TRUST AND AGENCY SERVICES
REITs in Asia – a resilient asset class
6 December 2021
As recognition of the flexibility of REITs grows across Asia, flow spoke with REIT trustee market leaders at Deutsche Bank in Hong Kong and Singapore about the opportunities awaiting investors post-pandemic in the Greater Bay Area and beyond
The REIT − or Real Estate Investment Trust − has done for property ownership what mutual funds did for stock ownership. But the revolutionary nature of this investment structure belied its unshowy birth. In 1960, the US Congress signed the Cigar Excise Tax Extension into law, and under the auspices of this unassumingly named piece of omnibus legislation, the creation of REITs heralded a win-win way forward for property ownership.
REITs as an investment structure
As helpfully explained by Deloitte China Real Estate Investment Trust Advisory Services, REITs offer corporates the opportunity to monetise their income-producing real estate assets (through selling them to a REIT which then manages the property); and they offer investors the chance to own and earn from a share of real estate without requiring the wherewithal to buy and manage those assets outright. 1
They are perpetual equity-type investment structures which invest and hold (directly or indirectly) a portfolio of real estate, thus earning the bulk of their income from the rents on those properties. REITs also generate revenue through financing income producing real estate (such as holding commercial or residential mortgage-backed securities). REITs are, typically, listed securities. To ensure their largely pass-through tax treatment, REITs are not intended to retain their earnings and therefore distribute almost all their audited annual post-tax net income to their unitholders as taxable dividends. They are restricted from investing or undertaking property development (subject to local regulatory thresholds), and investors are protected via strict codes of conduct governing REIT managers and trustees. Investors, ranging from pension funds to the archetypal ‘Belgian dentist’,2 favour the stable income flows that REITs are designed to yield, and the possibility of price appreciation.
Figure 1: Structure of REITS from trustee perspective
Since 1960, the attractiveness of REITs has seen countries around the world adopt REIT regimes, with Singapore and Hong Kong being key hubs for Asia. With more than two decades of experience at the forefront of the Asian REIT market, Deutsche Bank’s Trust and Agency Services (TAS) team shared some pertinent market insights. Figure 1, summarises the asset class structure and the role of the Bank as Trustee.
“REITs diversification into blended assets further increase resilience to shocks”
Trends in the Hong Kong and Singapore markets
REITs in Singapore (S-REITs) and Hong Kong (H-REIT) have a long history, with their regimes going live in 2002 and 2003 respectively. Stuart Harding, Deutsche Bank’s Head of Corporate Bank (Hong Kong) and Head of TAS for Asia Pacific (APAC), observed that REIT asset pools in APAC “initially focused on hotels, offices, and shopping malls”. As investors became more familiar with the structure, REITs have diversified into a wider mix of real estate assets − from manufacturing plants through to logistics hubs and data centres. These “blended assets further increase the REITs’ resilience to shocks”, such as the global financial crisis and Covid. But it is not just economic trends that REIT managers are adept at seizing, but demographic trends too. Kevin Martin, ASEAN Head of Sales and TAS at Deutsche Bank in Singapore notes, for example, a trend for S-REITs investing in “student housing, multi-family housing, and senior living real estate assets”.
S-REITs typically have a broader mix of both asset type and geography. However, this is changing as recent H-REITs extend their asset base to include overseas assets (such as Spring’s 2017 acquisition of 84 properties across Britain3, and Link’s 2020 acquisition of an office block in Canary Wharf in London’s Docklands4). This was further demonstrated by the Chinese government’s recent piloting of an H-REIT to hold Mainland assets as part of its investment in the Greater Bay Area (GBA), discussed below.
Just as the assets held by REITs can vary, so too can their price-to-book ratios and investment performance, and the type of investor that they attract. These aspects are a function of both the real estate assets that come online or that are subject to the subsequent acquisitions or disposals by the REIT manager, and also of investor type and demand. Hong Kong institutional investors typically place a higher premium on investments which present the opportunities for price appreciation, which is not something REITs generally offer. This difference in investor appetite is reflected in the average H-REIT having a 0.62 price-to-book ratio, versus that of 1.06 for S-REITs – that is, trading at roughly the net asset value of the S-REITs’ assets.
This cultural difference might be reflected in the fact Singapore has seen far more REIT IPOs than Hong Kong with more than 40 listed in the city-state compared to 11 in Hong Kong5. Singapore has also seen consolidation among REIT managers, with the 2018 merger of ESR and Viva Industrial. However, there is an increasing element of healthy pro-investor regulatory competition between Singapore and Hong Kong. For example, both jurisdictions recently permitted REITs to increase their leverage limits from 45% to 50%, which provided some relief for REITs that had experienced uncertainty given tenants of hotels, offices, and shopping malls suffered as those types of properties underperformed during the Covid lockdowns. Both jurisdictions also provided support to corporates – SMEs in particular – affected by Covid, which helped bolster the resilience of rental incomes for REITs.
