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The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
The development of asian reit markets
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The development of asian reit markets

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The steady growth in the Asian property market and the success of REITs in the US have been the major drivers for the development of REITs in Asia over the last ten years. There are now over 130 REITs …

The steady growth in the Asian property market and the success of REITs in the US have been the major drivers for the development of REITs in Asia over the last ten years. There are now over 130 REITs across Japan, Singapore, Hong Kong, Malaysia, Taiwan, Thailand and South Korea. Many other Asian countries are in the process of implementing REIT structures. Given the increased significance of Asian REITs, this paper provides an overall description of the evolution of REITs globally, the development of REITs in Asia, as well as the significance of Asian REITs within a global context.

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  1. 2014 The Development of REIT Markets in Asia The steady growth in the Asian property market and the success of REITs in the US have been the major drivers for the development of REITs in Asia over the last ten years. There are now over 130 REITs across Japan, Singapore, Hong Kong, Malaysia, Taiwan, Thailand and South Korea. Many other Asian countries are in the process of implementing REIT structures. Given the increased significance of Asian REITs, this paper provides an overall description of the evolution of REITs globally, the development of REITs in Asia, as well as the significance of Asian REITs within a global context. PHAM, AK (Alex) Anh Khoi Pham University of Western Sydney The Development of REIT Markets in Asia 1/1/2014 1
  2. Contents Introduction ..................................................................................................................... 3 The Development of REIT Markets in Asia ..................................................................... 3 Japan ........................................................................................................................... 6 Background .............................................................................................................. 6 Regulatory Structure .............................................................................................. 10 Singapore .................................................................................................................. 12 Background ............................................................................................................ 12 Regulatory Structure .............................................................................................. 14 Hong Kong ................................................................................................................. 16 Background ............................................................................................................ 16 Regulatory Structure .............................................................................................. 18 Malaysia .................................................................................................................... 20 Background ............................................................................................................ 20 Regulatory Structure .............................................................................................. 22 Thailand ..................................................................................................................... 24 Background ............................................................................................................ 24 Regulatory Structure .............................................................................................. 27 Taiwan ....................................................................................................................... 28 Background ............................................................................................................ 28 Regulatory Structure .............................................................................................. 29 South Korea ............................................................................................................... 31 Background ............................................................................................................ 31 Regulatory Structure .............................................................................................. 32 Prospective Asian REIT Markets ............................................................................... 33 India ....................................................................................................................... 33 Pakistan ................................................................................................................. 33 The Philippines....................................................................................................... 34 China...................................................................................................................... 35 The significance of Asian REITs ................................................................................... 35 Summary ....................................................................................................................... 39 References .................................................................................................................... 43 Contact Author .............................................................................................................. 43 PHAM, AK The Development of REIT Markets in Asia 2
  3. Introduction In the 1960s, the US Congress commenced the creation of Real Estate Investment Trusts (REITs) which would provide affordable access to investment in commercial property to all investors. Prior to the establishment of the US REIT regime, the commercial property market was dominated by high net-worth individuals or institutional investors. US REITs allow retail investors to purchase partial ownership of large-scale income-producing properties. In addition, US REITs would also offer investors tax advantages as they are pass-through vehicles, meaning that income tax is exempted at the corporate level. Over the last fifty years, investment in US REITs has increased, with US REITs becoming the most important indirect investment vehicle in property. As of December 2011, US REITs made up 88.5% of the total listed property market in the US (Macquarie 2011) . The last decade has seen a rapid expansion of REIT structures worldwide. By 2011, there were 22 countries and territories around the world that have established REIT regimes. Despite the major impact of the Global Financial Crisis (GFC), the global REIT market has grown dramatically in the last decade. The global REIT market has grown to a total market capitalisation of US$700 billion, with much of the recent growth being in Asia. The region has been the nucleus of the global economic growth in the last decade, recovering strongly from the GFC and remaining solid amid the debt crisis in the US and Europe. This strong economic growth combined with rapid urbanisation have been a major stimulus to the property markets in Asia (Newell 2012). The Development of REIT Markets in Asia The steady growth in the Asian property market has been the major driver for the development of REITs in Asia over the last ten years. In November 2000, Japan was the first country in Asia to establish a REIT market. Since then, there have been six other REIT markets established in the region. These are Singapore, South Korea, Thailand, Taiwan, Malaysia and Hong Kong. Other Asian nations such as China, India, Pakistan and the Philippines are also in the processing of implementing their own REIT regimes. Figure 0.1 illustrates the revolution of REIT markets in Asia. In just over a decade, the number of Asian REITs has grown to 133 REITs across the seven Asian REIT markets with a combined market capitalisation of over US$100 billion as of June 2012. Asian REITs has become a major component of the global property portfolio, accounting PHAM, AK The Development of REIT Markets in Asia 3
