the precise mechanism is adopted, it is clear that REITs must command the confidence of the market to support their continuous growth. Otherwise, neglected REITs could fall into a value trap, where their stock prices deviate much from the per share net asset value and make secondary placement prohibitively expensive. This would make it even harder to find growth, and ultimately, this could create a feedback loop.
The confidence of the market is ultimately based on the long-term growth of per share net asset value and per share dividend payout. Bringing in per share growth is where corporate strategies on operations, investment and financing will matter the most.
This is why as current asset owners, such as developers, private-equity funds, and even other non-real-estate enterprises, contemplate REIT listing, they are well advised to have a concrete post-listing growth plan. Assuming the listing is successful, most newly listed entities would enjoy a honeymoon period when the market allows the entities some time to prove themselves. A REIT that can accomplish the plans would then earn a solid reputation to sustain its growth in the long run. In a way, this is similar to politicians that attempt for some policy accomplishments within the first 100 days in office, as success in the beginning would create the momentum needed for a full term.
The discussion on growth, however, is not new. The Hong Kong chapter of the Royal Institution of Chartered Surveyors, for example, hosted a one-day conference last October to discuss the growth in Hong Kong REITs. I noted, in my speech then, that Hong Kong REITs did not develop slowly. The Link REIT, the largest Hong Kong REIT, is also the largest REIT in Asia, suggesting that at least one REIT has achieved commercial success at the pan-regional level.
Hong Kong REITs, however, have rather uneven development. For example, Singapore’s headline Strait Times Index has three REITs, but in Hong Kong, only the Link REIT has made it into the Hang Seng Index. Thus, for the government and the sector in general, the true challenge is to stimulate other Hong Kong REITs to reach their potential.
In addition, new REIT listings should also be encouraged. After a 10-year hiatus, for example, Taiwan has approved two new REIT listing this year. Hong Kong has had no new REIT listing since 2013. As the real-estate asset market stabilizes, more investors could be incentivized to bring their portfolios to Hong Kong.
For both existing and new REITs, we believe a renewed emphasis on earnings growth would reignite interest in the sector. We feel particularly encouraged that our new book, which focuses on REIT strategy, has attracted interest from friends in real-estate operation.
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