Global REITs provide diversification and stable dividend

September 20, 2019 16:15
Global REITs earn their rental income from the three most developed regions in the world, the United States and Canada, Asia Pacific, and Europe. Photo: AFP

We have recently published, once again through the publishing department of the Hong Kong Economic Journal, our third Chinese book on real estate investment trusts (REITs).

The previous incarnation of this book, which won an award at the Hong Kong Biannual Book Award, was published in early 2016. This was less than a year after the Link REIT has become a Hang Seng Index constituent, and the focus of the book was “what REITs are”.

However, in the years since we published the last book, asset diversification has become a much more popular topic in Hong Kong. According to a Citibank report published earlier in the year, the most well-off 10 percent of the Hong Kong population collectively holds 351,000 overseas property units, in addition to their Hong Kong and China holdings. This is clear evidence that, as a society, Hong Kong has truly evolved into an international financial center, with its inhabitants holding significant overseas assets.

Thus, as we updated our book for the second edition, we have decided to add US and European REITs to our coverage. The resulting book, published in late August, is thus renamed “Building Cash Flow with Global REITs”.

Institutional investors have long used Global REITs as an allocation for real estate exposure. Similar to a Hong Kong or Asia-Pacific REIT allocation, Global REITs tend to provide a relatively stable dividend stream derived mainly from rental income, and REIT prices appreciate alongside real estate price increases.

As of this writing, Global REITs provide a dividend stream of about 4 percent, and typically investors would expect a high single-digit or low double-digit total return.

Global REITs provide diversification benefits as a typical program includes about 60 percent US and Canadian REITs, 25 percent Asia-Pacific REITs and 15 percent European REITs. This means that Global REITs earn their rental income from the three most developed regions in the world. This is not surprising since rental real estate takes time to develop, and the regions with the most developed and thus diversified economies will have the most needs for rental real estate.

A Global REIT program is also mainly anchored on Common Law jurisdictions. The United States and Canada are both Common Law countries. Australia, Japan, Singapore and Hong Kong are the major Asia-Pacific markets, and the United Kingdom is about half of the European REIT universe.

Thus, other than Japan, all other major REIT markets are former British colonies or Commonwealth countries. Hong Kong-based investors should feel familiar with the legal system and largely similar land laws.

Hong Kong has experienced an eventful summer, and we have actually seen both outbound and inbound interests to invest. Inbound investment interests are mainly from sophisticated investors who have long waited for investment opportunities in Hong Kong.

Most of them are well diversified and can well afford to increase their allocation to Hong Kong. Some also believe that a peaceful resolution will be reached and will lead to a sharp rebound in both the stock and real estate markets, even if they are aware of the recession risk if social activities drag on.

Outbound investors are typically less sophisticated investors who are still heavily invested in Hong Kong. For these investors, a Global REIT program can provide diversification as they further study the investment merits of the individual markets.

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Chief Investment Officer, Admiral Investment Ltd.