  4. for 12.5% of the global REIT market in 2011 (Macquarie 2011). Japan, Singapore and Hong Kong are among the top 10 REIT markets globally by total market capitalization. Asian REITs have also delivered strong performance over the last five years, significantly outperforming the major REIT markets of the US, UK and Australia (S&P 2012). The development of Asian REITs is further supported by favourable changes in the regulatory structures in recent years. This has been received positively by both local and international investors. Figure 0.1: Evolution of Asian REIT Markets 2003: Thailand 2005: Taiwan Malaysia Hong Kong Future: India Pakistan Philippines China 2002: Singapore South Korea 2001: Japan Source: Author Table 0.1 shows the top REITs by market capitalisation in each of the seven Asian REIT market as of June 2012. The largest REITs in Asia were Link REIT (ranked #1 and had US$8.6 billion in market value), Nippon Building Fund (#2 and US$5.3 billion), Japan REIT (#3 and US$4.7 billion), Capita Mall (#4 and US$4.6 billion) and Accendas (#5 and US$3.5 billion). Three Asian REITs were in the top 50 REITs globally (Newell, 2012). Asian REITs invest across a wide range of property sectors including office, retail, industrial, lodging and residential sectors. Diversified REITs were also available in most markets. There were also REITs engaging in specialised assets such as healthcare and plantation. In addition, Asia was a pioneer in the establishment of specialised REIT products such as Islamic REITs and RMB-denominated REITs. This diverse profile for Asian REITs offer investors many investment opportunities and significant property exposure. PHAM, AK The Development of REIT Markets in Asia 4
  5. Table 0.1: Leading REITs in Asia by Country: June 2012 Property REIT Name Sector Japan NIPPON BUILDING FD. Office JAPAN REIT Office JAPAN RETAIL FD. INV. Retail Singapore CAPITAMALL TRUST Retail ASCENDAS REAL ESTATE INVESTMENT Industrial CAPITACOMMERCIAL TRUST Retail Hong Kong LINK REIT Retail HUI XIAN REIT Diversified CHAMPION REIT Office Malaysia PAVILION REIT Retail SUNWAY REIT Diversified CAPITAMALLS MALAYSIA TRUST Retail Thailand CPN RETAIL GROWTH LEASEHOLD Retail TESCO LOTUS RETAIL GROWTH Retail SAMUI AIRPORT PROPERTY FUND Industrial Taiwan CATHAY NO.1 REIT. Diversified SHIN KONG NO.1 REIT. Diversified CATHAY NO.2 REIT.TRUST Office South Korea KOCREF 15 CR-REIT Office KOCREF REIT 8 Office TRUS Y 7 REIT Diversified Source: Author’s compilation from DataStream PHAM, AK No. of Mkt Cap. Asia Properties (US$ mln) Rank 67 57 70 5,346 4,676 2,859 #2 #3 #7 16 95 9 4,634 3,476 2,593 #4 #5 #8 180 2 2 8,631 2,880 2,000 #1 #6 #11 2 8 4 1,135 1,087 839 #26 #27 #40 3 17 1 729 666 333 #44 #49 #75 3 6 3 828 487 347 #41 #56 #72 1 2 NA 52 41 34 #107 #110 #113 The Development of REIT Markets in Asia 5
  6. Japan Background In November 2000, Japan was the first country in Asia to establish a REIT market. The Japanese real estate investment trusts (J-REITs) were introduced by the Act on Investment Trusts and Investment Corporations also known as the Investment Trust Law (ITL). According to the ITL, there are two different types of J-REITs; (1) investment trusts and (2) investment corporations. So far, all listed J-REITs have been established as investment corporations (CBRE 2011). In September 2001, Japan Real Estate Investment (sponsored by Mitsui Fudosan) and Nippon Building Fund (sponsored by Mitsubishi Estate) were the first two J-REITs listed on the Tokyo Stock Exchange (TSE). The Japanese REIT market capitalisation has expanded rapidly to reach US$50 billion in May 2007. During the GFC, market value fell rapidly by more than half to its trough at US$21 billion in October 2008. In the period after the GFC, the J-REIT market has recovered strongly, supported by stimulus programmes (e.g. Real Estate Market Stabilisation Fund, Asset Purchase Program) by the Japanese government and the Bank of Japan (BOJ) (ARES 2012). On March 11 2011, a magnitude 9.0 earthquake struck the east coast of Japan triggering a devastating tsunami and causing a number of subsequent nuclear accidents. In the immediate aftermath of the earthquake, fear of a nuclear crisis has shocked the Japanese share market. The Nikkei 225 share index plunged by 10.22% within a week after the earthquake. The Japanese REIT market was also affected but to a lesser extent than shares, dropping by only 4.38% for the week. This is partly because the direct impact of the crisis on J-REITs was only limited, as they had only 3% of their assets in the affected areas (JLL 2011). The estimated repair cost of damages on J-REITs’ properties totalled ¥2,980 million (US$38 million), averaging 0.11% of their total asset size (ARES 2011). By the end of April 2011, the J-REIT index has actually increased by 1.72% over the previous month. With a strong boost by the BOJ’s asset purchasing scheme, J-REITs have been actively expanding their property portfolios. Acquisitions by J-REIT jumped by 67% yoy to US$9 billion in 2011, accounting for around two-thirds of the total regional volume during the period (CBRE 2012). Despite a temporary setback from the natural disaster, the post-GFC period from PHAM, AK The Development of REIT Markets in Asia 6
  7. October 2008 to April 2012 witnessed a remarkable recovery of the J-REIT market, as total market capitalisation almost doubled from US$21 billion to US$41 billion (Figure 0.2). With 34 listed J-REITs and a total market capitalisation of US$41 billion (Table 0.2), as of September 2011, Japan has become one of the major global REIT markets. It is home to the fourth largest REIT market in the world after the US (#1), Australia (#2) and France (#3). In Asia, Japanese REITs have been playing a leading role, making up 41.1% of the total Asian REIT market capitalisation as at June 2012. The country has 4 REITs in the top 10 largest REITs in Asia, 9 in the top 20 and 24 in the top 50. Within a domestic context, J-REITs accounted for 32.4% of the local listed property securities market. The industry is strongly supported by the government and the private sector, in particular by professional associations such as the Association for Real Estate Securitisation (ARES). Figure 0.2: Evolution of J-REIT Industry: October 2001 – April 2012 GFC 60 50 40 30 20 10 0 No of J-REITs Market Cap (US$ billion) Source: Author’s compilation from DataStream PHAM, AK The Development of REIT Markets in Asia 7
  8. Table 0.2: J-REITs by Property Sector: June 2012 Sector Market Cap. (US$ mln) Diversified 15,946 Office 14,599 Residential 4,926 Retail 4,434 Industrial 2,104 Lodging 277 Total 42,287 Source: Author’s compilation from DataStream No. of REITs 16 7 7 2 2 1 35 Figure 0.3 depicts the J-REIT property segmentation. J-REITs invested across the diversified (36%), office (35%), residential (12%), retail (11%), industrial (5%) and lodging (1%) property sectors (Figure 0.3). The majority of J-REITs hold assets in diversified property sectors (16), followed by the office (7) and residential (7) sector. Table 0.3 presents the profile of J-REITs as of June 2012. In total, J-REITs own 1,981 properties, averaging 58 properties per J-REIT. Figure 0.3: J-REIT Segmentation Industrial Lodging 5% 1% Industrial 6% Retail 11% Retail 5% Diversified 36% Residential 12% Diversified 46% Residential 20% Office 35% Office 20% By Market Capitalisation PHAM, AK Lodging 3% By Number of REITs The Development of REIT Markets in Asia 8
