International articles : the growth of REIT markets in Asia

Abstract Real Estate Investment Trusts (REITs) emerged in Asia in 2001, with Japan and Singapore as the market leaders. South Korea, Taiwan, Hong Kong and Malaysia have also launched REITs. This paper examines these REIT markets. The paper first examines the background of macroeconomic, financial market and real estate market development. The driving forces for REIT development on the supply and demand sides, government initiatives and market obstacles are also discussed. The initial performance of Asia REITs will be reviewed and contrasted with the common stocks in the respective markets. Finally, the future prospects of Asia REITs are assessed. Real estate investment trusts (REITs) in the United States and Listed Property Trusts (LPTs) in Australia have a long and successful history as effective real estate investment vehicles. In recent years, REITs have expanded internationally, with REIT markets being established in Asia and Europe (EPRA, 2004). In Asia, REIT markets have been successfully established in Japan, Singapore, South Korea and Taiwan, with REITs also established in Hong Kong, Malaysia and Thailand late in 2005. A recent survey by Jones Lang LaSalle (2004) has shown that maturity and transparency in many Asian real estate markets like Hong Kong (7th most transparent market in world), Singapore (9th), Malaysia (20th) and Japan (26th) have improved considerably since the Asian Financial Crisis in 1997. As such, the Asian real estate markets offer long-term diversification benefits for international real estate securities funds that have invested in real estate companies in several Asian countries (Bond, Karolyi and Sanders, 2003; and Garvey, Santry and Stevenson, 2001). The emergence of REITs in Asia offers new opportunities for international funds to diversify into real estate assets in these Asian countries (Newell, Liow, Ooi and Zhu, 2005). The REIT markets in Asia have started to flourish in recent years. Japan led the way with the launch of two J-REITs in September 2001. This was followed by Singapore, which saw its first S-REIT launched in July 2002. By June 2005, seventeen J-REITs have been listed on the Tokyo Stock Exchange and five S-REITs listed on the Singapore Exchange. Both the Japanese and Singaporean REITs have fared relatively well, with a market capitalization of around US$ 19.9 billion and US$ 5.2 billion respectively as of June 2005. There are currently seven Corporate Restructuring REITs (CR-REITs) listed on the Korean Stock Exchange, with a total market capitalization of US$ 564 million. Taiwan saw the successful launch of its first REIT in March 2005. After initial legal difficulties, Hong Kong launched the Link REIT in November 2005, which was the first HK-REIT and the largest REIT IPO in the world (US$ 2.6 billion). While having LPTs in Malaysia since 1989, Malaysia liberalized its REIT framework in early 2005, and the Axis REIT was listed under the new REIT guidelines in August 2005. Thailand also established REITs in 2005. Other Asian countries, such as India and China, are also considering and deliberating on the legislative frameworks for setting up REITs. This paper traces the development and growth of REITs across Asia up to June 2005. There are lessons to be learnt, so that subsequent efforts to introduce REITs in other markets stand a good chance of success. The paper also examines the significance of tax transparency1 in countries where tax regimes are significantly different from the U.S. Major constraints in the introduction of a REIT market in Asia are also highlighted. In particular, the low initial yield on Asian real estate restricts the ability of the sponsors to offer the low-risk high dividend income sought by international investors. Furthermore, as a new investment product, REITs in Asia face a challenging task of differentiating and competing against existing real estate stocks that are more diversified and have established track records. …