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Prospect of lower rates makes Asian REITs
an increasingly vibrant asset classMulti-year growth story could be in store
With borrowing costs expected to decline in 2024, Asian real estate investment trusts (REITs) have themakings of a multi-year growth story that global investors may find hard to ignore.
By the Nikko AM Asian Equity Team
19 March 2024

Asian REIT market still has plenty of room for growth
The Asian REIT market is the second-largest REIT market globally, but there is still plenty of room for growth. As REIT
regulations and listing processes become increasingly market-friendly in newer REIT markets, we expect more asset
owners to securitise their real estate into REIT products, driving greater investor interest.

More regions, and more types of real estate
That interest is partly due to the fact that Asian REIT investors can gain broad exposure to different countries—eachwith their own distinct real estate market—while also gaining access to several types of property with different return
characteristics. For example, Asia is where non-traditional assets such as data centres are benefitting from secular
artificial intelligence (AI) and big data themes. These “new economy” assets are critical for the digital age, and while
they are typically constrained by limited power supply, this only serves to enhance their value as an asset class withmulti-year attractiveness.
Similarly, the demand for logistics facilities is closely tied to the rise of e-commerce and the consequent increase inwarehousing needs. This trend underlines the robust nature of logistics as an asset class within the REITs universe,
promising sustained growth as e-commerce continues to expand its footprint.

Positioning for lower rates: REITs are direct beneficiaries of lower rates
While the performance of Asian REITs was hampered during the rising rate environment, there are several reasons
why they will be well positioned when rates begin their path towards normalisation.
First, the supportive backdrop created by lower rates would have a buoyant effect on capital values across real estate
sectors, in turn spurring a recovery in transactions, as more investors are encouraged to enter the market seeking
higher yields than available in the bond market. Lower rates also mean a cheaper cost of capital. REITs often rely on
FOR SOPHISTICATED INVESTORS ONLYPROSPECT OF LOWER RATES MAKES ASIAN REITS AN INCREASINGLY VIBRANT ASSET CLASS

debt for acquisitions and developments, and reduced rates mean they can acquire new properties more accretively,
adding assets to their portfolios that immediately contribute to earnings, enhancing value for investors.
Reduced interest expenses also mean REITs can service their debt more comfortably and potentially take on
additional leverage if needed to capitalise on growth opportunities while maintaining a healthy balance sheet. Lower
rates also help by driving down interest expenses and leading to growth in distribution per unit. This, in turn,translates into an increase in the cash flow available to return to investors, bolstering the overall appeal of REITs as anincome-generating asset class.

Resilience in a “higher for longer” rates environment
At the same time, Asian REITs remain an attractive asset class even if higher interest rates persist for longer. REITs area useful hedge against inflation due to their rental income, which usually includes fixed annual increases, helping toensure that the income generated by REIT-owned properties grows over time, potentially in line with or above therate of inflation. Additionally, lease agreements with tenants frequently incorporate cost pass-through clauses,
allowing property owners to transfer some inflationary costs back to the tenants. For instance, in a market with strong
fundamentals such as Singapore, this translates into a robust capacity for REITs to mitigate inflationary pressures. Ascosts rise, these can be partially or fully passed through to tenants, ensuring that the income from REITs remains
stable or even increases, thereby preserving and potentially enhancing investor value despite the eroding effects ofinflation on purchasing power.

Nikko AM’s approach to Asian REITs
At Nikko AM, we look for Asian REITs that are attractively-valued with positive fundamental changes and strong
sustainable returns. We look for growth in new economy sectors (such as data centres), and companies withmanagement executing a strategic turnaround. We currently prefer commercial REITs with exposure mainly toSingapore, as their operations have been resilient, and they are better leveraged for a rate-driven recovery.
An example is a Singapore-listed REIT owning a diversified property portfolio including logistics properties, high-spec
industrial properties, business parks and general industrial properties. In our view, such a REIT can successfully “futureproof” its portfolio by recycling older assets at a premium to invest in higher-quality assets.
Over the past 15 years, the growth of global listed real estate has been led by the emergence and expansion of theREIT asset class. But right now, Asian REITS offer considerable upside for investors worried about a prolonged higherrate environment or who want to take advantage of long-term opportunities as rates begin to fade. This is particularly
timely, considering REITS also offer a substantial yield spread of 320 basis points compared to bond yields, and withattractive valuations and considerable potential for price appreciation.
Chart 1: Growth of global listed real estate driven by REIT markets
USD billion

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
200620072008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024 YTD

2,600
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
4002000REIT

Non-REIT

Source: FTSE EPRA NAREIT, Bloomberg, Datastream, EPRA, UBS as at 29 February 2024
UBS and other third parties are the owner of the copyright of the charts. All rights reserved. Reproduced withpermission. May not be forwarded or otherwise distributed.

YOUR GOALS, OUR COMMITMENT.

2PROSPECT OF LOWER RATES MAKES ASIAN REITS AN INCREASINGLY VIBRANT ASSET CLASS

Table 1: EPRA Total Markets Table
Global listed real estate: 8.3% of total real estate and 2.8% of equities
Total real estate
Listed real(USD bln)
estate(USD bln)

Number ofcompanies% listed to total

Stock market(USD bln)

Listed realestate vs. stock
market (%)

REITs market
cap (USD bln)

% Listed to GDP

Region
UK

3,192

79

70

2.5%

3,090

2.6%

73

2.4%

France

1,309

56

46

4.3%

3,272

1.7%

53

1.8%

Germany

1,909

79494.1%

2,411

3.3%

21.8%

Total Europe

11,249

463

494

4.1%

17,0702.7%

186

2.1%

Japan

1,988

217

149

10.9%

6,235

3.5%

109

5.1%

333

156

83

46.9%

4,727

3.3%

1940.5%

China

5,578

283

241

5.1%

9,538

3.0%

41.6%

India

644

87

117

13.5%

4,202

2.1%

122.3%

1,486

107

54

7.2%

1,671

6.4%

101

6.3%

Hong Kong

Australia
Singapore
Total Asia Pac

413

106

64

25.6%

407

26.0%

72

21.2%

13,219

1,130

1,197

8.6%

32,762

3.5%

356

3.3%

Total Middle East, Africa

1,880

178

269

9.5%

5,218

3.4%

294.0%

Latin America

1,27942318

3.3%

1,663

2.5%

290.9%

North America

12,259

1,409

282

11.5%

53,376

2.6%

1,383

4.8%

Total Global

39,886

3,222

2,560

8.1%

110,089

2.9%

1,983

3.4%

Source: EPRA, UBS as at 4Q 2023
UBS and other third parties are the owner of the copyright of the charts. All rights reserved. Reproduced withpermission. May not be forwarded or otherwise distributed.
Note: Total real estate (high quality commercial) estimated using 45% of GDP, based on a formula devised by Prudential Real Estate Investors, aspublished in “A Birds Eye View of Global Real Estate Markets.” In developing countries, the figure is lower. Listed Real Estate is that portion heldvia a listed form.
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PROSPECT OF LOWER RATES MAKES ASIAN REITS AN INCREASINGLY VIBRANT ASSET CLASSYOUR GOALS, OUR COMMITMENT.

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