  9. Table 0.3: Profile of Listed J-REITs: June 2012 Listed Property No. of Mkt Cap. Asia REIT Name Date Sector Properties (US$ mln) Rank NIPPON BUILDING FD. Sep-01 Office 67 5,346 #2 JAPAN REIT Sep-01 Office 57 4,676 #3 JAPAN RETAIL FD. INV. Mar-02 Retail 70 2,859 #7 UNITED URBAN INV. Dec-03 Diversified 90 2,150 #10 JAPAN PRIME REALTY INV. Jun-02 Diversified 58 1,981 #12 ADVANCE RESIDENCE INV. Mar-10 Residential 190 1,966 #13 MORI TRT. SOGO REIT Feb-04 Diversified 13 1,941 #14 NOMURA RE OFFICE FD. Dec-03 Office 51 1,643 #17 FRONTIER REIT Aug-04 Retail 26 1,576 #18 JAPAN LOGISTICS FD. May-05 Industrial 29 1,255 #22 NIPPON ACC. FD. Aug-06 Residential 88 1,224 #23 ORIX JREIT Jun-02 Diversified 66 1,188 #24 ACTIVIA PROPERTIES INC. Jun-12 Diversified 18 1,172 #25 DAIWA HOUSE RES. Mar-06 Diversified 124 1,061 #28 DAIWA OFFICE INV. Oct-05 Office 36 945 #30 JAPAN EXCELLENT Jun-06 Office 23 929 #33 MORI HILLS REIT INV. Nov-06 Diversified 10 884 #35 KENEDIX REALTY INV. Jul-05 Diversified 83 879 #36 IND. & INF. FD. Oct-07 Industrial 22 849 #37 FUKUOKA REIT Jun-05 Diversified 19 842 #39 TOP REIT Mar-06 Diversified 18 828 #42 TOKYU REIT Sep-03 Diversified 26 781 #43 NOMURA RE RES. Feb-07 Residential 152 725 #45 PREMIER INV. Sep-02 Diversified 54 671 #47 GLOBAL ONE REIT Sep-03 Office 8 594 #51 JAPAN RTL. HOUSING INV. Jun-06 Residential 177 591 #52 MID REIT Aug-06 Office 12 466 #59 SEKISUI HOUSE SI INV. Jul-05 Diversified 64 459 #61 ICHIGO REIT Oct-05 Diversified 67 373 #68 HANKYU REIT Oct-05 Diversified 15 370 #69 HEIWA RE REIT Mar-05 Diversified 88 367 #70 JAPAN HOTEL AND RESORT Feb-06 Lodging 28 277 #79 KENEDIX RES. INV. Apr-12 Residential 20 168 #85 STARTS PROCEED INV. Nov-05 Residential 76 143 #89 INVINCIBLE INV. May-04 Residential 54 108 #96 TOTAL 1,999 42,287 Sources: Author’s compilation from DataStream, ARES (2012) and various companies’ websites PHAM, AK The Development of REIT Markets in Asia 9
  10. Regulatory Structure Legal Form According to the Act on Investment Trusts and Investment Corporations (ITL), a J-REIT must be formed as a trust type or a corporation type. They are further sub-divided to open-ended or closed-ended funds depending on the possibility of cancellation or redemption of shares. Up to 2011, all of the current J-REITs were corporate type since the legal process for the trust type was more burdensome and expensive (EPRA 2011). The corporate governance rules for the corporate type were also considered to be more favourable for investors. Minimum Initial Capital J-REITs are subject to the minimum investment capital of ¥100 million (US$1.26 million). Sponsorship The REIT market in Japan has a unique sponsorship system. Under this system, a J-REIT is required to have a sponsor or a parent company. The sponsor will establish a REIT manager and acquire a “Building Lots and Building Transactions Agent Licence” and a “Discretionary Transaction Agent Licence” from the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). After these licences are obtained, the manager may apply for registration as an investment manager with the Financial Services Agency (FSA). Typically, J-REITs are sponsored by major property companies in Japan. For example, the first two J-REITs Japan Real Estate Investment and Nippon Building Fund, are sponsored by two major property players in Japan; the Mitsui Fudosan and the Mitsubishi Estate respectively. The REIT sponsor has an important role because it wholly owns the REIT management company and often have a large holding in the REIT (CFA Institute 2011). Management Structure Figure 0.4 outlines the typical corporation structure for a listed J-REIT. J-REITs have an external management structure, whereby the trust or investment corporation has no employees and must use a registered asset management company. The investment manager is required to have a minimum paid-in-capital or net assets of ¥50 million (US$0.63 million) and sufficient experienced personnel. PHAM, AK The Development of REIT Markets in Asia 10
  11. Figure 0.4: Investment Corporation Structure for Listed J-REITs Unit Holders Distributions Outsourcing of Management Services Asset Manager Management Fee J-REIT Investment Corporations Board of Directors Outsourcing of Custodian Function Custodian Asset Custody Fee Distributable Income Flow of funds Services Ownership Properties Source: CFA Institute (2011) PHAM, AK The Development of REIT Markets in Asia 11
  12. Singapore Background The Singaporean REIT (S-REIT) sector started in 1999, after the first set of regulatory guidelines for REITs was issued by the Monetary Authority of Singapore (MAS). S-REITs are subject to the Securities and Future Act (SFA) and the Code on Collective Investment Schemes (CCIS). S-REITs may or may not be listed on the Singapore Exchange (SGX). In July 2002, CapitaMall Trust made a successful debut public offering and became the first SREIT to be listed on the SGX. The following five years saw a wave of new S-REITs, as both developers and investors took advantage of the low interest rate environment. During the period from 2002 to 2007, there were 19 additional S-REITs launched. The industry however suffered in 2008 as the capital market was impacted by the GFC. The market endured a dry spell over the next two years with only one successful listing, the IndiaBulls Properties Trust on June 2008. Since 2011, the market however has become more active, thanks to ample liquidity in the financial system following the implementation of measures to stimulate economic growth. The period over 2010-2011 saw the establishments of 5 new S-REITs, among which were the two heavyweights backed by Temasek; the Mapletree Industrial Trust (raising approx. US$1 billion) and the Mapletree Commercial Trust (raising US$ 1.6 billion). As of June 2012, there were 26 publicly traded S-REITs with an overall market capitalisation of approximate US$31 billion (Table 0.4). Singapore is the second largest REIT market in Asia after Japan, accounting for 30.9% of the total size of the regional REIT market. As of June 2012, 9 of the 26 S-REITs were retail REITs, representing almost half (US$14.97 billion) of the S-REIT market capitalisation (Figure 0.5). The industrial sector accounts for 8 S-REITs (US$9.08 billion), corresponding to 29% of the total market capitalisation. Table 0.5 depicts the property profile and market capitalisation of public S-REITs as of June 2012. S-REITs had a significant profile in terms of portfolio size and market capitalisation. The number of properties ranged from 2 (Indiabulls Properties) to 133 (Saizen REIT), averaging 28 properties per S-REIT. The largest S-REIT, in terms of market capitalisation, was CapitaMall Trust (US$4.6 billion), while the smallest one was Saizen REIT (US$144 million). S-REITs also have a significant position regionally, accounting for 4 of the top 10 Asian REITs, 8 of the top 20 and 16 of the top 50 in terms of market value. It has been considered the best REIT market in PHAM, AK The Development of REIT Markets in Asia 12
  13. Asia consistently for overall potential, property market growth, REIT opportunity and regulatory support (Trust 2011). Table 0.4: S-REITs by Property Sector: June 2012 Sector Market Cap. (US$ mln) Retail 14,972 Industrial 9,083 Office 2,393 Lodging 1,348 Specialty 1,273 Residential 1,066 Diversified 738 Total 30,873 Source: Author’s compilation from DataStream No. of REITs 9 8 2 1 2 2 2 26 Figure 0.5: S-REIT Segmentation Residential Diversified 2% Specialty 4% Lodging 4% Residential 8% 4% Office 8% Retail 49% Diversified 8% Retail 34% Lodging Specialty 4% 8% Office 7% Industrial 29% Industrial 31% By Market Capitalisation PHAM, AK By Number of REITs The Development of REIT Markets in Asia 13
  14. Table 0.5: Profile of Listed S-REITs: June 2012 Listed Property No. of Mkt Cap. REIT Name Date Sector Properties (US$ mln) CAPITAMALL TRT. Jul-02 Retail 16 4,634 ASCENDAS REIT Nov-02 Industrial 95 3,476 CAPITACOMMERCIAL TRT. May-04 Retail 9 2,593 SUNTEC REIT Dec-04 Retail 7 2,218 K-REIT ASIA Apr-06 Office 8 1,930 MAPLETREE LOGISTIC TRT. Jul-05 Industrial 96 1,811 MAPLETREE IND. TRT. Oct-10 Industrial 70 1,444 CDL HOSPITALITY TRT.S Jul-06 Lodging 12 1,348 MAPLETREE COMERCIAL TRT. Apr-11 Retail 2 1,327 FRASERS CENTREPOINT TRT. Jul-06 Retail 4 1,043 FORTUNE REIT Aug-03 Retail 14 944 STARHILL GLOBAL REIT Sep-05 Retail 6 936 ASCOTT RESIDENCE TRT. Mar-06 Residential 48 922 PARKWAY LIFE REIT Aug-07 Specialty 36 849 CAPITARETAIL CHINA TRT. Dec-06 Retail 9 667 LIPPO MALLS INDO. RETAIL Nov-07 Retail 15 610 CACHE LOGISTICS TRT. Apr-10 Industrial 10 558 CAMBRIDGE IND. TRT. Jul-06 Industrial 47 490 SABANA SHARIAH IND. TRT. Nov-10 Industrial 20 467 FRASERS COMMERCIAL TRT. Mar-06 Office 9 463 ASCENDAS INDIA TRT. Aug-07 Industrial 5 450 FIRST REIT TRT. Dec-06 Specialty 10 424 PERENNIAL CHINA RETAIL TRT. Jun-11 Diversified 8 394 AIMS AMP CAPITAL IND. Apr-07 Industrial 26 388 INDIABULLS PROPERTIES Jun-08 Diversified 2 344 SAIZEN REIT Nov-07 Residential 133 144 TOTAL 717 30,873 Source: Author’s compilation from DataStream and various companies’ websites Asia Rank #4 #5 #8 #9 #15 #16 #19 #20 #21 #29 #31 #32 #34 #38 #48 #50 #53 #55 #58 #60 #62 #63 #64 #66 #73 #88 Regulatory Structure Legal Form An S-REIT must be formed as a trust. Minimum Initial Capital There is no minimum capital required for S-REITs. PHAM, AK The Development of REIT Markets in Asia 14