Ivy Fung, Head of Sales for TAS North Asia at Deutsche Bank points out that Hong Kong authorities have also recently introduced a new sponsor regime, have run a public consultation on modifications to the REIT Code6 and are also proposing a slew of further incentives to encourage more H-REIT listings. All these, together with the pipeline of investments on assets in the GBA, should boost that market’s critical mass and liquidity. It also means that Hong Kong’s REIT market is fast catching up with Singapore as an internationally competitive hub for REIT managers and REIT-related banking services.
Trustee, agency, and related value-added services to the REIT market
Banks sit at the heart of the REIT market, from acting as sponsor and advisor in establishing the structure and its public listing and liaising with regulators, corporates, managers, and investors, through to their trust arms overseeing the REIT manager and the collection of rental income, reporting, and distribution of dividends to investors. Post-IPO, the REIT manager still requires manifold banking services, from cash management and FX services – if converting overseas rental income into Hong Kong dollars for dividends for example, through to advisory work on follow-on acquisitions and disposals of real estate assets held. It can therefore significantly help clients when a bank can act as a one-stop-shop. Deutsche Bank’s role as REIT trustee is only part of a wider array of ancillary services offered to its clients, given its TAS team sits within the Corporate Bank, thereby also enabling easier KYC processes for clients and subsequent access to all services required by the REIT manager for itself and its investors. For example, Deutsche Bank’s global presence helps it handle overseas assets in REIT clients’ portfolios, regarding both daily administration, acquisitions and disposals.
Deutsche Bank’s TAS business dates back to 1903, and in 1987 was the first foreign bank to establish a direct presence in Hong Kong, Harding explains. This has helped develop good collaborative relationships with local regulators like the State Administration of Foreign Exchange in China, the Securities and Futures Commission in Hong Kong, and the Monetary Authority of Singapore, but also in garnering market recognition. The Bank has been appointed as trustee for six of the 12 REITs ever listed in Hong Kong, including all new H-REITs since 2007, being the Regal, Hui Xian, New Century, Spring, China Merchants, and SF H-REITs. Furthermore, Deutsche Bank won The Asset Triple A Awards ‘Best Corporate Trust Mandate’ for the China Merchants Commercial (CMC) REIT deal7. The CMC deal achieved a number of ‘firsts’: the first REIT investing in GBA commercial properties, first H-REIT by a Chinese state-owned enterprise since 2006, and first H-REIT listed since 2013.
China’s GBA comprises nine cities in the province of Guangdong8 plus the two Special Administrative Regions of Hong Kong and Macau. Based on 2018 figures, the GBA would have comprised the world’s 12th largest economy, with a total population of more than 70 million. The impetus behind the GBA is evidenced by the Chinese government’s 2017 Framework Agreement9 and 2019 Outline Development Plan10. These seek to strengthen the coordination of regional development, and the attractiveness of the GBA as a place to study, work, and live. Specifically, the GBA initiative aims to leverage Hong Kong’s international prominence in finance, trade, and transport to boost the flow of people, goods, capital and information and to foster connectivity within the GBA under the principle of “one country, two systems”10. This political willpower is being matched by economic firepower, given the Chinese government’s piloting of the CMC deal as a way of using H-REITs to monetise infrastructure assets in the scores of projects being undertaken in the development of the GBA. All these trends point to the continuation of the REIT success story in the GBA and across APAC.
Note: a shorter version of this article was first published in the Asian real estate newswire Mingtiandi on 25 October 2021 and can be viewed here
1 See https://bit.ly/3oiCjW0 at deloitte.com
2 Christian Hemain, founder of International Financing Review, came up with this term to denote a conservative, wealthy, risk averse private investor. It is well-known in wealth management communities
3 See https://bit.ly/3Dli12n at springreit.com
4 See https://bit.ly/3dd6qYK at mingtiandi.com
5 See https://bit.ly/3GcfCco at hkex.com.hk
6 See https://bit.ly/31lECyB at apps.sfc.hk
7 See https://bit.ly/3lwJUia at europawire.eu
8 Dongguan, Foshan, Guangzhou, Huizhou, Jiangmen, Shenzhen, Zhaoqing, Zhongshan, and Zhuhai.
9 See https://bit.ly/3oktLhj at bayarea.gov.hk
10 See https://bit.ly/3dlv35i at bayarea.gov.hk
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