Research Summary: The Growth of REIT Markets in Asia

This research paper was written by Ooi, Newell, and Sing in 2005 and summarized by Jamestate.

To explain the growth of REIT in Asia, one must first understand what REIT is. A REIT (Real Estate Investment Trust) is a publicly traded fund that owns properties such as shopping malls, office towers, or apartments, and earns money by renting them out. As it is publicly traded, individual investors like us can buy its shares, like stocks, we will get paid a dividend, and it comes from the tenants' rent.

Think of it like this, many investors like you and I invest in this REIT, the REIT company then acquires properties, and so we own part of that property. The value of our share prices fluctuates with the market supply and demand, but also with the appreciation and depreciation of the property value.

1997 Asian Financial Crisis

(The original paper did not fully explain this crisis; however, the blog writer believes it is necessary, therefore this is their own summary)

To understand the growth of the REIT market in Asia, one must understand the Asian financial crisis of 1997. In the early 1990s, East and South Asia became a major investment hub, with FDI coming in from manufacturing to real estate, with many multinational corporations wanting a piece of the pie, which then fueled the economy with FDI. 

From the late 1980s, the Thai government pegged the Thai baht to the US dollar (25 baht to 1 dollar) as they believed maintaining a stable exchange rate would encourage FDI, reduce inflation, and encourage exports. This worked; however, it only worked for a short period of time. Investors became really interested in the Thailand market and have invested heftily in the market. 

What happened was that by pegging the Thai baht to US dollars, Thai banks were also borrowing USD in short-term, lower-interest loans and re-distributing these loans to Thai investors in baht, specifically for real estate developers. They believe that because the value of the Thai baht is pegged to USD, there is a low chance of the Thai baht losing its value, and banks will gain the difference in interest value. 

However, the growth does not last very long due to 3 main reasons: real estate bubble burst, overdependence on foreign capital, and weak financial regulation.

1. Real Estate Bubble Burst

This happens as Thai banks' primary borrowers are investors and developers who invest heavily in building new property projects. However, too many constructions, as investors believe there will always be demand for housing, have led to an oversupply of housing. The real estate boom has also led to a real estate bubble being created, raising the price really high for investors. Falling demand left many projects being abandoned, real estate prices crashed, and loans taken out became bad debt. 

2. Overdependence on Foreign Capital

A lot of money coming into Thailand then was short-term investment in non-productive sectors such as stocks and real estate, not in productive industries that increase Thailand's exports. Foreign debt rose to over 50% of Thailand's GDP, and most of it is short-term debt. This becomes especially important when foreign investors become nervous and pull money out of Thailand's market very easily, as it is short-term debt.

3. Weak Financial Regulation

Banks and finance companies were lending money without proper checks. Many of these loans are based on speculation, not on a solid business plan. Furthermore, they also do not hedge against the changes in currency value as they believe in Thailand's government pegging strategy and that the baht would stay stable. Transparency was incredibly poor. When the bubble burst, banks and financial institutions were stuck with lots of bad debt. 

These 3 reasons altogether have caused the crisis that started in Thailand and slowly spread all over Asia. As it is shown, real estate prices plummeted, banks were in trouble, the government needed money, people lost confidence in property and developers, and panic spread all over this continent.

The Introduction of Asian REITs

After the financial crisis in 1997, countries in Asia needed a solution to solve their problems, specifically a new way to recover the real estate sector, manage large inventories of commercial properties, restructure debts, attract international investment, and invest in vehicles with stable, income-generating revenue. Setting the base for the rapid introduction of REIT frameworks in Asia from 2001.

Japan was the first to launch an Asian REIT and is very successful. Following Japan is Singapore, South Korea, Taiwan, Hong Kong, Malaysia, Thailand, China, and India, which were in the planning stage at the time. REITs, when launched, were very attractive to Asian investors due to their being a supply-side driver, a demand-side driver, and regulatory support, which is as follows:

1. Supply-side driver

Supply-side drivers are reasons why REITs were attractive to those who owned real estate; they have the real estate supply, and REITs become attractive to them because it is one of the best ways for them to offload bad real estate form banks. After the 1997 financial crisis, with the real estate bubble burst, a lot of banks were holding non-performing loans (NPLs) backed by real estate. Singaporean government was also making banks sell off non-core asset, leading to more securitization into REITs. REITs gave them a way to clean up their balance sheet by transferring those assets into REITs and raising capital. This is especially true when looking at the real estate of South Korea or Japan after the crisis. Companies that do not work in real estate can sell those buildings into a trust, get the cash, and manage the property or rent it back. Finally, after the crisis, many banks were reluctant to give out loans; therefore, REITs offer a gateway for property owners to raise money by selling property into a REIT and getting investors to buy shares.