  15. Management Figure 0.6 illustrates a typical structure for a listed S-REIT. An S-REIT may be managed externally or internally, but in practice all are externally managed. Under the SFA, the management company is required to be a public company incorporated in Singapore. In addition, the manager should have a physical office in Singapore and have minimal capital funds of S$1 million (US$0.78 million). Figure 0.6: Typical Structure for a Listed S-REIT Unit Holders Adviser Identifies Investment Opportunities Fee Distributions Management Services Manager Holds Property on Trusts for Unit Holders S-REIT Trustee Management Fee Trustee Fee Distributable Income Flow of funds Services Ownership Properties Source: CFA Institute (2011) PHAM, AK The Development of REIT Markets in Asia 15
  16. Hong Kong Background In July 2003, The Hong Kong Securities and Future Commission (SFC) issued the Code on Real Estate Investment Trusts (Code on REITs), setting up the foundation for the establishment of Hong Kong Real Estate Investment Trusts (HK-REITs). The code was ratified in 2005 and 2007 for the formal regulatory operation of HK-REITs. In 2010, further amendments were made to encourage the growth and attractiveness of HK-REITs to investors. The changes included lifting the maximum borrowing ratios from 35% to 45% and allowing overseas investments and new property sectors. In November 2005, the Link REIT became the first Hong Kong REIT (HK-REIT) to be established through the world’s largest initial offering at that time. At June 2012, there were 7 HK-REITs listed on the Hong Kong Stock Exchange (HKEx) with a total market capitalisation of US$15 billion (Table 0.6). This saw Hong Kong being the third largest REIT market in Asia, after Japan and Singapore. HK-REITs engaged across the retail (2 REITs), diversified (2), office (2) and lodging (1) industry. The retail REITs dominated the market, accounting for almost 60% of the total market capitalisation. The profiles of HK-REITs at June 2012 are provided in Table 0.7. HK-REITs are often established and supported by major property players in the country. Link REIT, the largest REIT in Hong Kong and Asia, was established by the Hong Kong Housing Authority. At June 2012, it had a market capitalisation of US$8.6 billion and the portfolio consisted of 180 properties with an internal floor area (IFA) of approximately 11 million square feet (1 million sqm) of retail space. Several other HK-REITs are also founded by leading property companies, such as Prosperity REIT (Cheung Kong), Champion REIT (Great Eagle) and Sunlight REIT (Henderson Land). With many positive regulatory changes in recent years, Hong Kong is considered the second most attractive REIT market in Asia, after Singapore, in terms of overall potential, property market growth and regulatory support (Trust 2011). Hong Kong is also an important gateway for investors to gain access to the mainland China’s property market. Many HK-REITs hold substantial assets in mainland China. Hui Xian REIT (backed by Cheung Kong) was the first RMB-denominated REIT in the world and established in April 2011. As of June 2012, it was the second largest REIT in Hong Kong and ranked 6th in Asia. All of its investment properties are PHAM, AK The Development of REIT Markets in Asia 16
  17. located in mainland China; i.e. the Beijing Oriental Plaza and the Sheraton Shenyang Lido Hotel. Other China-focus HK-REITs include the Regal REIT and the GZI/Yuexiu REIT. Table 0.6: HK-REITs by Property Sector: June 2012 Sector Market Cap. (US$ mln) Retail 9,106 Diversified 3,386 Office 2,295 Lodging 714 Total 15,501 No. of REITs 2 2 2 1 7 Figure 0.7: HK-REIT Segmentation Lodging 4% Lodging 14% Office 15% Diversified 22% Retail 59% Retail 28% Office 29% Diversified 29% By Market Capitalisation Table 0.7: Profile of Listed HK-REITs: June 2012 Listed Property REIT Name Date Sector LINK REIT Nov-05 Retail HUI XIAN REIT Apr-11 Diversified CHAMPION REIT May-06 Office REGAL REIT Mar-07 Lodging SUNLIGHT REIT Dec-06 Diversified YUEXIU REIT Dec-05 Retail PROSPERITY REIT Dec-05 Office TOTAL Source: Author’s compilation from DataStream PHAM, AK By Number of REITs No. of Mkt Cap. Properties (US$ mln) 180 8,631 2 2,880 2 2,000 6 714 20 506 5 475 7 295 222 15,501 The Development of REIT Markets in Asia Asia Rank #1 #6 #11 #46 #54 #57 #78 17
  18. Regulatory Structure Legal Form A typical structure of a HK-REIT is shown in Figure 0.8. A HK-REIT is a collective investment scheme established as a unit trust. It may hold property directly or indirectly through SPVs. However, such SPVs must be legally and beneficially owned by the HK-REIT and it must have the majority ownership of the SPVs. Generally, no more than two layers of SPVs are allowed unless specifically approved by the SFC. As all HK-REITs must be listed, they are governed by the Code on REITs as well as the Listing Rules issued by the HKEx. Unit holders of a HK-REIT cannot require redemption of their units, but they can only exit via a sale of their units on the HKEx. Minimum Initial Capital There is no minimum initial capital for HK-REITs. Management The appointed management company can be internal or external. The management company may choose to itself perform all the functions required of it under the Code on REITs or delegate or contract out to one or more outside entities one or more of these functions. Furthermore, a trustee that is functionally independent of the management company of the REIT must be appointed, but may be part of the same corporate group if certain requirements are met. PHAM, AK The Development of REIT Markets in Asia 18
  19. Figure 0.8: Typical Structure of a Listed HK-REIT Unit Holders Holds Units Trustee Fees Owner of the SPVs, holding the Properties on Trust for Unit Holders The H-REIT Management Company Management Services Special Purpose Vehicles (SPVs) Fees The Properties Source: CFA Institute (2011) PHAM, AK The Development of REIT Markets in Asia 19
  20. Malaysia Background The history of the Malaysian REIT (M-REIT) industry dated back to the establishment of listed property trusts (LPTs) in 1989. However, it was not until 2005 that the Securities Commission of Malaysia (SC) issued the Guidelines on Real Estate Investment Trusts (ordinary M-REITs) and Guidelines for Islamic Real Estate Investment Trusts (Islamic M-REITs), providing the principal legislations governing the official establishment of REITs in Malaysia. Both types of M-REITs share similar regulatory structures and requirements, except that the Islamic M-REITs have to comply with the Sharia requirements. Malaysia was the first country to introduce guidelines for Islamic REITs at that time (Newell & Osmadi 2009). As of June 2012, there were 15 M-REITs listed on the Bursa Malaysia (MYX), with a total market capitalisation of US$5 billion (Table 0.8). This saw Malaysia being the fourth largest REIT market in Asia. However, the REIT industry in Malaysia was still relatively small as compared to those in Japan, Singapore and Hong Kong. Three of the largest M-REITs; Pavilion REIT (US$1.14 billion), Sunway REIT (US$1.09 billion) and CapitaMalls Malaysia Trust (US$839 million), were among the top 50 REITs in Asia in terms of market value. The three Islamic M-REITs were Axis (US$390 million), Al-Hadharah Boustead (US$351 million) and Al’Aqar Healthcare REIT (US$274). The number of properties in M-REIT portfolios ranged from 2 to 29, averaging 10 properties per M-REIT. PHAM, AK The Development of REIT Markets in Asia 20
