How REITs evolve with economic development

August 23, 2019 11:14
Currently, the two largest REITs in the United States are telecom infrastructure REITs, which invest mainly in telecommunication towers. Photo: Reuters

Asia-Pacific real estate investment trusts (REITs) have seen massive growth in the last two decades, growing from a US$6 billion sector of only Australian and New Zealand REITs to over 250 REITs and over US$370 billion in market cap (as of the end of June 2019).

However, Asia-Pacific REITs currently account for only about 20 to 25 percent of Global REITs in terms of overall market capitalization, depending on the index referenced.

The United States remains the world’s largest REIT market, which consistently comprises over half of the Global REIT market capitalization. This is a natural development, as the US was the first country to create a REIT sector by passing the relevant legislation in 1960.

Through the years, however, American REITs have evolved several times. Before 1993, for example, American REITs used to be dominated by mortgage REITs, which invest in mortgages and profit from the resulting interest payments. It was after three revisions to the legal structure and a financial crisis that Kimco was born. Kimco is often seen as the first modern REIT.

In the last five years, US REITs have seen a rapid shift in sector focus. Office and retail assets have long been the senior asset class in commercial real estate. In fact, in some circles, such as Hong Kong’s real estate industry, commercial real estate has long been synonymous to office assets. As a result, REITs focusing on these two asset classes have long been the dominant REITs in the US and other countries.

Real estate, however, is ultimately the vessel of economic activities, and over time real estate has evolved to serve the needs of the wider society. As computers and telecommunications gain greater importance, American REITs have also evolved to cater for their needs.

Currently, the two largest REITs in the US are American Tower Corp. and Crown Castle International Corp. Both are officially known as [telecom] infrastructure REITs and invest mainly in telecommunication towers.

Many Asian cities are developed with a high-density model, with high-rise commercial and residential buildings dominating the skyline. Thus, telecommunication equipment can mostly be installed on the rooftop or dedicated space of taller buildings.

However, high-density development is an exception, rather than the rule, across America. Thus, telecommunication equipment requires dedicated telecom towers that are deployed widely. These telecom towers operate like many other kinds of commercial real estate as they charge the telecom operators a rent to use specific space in the tower.

In addition, the fifth-largest American REIT, Equinix Inc., is a data center REIT. As Keppel Data Center REIT is already listed in Singapore, data center REITs should not sound foreign to Singaporean investors. Data centers grew out of the general industrial sector. However, since data centers house mainly computer servers, there are specific requirements for electricity, cooling and security. These requirements mean that often dedicated structures are required, and thus, dedicated REITs can develop the know-how and brand name to serve their IT users.

In short, while as a sector American REITs have a long history, individual REITs do respond to economic and social developments. We believe that investing in REITs can be a proxy to gain exposure to the overall economic activities of a country. As the US remains the world’s largest economy, some investment into its REIT market can be a thoughtful diversification.

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Chief Investment Officer, Admiral Investment Ltd.