2. Demand-side driver

As REITs are required to pay out most of their income (often more than 90%) to their shareholders as dividends, a lot of investors saw it as a stable, passive source, considering the low-interest environment at the time. As pointed out in the paper J-REIT (Japanese REITs) yields is around 3.5-4% and S-REIT (Singaporean REITs) yields is 5-6%, a much higher return than the 0.2% and 0.8% in bank deposits respectively. Also pointed out in a later part of the paper, is that REITs are much less volatile than stocks with the market beta of J-REIT, S-REIT, and CR-REIT (Korean REIT) to all be below 0.35, with CR-REIT market beta only at 0.03. On top of that, the interest from institutional investors to diversify their portfolio and for retirees who are looking for steady, low-risk income REITs was seen as an ideal investment for them. 

3. Regulatory Support

Alongside the demand and supply side driver, government support was also critical in the success of REIT development. First of all, without the creation of the legal framework for REIT there would be no REIT! The development of J-REIT and S-REIT were largely influence by the laws that created it, which allow REIT to be a legally traded entity, allow foreign ownership of REIT and define all the management rules, borrowing limits and the payout policy - more on this, in countries that granted tax transparency, REITs did not have to pay corporate tax if they paid out at least 90% of their income.

Breaking Down Different Countries' REIT

(The original writer broke down and analyzed each REIT market individually; however, this blog writer, for the purpose of summary, will compile it into a paragraph, showing key changes and similarities)

Japan was the first to introduce REIT to the Asian market in 2001. By 2005, it had 17 REITs with a total market capitalization of nearly US$20 billion. J-REITs benefited greatly from tax transparency, no gearing limit, and high investor interest, especially from pension funds, through their dividend yield of 3.8% and their total return of 32.5%.

Singapore launched its REIT in 2002 and became the fastest-growing market due to strong government support, including generous tax incentives and investor benefits such as foreign ownership and a high gearing limit. By 2005, there were 5 REITs available on the market worth over US$5.1 billion, offering a 5-6% yield and the highest annualized returns among the Asian market at 38.5%.

South Korea, Hong Kong, Taiwan, Malaysia, and Thailand all launch their first REIT in that order after the other two. In summary, Japan and Singapore were the first, with clear tax benefits, strong governance, and investor trust; the other struggled more due to regulatory complexity, low yields, and lack of incentives. Despite all of that, REITs across Asia showed strong promise as a tool for restructuring emerging real estate markets and attracting long-term capital. 

Key Challenges Faced by REITs in Asia

Despite all the support, Asian REIT still faces immense challenges. First of all, REITs in Asia have a low dividend yield due to high property prices and low rental income, especially in cities like Tokyo, Singapore, or Hong Kong, making it unattractive to investors. Moreover, the lack of tax transparency in some countries (in Hong Kong at the time, REITs were taxed like companies, reducing investors' returns) discourages participation in REIT investment. A limited pool of quality assets, investor unfamiliarity, and fear of foreign ownership of real estate posed even more concern for the growth of REITs at the time. 

Future Outlook

The writer predicts that the REIT market could grow from US$20 billion to over US$200 billion in the next decade, demonstrating significant growth potential. They believe that this is the result of the expansion of REIT in emerging markets such as China and India (which was still in the planning phase in 2005), more cross-border REIT structures, and the continued support from the government in regulatory support, stable tax, and investor education. Overall, the Asian REIT market has lots of growth potential; however, in order for it to be successful, it would continue to need regulatory support, stable tax and legal frameworks, and governmental as well as public support.  

Conclusion

Asian REIT market is emerging rapidly, post-2000, especially after the 1997 financial crisis. Japan and Singapore led the way with great tax incentives and investor interest in this investment. South Korea, Hong Kong, Taiwan, and Malaysia then followed, but with very different levels of success due to structural, tax, and regulatory differences. Despite having difficulties, REITs have proven to be useful for restructuring a corporation's balance sheet, unlocking value from real estate assets, providing alternative capital sources, and offering a stable, low-risk, income-producing investment option for investors.