  21. Table 0.8: Profile of Listed M-REITs: June 2012 Listed Property REIT Name Date PAVILION REIT Dec-12 SUNWAY REIT Jul-10 CAPITAMALLS MALAYSIA TRT. Jul-10 AXIS REIT Aug-05 STARHILL REIT Dec-05 AL-HADHARAH BOUSTEAD REIT Feb-07 AL’AQAR HEALTHCARE REIT Aug-06 UOA REIT Dec-05 AMANAHRAYA REIT Feb-07 AMFIRST REIT Dec-06 HEKTAR REIT Dec-06 QUILL CAPITAL TRT. Jan-07 TOWER REIT Apr-06 ATRIUM REIT TRT. Apr-07 AMANAH HARTA TANAH PNB Sep-01 TOTAL Source: Author’s compilation from DataStream Sector Retail Diversified Retail Office Retail Specialty Specialty Office Diversified Office Retail Office Office Industrial Diversified No. of Propertie s 2 8 4 29 10 12 19 6 15 8 5 10 3 5 11 147 Mkt Cap. Asia (US$ mln) 1,135 1,087 839 390 383 351 274 181 161 156 141 139 123 44 33 5,436 Rank #26 #27 #40 #65 #67 #71 #80 #83 #86 #87 #90 #91 #94 #109 #114 Based on the types of properties, M-REITs were categorised as retail (4 REITs), diversified (3), office (5), specialty (2) and industrial (1) sector (Table 0.9). Retail M-REITs comprised the largest segmentation, accounting for 46% of M-REIT market capitalisation (Figure 0.9). This group was followed by the diversified and office REITs, representing 25% and 18% of the total market value respectively. Table 0.9: M-REITs by Property Sector: June 2012 Sector Market Cap. (US$ mln) Retail 2,497 Diversified 1,282 Office 988 Specialty 625 Industrial 44 Total 5,436 Source: Author’s compilation from DataStream PHAM, AK The Development of REIT Markets in Asia No. of REITs 4 3 5 2 1 15 21
  22. Figure 0.9: M-REIT Segmentation Industrial 1% Industrial 7% Specialty 11% Specialty 13% Office 18% Retail 27% Retail 46% Office 33% Diversified 24% By Market Capitalisation Diversified 20% By Number of REITs Regulatory Structure Legal Form REITs in Malaysia have to be registered as unit trusts. Malaysian trustees must be approved by the SC (Figure 0.10). M-REITs can be listed or unlisted. A listed M-REIT is subject to the listing requirements of the MYX. Unlisted M-REITs are opened-ended, meaning there is a mandatory requirement for the management company, upon the proper request of an investor, to repurchase units issued to unit holders. Minimum Initial Capital The minimum initial capital of an M-REIT is MYR100 million (US$32 million). For subsequent offerings, the minimum size of the funds is MYR25 million (US$7.8 million). Management An M-REIT must be externally managed and administered by a management company approved by the SC. Foreigners can hold up to 70% of the equity of the management company. At least 30% of the equity of the management company must be held by bumiputra (ethnic Malay) shareholders. The properties held by the trust must be managed by a qualified property manager. PHAM, AK The Development of REIT Markets in Asia 22
  23. An Islamic M-REIT is subject to similar requirements as above, plus a Shariah committee or a Sharia to ensure that any asset acquired is Shariah-compliant. Figure 0.10: Typical Structure for an M-REIT Unit Holders Dividends and other distribution Management Fee REIT Managers Trustee Fee REIT Management Service Property Management Companies PHAM, AK Trustee Acts on behalf of Unit Holders Property Management Service Authorised Investments Property Management Fee The Development of REIT Markets in Asia Flow of funds Services Ownership 23
  24. Thailand Background The concept of real estate investment trusts in Thailand (Thai-REIT) was introduced in 2002, as a recovery vehicle for distressed properties after the 1997 Asian financial crisis. The Thai version of a REIT is known in the country as Listed Property Funds for Public Offering (PFPO). This is a type of mutual fund and is listed on the Stock Exchange of Thailand. The law regulating the PFPO is the Securities and Exchange Act B.E. 2535, enacted in 1992. Although PFPO was initially established as a resemblance of the REIT structures in the US and Australia, the PFPO code is considered to be more rigid than other REIT regulations overseas. In October 2010, the Securities and Exchange Commission of Thailand (TSEC) announced that it has approved the new REIT regulatory framework, under the Trust for Transactions in Capital Market Act B.E. 2550 (2007). The new legislations aimed to follow international REIT practices and provide greater flexibility for REITs as compared to the current PFPO code. There will be less restriction on investment activities. More importantly, the maximum total borrowing of ThaiREITs will be raised to 50% of NAV, as opposed to 10% in the case of PFPO. This will give Thai-REITs more flexibility to acquire additional properties and to optimise their capital structure. These changes had been well received by property trust managers as well as institutional investors. The current PFPO will be able to convert into the REIT. However, in March 2011, the government announced that the enactment of the new Thai-REIT framework will be delayed until the Revenue Department clarifies the corporate income tax status of institutional investors. The first Thai-REIT, UOB Apartment Property I Leasehold, was listed on the SET in 2003. As of June 2012, there were 37 listed Thai-REITs investing across retail (5), industrial (8), office (6), lodging (6), residential (7) and diversified (5) property sectors (Table 0.10). Even though small in number (5), the retail REITs accounted for the almost half (44%) of the total market capitalisation of US$4.1 billion, followed by industrial (23%) and office (12) REITs (Figure 0.11). The profile of listed Thai-REITs as of June 2012 can be seen in Table 0.11. Thai-REITs are characterised by small size, with an average market capitalisation of US$111 million and lack of property exposure. The average number of properties in a Thai-REIT portfolio is only 8, with the majority of them (11) holding single property portfolios. The largest Thai-REIT in terms of the number of properties is the Ticon Property Fund, with 174 assets in the industrial property sector. PHAM, AK The Development of REIT Markets in Asia 24
  25. Table 0.10: Thai-REITs by Property Sector: June 2012 Sector Market Cap. (US$ mln) Retail 1,817 Industrial 937 Office 509 Lodging 395 Residential 275 Diversified 177 Total 4,111 No. of REITs 5 8 6 6 7 5 37 Source: Author’s compilation from DataStream Figure 0.11: Thai-REIT Segmentation Residential 7% Diversified 4% Diversified 14% Retail 13% Lodging 10% Retail 44% Office 12% Lodging 16% Industrial 23% By Market Capitalisation PHAM, AK Residential 19% Industrial 22% Office 16% By Number of REITs The Development of REIT Markets in Asia 25
  26. Table 0.11: Profile of Listed Thai-REITs: June 2012 REIT Name CPN RETAIL GROWTH LH TESCO LOTUS RETAIL GROWTH SAMUI AIRPORT PROP. FD. TICON PROP. FD. QUALITY HOUSES LH FUTURE PARK LH MAJOR CINEPLEX DUSIT THANI FH & LH PRIME OFFICE LH WHA PREMIUM FACTORY LAND AND HOUSE PROP. FD. TALAAD THAI LH CENTARA HOTEL & RESORT THAI RETAIL INV. FD. TPARK LOGISTICS PROP. FD. MILLIONAIRE PROP. FD. MFC AMAZING A-LA ANDAMAN THAI COMMERCIAL INV. QUALITY HOSPITALITY LH GOLD PROP. FD. LUXURY RE MFC-NICHADA THANI MULTI-NATIONAL RESIDENCE NICHADA THANI PROP. FD. 2 BANGKOK COMMERCIAL PROP. TU DOME RESIDENCE COMPLEX MERCURE SAMUI PROP. MFC-STRATEGIC STORAGE FD. THAI IND. FD. 1 SALA @ SATHORN PROP. FD. TRINITY PROP. FD. SUB SRI THAI 101 MONTRI STORAGE PROP. PROP. PERFECT FD. URBANA PROP. FD. UOB APARTMENT PROP. JC LH PROP. FD. TOTAL Listed Date Aug-05 Mar-12 Nov-06 May-05 Dec-06 Dec-06 Jul-07 Jan-11 Apr-11 Dec-10 Apr-12 Nov-10 Oct-08 Jul-11 Dec-09 Mar-05 Nov-11 Jun-10 Apr-08 May-07 Jun-08 Aug-05 Jun-08 Apr-09 Nov-03 Dec-06 Aug-10 Aug-09 Jun-05 Aug-09 Mar-11 May-11 Aug-09 Mar-08 Oct-07 Oct-03 Jan-07 Property Sector Retail Retail Industrial Industrial Office Retail Retail Lodging Office Industrial Residential Diversified Lodging Retail Industrial Office Lodging Office Lodging Residential Lodging Residential Residential Residential Diversified Diversified Lodging Industrial Industrial Office Diversified Industrial Industrial Residential Diversified Residential Office No. of Mkt Cap. Asia Properties (US$ mln) Rank 3 729 #44 17 666 #49 1 333 #75 174 328 #76 3 234 #81 1 212 #82 2 124 #92 3 123 #93 2 118 #95 3 108 #97 3 104 #98 NA 91 #99 1 87 #100 1 87 #101 15 86 #102 1 73 #103 2 67 #104 4 63 #105 1 55 #106 1 50 #108 1 39 #111 2 35 #112 3 33 #115 2 30 #116 2 29 #117 3 26 #118 1 24 #119 4 22 #120 8 21 #121 1 21 #122 1 21 #123 NA 21 #124 1 18 #125 2 14 #129 1 10 #130 1 8 #132 1 NA NA 272 4,111 Source: Author’s compilation from DataStream and various companies’ websites PHAM, AK The Development of REIT Markets in Asia 26
  27. Regulatory Structure Legal Form The current Thai-REITs are established as mutual funds. However, under the new regime, ThaiREITs will be closed-ended trusts with no maturity. The Thai-REITs must be listed on the SET within 60 days of completion or the date they are offered to investors. Management The management company, appointed by the trustee, must be licensed by the Ministry of Finance and regulated by the Office of Securities and Exchange Commission of Thailand. The management company and the trustee cannot be related. Minimum Initial Capital A capital of minimum ฿500 million (US$3.2 million) is required. PHAM, AK The Development of REIT Markets in Asia 27
  28. Taiwan Background In Taiwan, the Real Estate Securitisation Act (RESA) came into effect in 2003 and was last amended in 2009. Fubon No. 1 was the first Taiwanese REIT (T-REIT), which was established on March 2003 and listed on the Taiwanese Stock Exchange (TWSE) on July 2006. To date, a total of eight T-REITs have been launched and floated on the TWSE. However, two T-REITs have been delisted since 2011 (i.e. Trident REIT and Kee Tai REIT). Table 0.12 shows the market break-up of the current T-REITs as of June 2012. There were six currently listed T-REITs with a total market capitalisation of US$2.4 million, accounting for 2.5% of the Asian REIT market. This saw Taiwan having the second smallest REIT market in Asia (#6/7 market), above only South Korea. Among the 6 T-REITs, 4 of them invested in the diversified property sector, representing 73% total market capitalisation, while the other 2 invested in offices, accounting for the remaining 27% of the T-REIT market capitalisation (Figure 0.12). As seen from Table 0.13, all of the currently listed T-REITs were launched prior to May 2007; no new T-REITs have been launched subsequently as of June 2012. T-REITs have relatively small capitalisation, averaging US$415 million and small property portfolios ranging from 3 to 6 properties. Table 0.12: T-REITs by Property Sector: June 2012 Sector Market Cap. (US$ mln) Diversified 1,830 Office 661 Total 2,491 Source: Author’s compilation from DataStream PHAM, AK The Development of REIT Markets in Asia No. of REITs 4 2 6 28
  29. Figure 0.12: T-REIT Segmentation Office 27% Office 33% Diversified 67% Diversified 73% By Market Capitalisation By Number of REITs Table 0.13: Profile of Listed T-REITs: June 2012 Listed Property No. of Mkt Cap. REIT Name Date Sector Properties (US$ mln) CATHAY NO.1 REIT Jul-06 Diversified 3 828 SHIN KONG NO.1 REIT Jul-06 Diversified 6 487 CATHAY NO.2 REIT Oct-06 Office 3 347 FUBON NO.1 REIT Jul-06 Diversified 4 338 FUBON NO.2 REIT Jul-06 Office 3 313 GALLOP NO.1 REIT May-07 Diversified 3 177 TOTAL 22 2,491 Sources: Author’s compilation from DataStream and various companies’ websites Asia Rank #41 #56 #72 #74 #77 #84 Regulatory Structure Legal Form The RESA allows two structures for T-REITs; real estate investment trusts (REITs), following US model, which require the establishment of a mutual fund; and real estate asset trust (REAT), following the Japan’s regime of special purpose trusts. Both types of T-REITs are established as trusts and administered by a trustee. A trustee is an institution that may manage and dispose the trust property and raise public offerings or private placements the in the shares of T-REITs. In practice, all trustees have been local banks or branch offices of foreign banks in Taiwan. PHAM, AK The Development of REIT Markets in Asia 29
  30. Management Under the RESA, the manager is external and must be appointed by the trustee. A manager is not required to be specially licensed or approved. Minimum Initial Capital The minimum initial capital ranges from NT$300 million (US$10 million) to NT$2 billion (US$67 million) depending on the scope of business engaged by the trust. The minimum paid-in capital required for a T-REIT engaging only in REIT or both the REIT and REAT business under the RESA is NT$1 billion (US$67 million) and the minimum paid-in capital for a trust company engaging only in REAT business is NT$300 million (US$67 million). PHAM, AK The Development of REIT Markets in Asia 30
  31. South Korea Background The ground work for REITs in South Korea (K-REITs) was laid in 2001 by the amendment of the Real Estate Investment Company Act (REICA). The introduction of REITs was a part of the government’s reforms to create an effective scheme for troubled property companies to spin off their real assets. Despite high expectations, the K-REIT market attracted little attention from both property companies and investors due to a burdensome legal process. In 2007, the Korean Ministry of Construction and Transportation revised the REICA in an attempt to further simplify regulations governing the establishment and operation of K-REITs. Major elements of the revision included the reduction of restrictions on borrowing, initial capital requirements and lengthy approval processes. Currently, there are 3 REIT regimes in South Korea; (1) corporate restructuring (CR) REITs, self-managed (SM) REITs and managerentrusted (ME) REITs. The first listed K-REIT was the Kyobo-Meritz 1 CR-REIT, launched in April 2002. However, it has since been delisted from the Korea Stock Exchange (KRX). As of June 2012, there were 7 active K-REITs in the diversified (4), office (2) and residential (1) property sector (Table 0.14). Despite having an early start, the K-REIT industry was still lagging behind its regional counterparts. As of June 2012, it was the smallest REIT market in Asia, with a total market capitalisation of just US$465 million, accounting for less than 0.5% of the total Asian REIT market capitalisation. The diversified sector made up the largest segmentation, representing 74% of K-REIT total market capitalisation (Figure 0.13). Table 0.14: K-REITs by Property Sector: June 2012 Sector Market Cap. (US$ mln) Office 93 Diversified 81 Residential 10 Total 184 Source: Author’s compilation from DataStream PHAM, AK The Development of REIT Markets in Asia No. of REITs 2 4 1 7 31
  32. Figure 0.13: K-REIT Segmentation Residential 5% Residential 14% Office 29% Office 51% Diversified 44% Diversified 57% By Market Capitalisation By Number of REITs Table 0.15: Profile of Listed K-REITs: June 2012 Listed Property No. of Mkt Cap. REIT Name Date Sector Properties (US$ mln) KOCREF 15 CR-REIT Jan-10 Office 1 52 KOCREF REIT 8 Jun-06 Office 2 41 TRUS Y 7 REIT Sep-11 Diversified NA 34 K-TOP REIT Jan-12 Diversified NA 18 GOLDEN NARAE RE DEV. May-10 Diversified NA 15 KWANG HEE DEV. REIT Jul-11 Diversified NA 14 E-COREA REIT Mar-11 Residential NA 10 TOTAL 3 184 Sources: Author’s compilation from DataStream and various companies’ websites Asia Rank #107 #110 #113 #126 #127 #128 #131 Regulatory Structure Legal Form A K-REIT must be established as a stock corporation (chusik hoesa) under the Korean Commercial Code and REICA. CR K-REITs are joint stock companies that have finite lives of five years and must be dissolved when the period ends, while the ordinary K-REITs, SM and ME, are paper companies with infinite lives. K-REITs must be established in Korea. PHAM, AK The Development of REIT Markets in Asia 32
  33. Minimum Initial Capital The minimum initial capital of ₩500 million (US$0.4 million) is required for obtaining a business license from the Ministry of Land, Transport and Maritime Affairs (MOLTM). Within 6 months after the license is granted, the equity capital should be increased to ₩7 billion (US$6 million) for the SM K-REITs and ₩5 billion (US$4.3 million) for the CR and SM K-REITs. Management The management can be either internal or external. Prospective Asian REIT Markets India In December 2007, the Securities and Exchange Board of India (SEBI) issued the long awaited draft regulations on Real Estate Investment Trusts for public comments. Based on the public consultation, the SEBI determined that Indian REITs should be established in the form of mutual funds, of which the legal framework has existed. In April 2008, the SEBI further amended the existing SEBI Mutual Fund Regulation to incorporate Real Estate Mutual Funds (REMFs), the Indian model of REITs. Currently, there is as yet any REMF to be established in India. However, there is a number of Real Estate Private Equity Funds (REPEFs) providing access to India’s property market. Pakistan A REIT framework has been introduced in Pakistan in 2008, following the enactment of the Real Estate Investment Trust Regulation by the Securities and Exchange Commission of Pakistan (SECP). REITs in Pakistan are established as closed-ended trusts. The requirements for Pakistan REITs are very similar to those in other Asian REIT markets. For example, Pakistan REITs are also required to distribute not less than 90% of their annual income to unit holders. As long as the 90% minimum distribution obligations are met, Pakistan REITs will be subject to income tax exemption. In addition, the REIT regulations also require that each REIT must have a minimum size of PKR2 billion (US$21 million) and the management company must hold at least 20% in each REIT. In March 2009, the SECP granted permission to two REIT management companies. Among four applications received,f only two were approved, whereas the other two were rejected due to PHAM, AK The Development of REIT Markets in Asia 33
  34. their failure to meet the requirements. The two approved managers were Arif Habib REIT Management Company Ltd. and AKD REIT Management Company Ltd. Both companies have filed a number of REIT schemes with the SECP for its approval. The Philippines The Real Estate Investment Trust Act of 2009, also known as the Republic Act 9856, was enacted in December 2009, providing the legal base for Philippine REITs (P-REITs). The REIT Act became effective in February, 2010. In April 2010, the Securities and Exchange Commission of the Philippines (PSEC) released a draft of the Implementing Rules and Regulations in relation to the REIT Act 2009. The legal structure of P-REITs follows that of J-REITs, where they will be formed as corporations with shares of stocks instead of unit trusts. P-REITs are required to have a minimum paid-up capital of ₱3 million (US$72,000) and at least 1,000 public shareholders. The Act further advises that at least 75% of a P-REIT’s assets must be in income-generating property. With respect to leveraging, borrowings shall not exceed 75% of the market value of each P-REIT. Furthermore, 90% of distributable income must be allocated to shareholders. In addition to the general requirements, which are in line with international standards, the Philippine’s regulators has imposed a number of highly stringent rules in terms of ownership and taxation. In particular, the public ownership of P-REITs is required to be at least 40% during the first two years from listing and 67% by the third year. The Bureau of Internal Revenue (BIR) further insists that P-REITs could only receive pass-through status if they maintain public ownership of at least 67% and distribute at least 90% of their distributable income. Additionally to the minimum ownership, the BIR also requires a 12% value-added tax on the initial transfer of property assets in P-REITs. These strict rules have been publicly criticised by property market participants. A number of major property developers in the country, including SM Prime, Ayala Land and Megaworld, have postponed their plans for P-REIT initial offerings. Consequently, the Philippines was placed second last, above only Thailand, in Asia in terms of overall potential, REIT opportunity and regulatory support, despite having high property market growth potential (Trust 2011). PHAM, AK The Development of REIT Markets in Asia 34
  35. China As at June 2012, China does not have any legal framework for REITs. The first attempt to establish a REIT model in China (C-REIT) was in 2004 when the China Banking Regulatory Commission (CBRC) issued a consultation draft governing companies that engage in REITs (Clifford Chance 2010). In 2007, two local companies Union Trust & Investment and CITIC Securities, were given permission by the People’s Bank of China (PBC) to establish pilot schemes. However, these pilot programmes were later abandoned due to the 2007 GFC and fear of the Chinese property bubble. In December 2008, the Chinese government reconsidered the introduction of C-REITs to the financial market. The PBC and other central government authorities, including the CBRC and the China Securities Regulatory Commission (CSRC), have been drafting rules and administrative guidelines for pilot C-REITs. Local governments in Beijing, Tianjin, Shanghai and Shenzhen have expressed their interest to participate in the pilot programmes formulated by the PBC. In 2009, it was reported that a number of listed companies in Shanghai, including Shanghai Zhangjiang Hi-Tech Park Development, Shanghai Jinqiao Export Processing Zone Development, Shanghai Waigaoqiao Free Trade Zone Development and Shanghai Lujiazui Finance & Trade Zone Development, have submitted their applications to the State Council for approval. However, no pilot C-REIT scheme has been endorsed up to date. The significance of Asian REITs Since the establishment of the first REIT in 2001, the Asian REIT market has grown significantly to reach its peak at U$81 billion in May 2007 (Figure 0.1). As the GFC unfolded, the total market value plunged by half to its lowest point at US$38 billion in October 2008. However, the subsequent period after the GFC has witnessed a robust recovery of the market, supported by strong fiscal stimulus and quantitative easing measures from governments across Asia. Taking advantage of the low interest rates and abundant capital, Asian REITs have intensified new public offerings and acquisition activities during 2009 – 2011. Total market capitalisation has almost trebled from its trough to an all-time high at US$106 billion in April 2012, well above the pre-GFC’s level. PHAM, AK The Development of REIT Markets in Asia 35
  36. Figure 0.1: Evolution of Asian REIT Markets: October 2001 – June 2012 120 GFC 100 60 US$ billion 80 40 20 0 Japan Singapore Hong Kong Malaysia Taiwan Thailand South Korea Source: Author’s complitation from DataStream The strong recovery of Asian REITs after the GFC is further shown in Table 0.1. It can be seen that Asian REIT markets were stronger performers than the mature REIT markets of the US, UK and Australia. As of the first quarter of 2012, the Asian REIT markets, except Japan, have recovered from the previous 5-year’s levels, while the mature markets were still in negative territory. Table 0.1: Asian REIT Performance: Q1 2012 YTD Japan 12.2% Singapore 15.8% Hong Kong 4.1% Malaysia 3.4% Taiwan 12.3% US 10.7% UK 14.3% Australia 8.4% Source: S&P (2012) 1 Year -0.2% 1.3% 14.5% 20.2% 45.0% 12.9% -5.4% 2.3% 3 Year 18.7% 37.6% 31.1% 13.0% 30.9% 43.4% 24.1% 31.4% 5 Year -5.5% 0.9% 12.0% 4.1% 13.8% -0.3% -18.1% -9.4% As of June 2012, there were 133 REITs across Asia with a combined market value of US$100 billion. Table 0.2 and Figure 0.2 depict the significance of Asian REITs within a regional and global context. Currently, the Asian REIT market is dominated by the three developed markets PHAM, AK The Development of REIT Markets in Asia 36
  37. of Japan, Singapore and Hong Kong, making up more than 90% of the total market capitalisation. Japan is still the largest REIT market in Asia, representing 41% of the regional market value. However, there has been strong competition coming from Singapore (31%) and Hong Kong (15.5%), as they position themselves as regional hubs for offshore REIT listings. The last few years have also seen the emerging markets of Malaysia, Thailand, Taiwan and South Korea implementing significant regulatory changes in order to catch up with the leading players. Within a global context, Asia REITs also have a significant profile, adding up to 12% of the global REIT market as of June 2011. Japan (#5), Singapore (#7) and Hong Kong (#8) were among the top 10 REIT markets globally in terms of market size. Table 0.2: Significance of Asian REITs: June 2012 No. of Mkt Cap. % of Asia Asia REIT % of Global Global REIT Country REITs (US$ bln) REITs Rank REIT* Rank* Japan 35 42.3 41.9% #1 5.8% #5 Singapore 26 30.9 30.6% #2 3.8% #7 Hong Kong 7 15.5 15.4% #3 1.9% #8 Malaysia 15 5.4 5.4% #4 0.5% #12 Thailand 37 4.1 4.1% #5 0.1% #15 Taiwan 6 2.5 2.5% #6 0.3% #20 South Korea 7 0.2 0.2% #7 <0.1% #22 Asia Total 133 100.9 100.0% 12.5% *As of September 2011. Sources: Author’s compilation from DataStream, Macquarie (2011) PHAM, AK The Development of REIT Markets in Asia 37
  38. Figure 0.2: Asian REIT Market Share Thailand 4.1% Malaysia 5.4% Taiwan 2.5% Hong Kong 15.4% South Korea 0.2% Japan 41.9% Singapore 30.6% Table 0.3 and Figure 0.3 present the break-down of Asian REIT assets by property types. In terms of market value, retail property was the largest REIT sector in Asia, followed by the diversified and office sector. As of June 2012, there were 22 retail REITs with a combined market value of US$32.8 billion, representing 33% of the total Asian REIT market. Among the 133 listed REITs, 36 REITs held diversified property portfolios with a total equity value of US$22.5 billion (23%), while 26 REITs invested in office buildings worth US$21.6 billion (22%). Asian REITs also invest across industrial (US$12.2 billion; 12%), residential (US$6.3 billion; 6.3%), lodging (US$2.7 billion; 2.7%) and specialty (US$1.9 billion; 1.9%) properties. Table 0.3: Asian REIT Market by Property Sector Sector No. of REITs Mkt Cap. (US$ mln) Retail 22 32.8 Diversified 36 22.5 Office 26 21.5 Industrial 19 12.2 Residential 17 6.3 Lodging 9 2.7 Specialty 4 1.9 Total 133 100.0 Source: Sources: Author’s compilation from DataStream PHAM, AK The Development of REIT Markets in Asia % of Total 32.8% 22.6% 21.5% 12.2% 6.3% 2.7% 1.9% 100.0% 38
  39. Figure 0.3: Asian REIT Market Break-down by Property Type Lodging Residential 2.7% 6.2% Specialty 1.9% Retail 32.5% Industrial 12.1% Office 21.4% Diversified 23.2% Summary This paper has provided an overall description of the evolution of REITs globally, the development of REITs in Asia, as well as the significance of Asian REITs within a global context. Since its inception in the 1960s in the US, the REIT marketplace has grown dramatically. REITs now play an important role in the commercial property market as well as the broader economy. The success of REITs in the US has led to their adoption around the world. As of 2011, there were more than 500 listed REITs across 22 markets, with a combined market capitalisation of US$815 billion (Macquarie 2011). In Asia, REITs have been introduced during the early 2000s. At the moment, REIT regulations have been developed across Japan, Singapore, Hong Kong, Malaysia, Taiwan, Thailand and South Korea. Table 0.1 provides a legislation summary of the current REIT regimes in Asia. Other major Asian economies including India, Pakistan, the Philippines and China are also in progress towards setting up their own REIT markets. The rapid development of the REIT sector in Asia is underpinned by strong economic growth, increased competitiveness, transparency and reduced corruption levels. Recent years have also seen the industry enjoying many positive regulatory changes and government support. PHAM, AK The Development of REIT Markets in Asia 39
  40. At the moment, there are 133 Asian REITs with a total market capitalisation of US$100 billion, representing 12% of the global REIT market. The post-GFC period has seen robust recovery of the Asian REIT industry, outperforming those in the US and UK. Asian REIT markets provide institutional investors effective channels to tap into the huge potential of the commercial property markets in the region. In addition, special products such as Islamic REITs and RMBdenominated REITs also create new investment opportunities and diversification tools for global investors. As the prospective REIT markets, in particular those of India and China, are expected to be launched in the next couple of years, the medium and long-term outlook for Asian REITs remains very optimistic. PHAM, AK The Development of REIT Markets in Asia 40
  41. Table 0.1: Asian REIT Legislation Overview JAPAN SINGAPORE HONG KONG Structure Trust or corporate Collective Unit trust (listed REITs are all investment corporations) scheme (Unit trust) or corporate Management structure External External SOUTH KOREA CorporateRestructuring, Entrusted Management, DevelopmentSpecialised, SelfManaged Internal/ External Internal/ External % invested in For listed J-REIT, at At least 70% Only invest in real real estate least 75% of assets of deposited estate must be invested in property real estate should be invested in real estate or real estaterelated assets At least 70% in real estates or corporate restructuring related properties Geographical No restriction under No restrictions the Investment Trust and Investment Company Act, but no overseas acquisitions have been made as the requirements on real estate appraisal of overseas No PHAM, AK No The Development of REIT Markets in Asia TAIWAN Trust (Real estate asset trust or investment trust) THAILAND MALAYSIA Closed-end Unit trust mutual fund Internal/ External External External Cash, government Must invest At least 50% of a bonds, property, at least 75% fund’s total asset property-related rights, of NAV in value must be beneficiary securities property invested in real or ABS issued under estate and/or Real Estate single- purpose Securitization Act/ companies at all Financial Asset times Securitization Act (RESA/ FASA) must form at least 75% of the NAV No restriction under the Thailand only No restriction RESA; subject to basically, subject approval to approval from SC and relevant authorities 41
  42. Table 0.1: Asian REIT Legislation Overview properties are ambiguous. Property Restricted – at least Property Prohibited, but Hdevelopments 50% of total assets developmentsREIT may acquire are income and uncompleted units producing and investments comprising less unlikely be sold in than10% NAV within one year uncompleted projects should not exceed 10% Leverage No restriction Over 35% of Capped at 45% of total assets gross asset value permitted with disclosed credit rating (capped at 60%) Allow for urban May acquire Prohibited, but renewal, infrastructure properties may enter into or public amenities over 80% conditional construction; completed, forward purchase investments should not but agreement exceed 15% of asset prohibited to value invest in dormant land (for PFPO) REITs are Varies based on credit Not more 50% of total asset permitted to have rating; 50% of total than 10% of value (revised exceptional asset value for REITs NAV from 35%) borrowing up to with credit rating of 1000% of equity twAA or above capital, upon special approval of shareholders Dividend At least 90% of At least 90% At least 90% of At least 90% At least 90% of At least 90% Not specified in payout distributable income so as to enjoy annual net income distributable income of net profits the M-REIT to qualify for tax exemption after tax guideline deduction from paying corporate tax Source: CBRE (2010) PHAM, AK Allow The Development of REIT Markets in Asia 42
  43. References A full reference list will be provided upon requested. Contact Author (Alex) Anh Khoi PHAM Email: ak_pham@live.com Alex is an investment specialist with solid academic and industry experience. He is specialised in property econometrics, asset allocation, portfolio management and investment analysis. Disclaimer: This paper is an amended extract from the author’s PhD thesis titled “An empirical analysis of Real Estate Investment Trusts in Asia: Structure, Performance and Strategic Investment Implications”. No part from this paper may be copied, reproduced, re-published, uploaded, posted, transmitted, or distributed in any way without permission from the author. PHAM, AK The Development of REIT Markets in Asia 43

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