As REITs grow in popularity across Asia, Mingtiandi 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 the US in 1960, which heralded new opportunites for property developers and other owners of real assets as well as for investors in public financial markets.
REITs as an Investment Structure
REITs offer corporates the opportunity to monetise their income-producing real estate assets by selling them to a REIT which then both owns and manages the property. At the same time, the structure allows investors of any scale the chance to own and earn income through direct ownership of shares in real estate assets without requiring the wherewithal to buy and manage those assets outright.
Since 1960, the attractiveness of REITs has seen countries around the world adopt these listed trust regimes, with Singapore and Hong Kong standing out as key hubs for Asia. With more than two decades of experience at the forefront of the Asian REIT market, Deutsche Bank’s team shared some insights on the current market landscape and their outlook for the structure.
Trends in the Hong Kong and Singapore markets
REITs in Singapore (S-REITs) and Hong Kong (H-REITs) have a long history, with their regimes being implemented in 2002 and 2003 respectively. Stuart Harding, Deutsche Bank’s Head of Corporate Banking in Hong Kong and Head of Trust & Agency Services (TAS) for Asia Pacific, observed that REIT asset pools in APAC “initially focused on hotels, offices, and shopping malls”.
As investors became more familiar with the structure, REITs diversified into a wider mix of assets − from manufacturing plants through to logistics hubs and data centres. “This blend of asset classes has made the REIT sector more resilient to shocks such as the global financial crisis and Covid,” Harding added.
But it is not just opportunities and risks related to economic trends that REIT managers are adept at managing, but demographic shifts as well. Kevin Martin, ASEAN Head of Sales and TAS at Deutsche Bank in Singapore notes that, “Many Singapore-listed REITs are now investing in student housing, multi-family housing, and senior living real estate assets, which gives them exposure to asset classes which benefit from emerging trends and often run counter to commercial real estate cycles”.
S-REITs have historically spanned a broader mix of both asset types and geographies than their counterparts in Hong Kong, with a number of Singapore-listed vehicles holding properties outside of Asia, including in North America, Europe and Australia.
However, the geographic focus of Hong Kong REITs is also expanding as a number of vehicles listed in the city have extended their asset bases to include overseas properties. Some examples of this are Spring REIT’s 2017 acquisition of 84 properties across Britain, and Link REIT’s 2020 acquisition of an office block on London’s Canary Wharf. This is 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), as will be discussed below.
Just as the assets held by S-REITs and H-REITs can vary, so too can their price-to-book ratios and investment performance, as well as the type of investor that these characteristics attract. The cultural difference might be reflected in the fact that Singapore has seen far more REIT IPOs than Hong Kong to date, with more than 40 now listed in the city-state.
But things are changing, as both Singapore and Hong Kong are competing to develop healthier and more pro-market REIT codes in order to attract investors.
For example, both jurisdictions recently permitted REITs to increase their leverage limit from 45 percent to 50 percent, which provided some relief for REITs that had experienced some uncertainty given hotels, offices, and shopping mall tenants had suffered as those types of properties emptied 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, North Asia Head of TAS Sales for Deutsche Bank, explains that Hong Kong authorities have also recently introduced a new sponsor regime, have run a public consultation on the REIT Code, and are proposing a slew of further incentives to encourage H-REIT listings.
These moves, together with the pipeline of investments in the GBA, should boost the Hong Kong REIT 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 sponsors in establishing the structure 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, REIT managers still require 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 help REIT managers greatly when a bank can act provide the full range of financial management services required to faciltate their activities.
Deutsche Bank takes such an approach, and has been appointed as trustee for six of the 12 REITs ever listed in Hong Kong, including all each new H-REIT listed since 2007. The bank has also won the Triple A Awards for ‘Best Corporate Trust Mandate’ from regional finance publication The Asset, for its services in the China Merchants Commercial (CMC) REIT deal. The CMC deal achieved a number of ‘firsts’, including being the first REIT to invest in GBA commercial properties, the first H-REIT sponsored by a Chinese state-owned enterprise since 2006, and the first REIT listed in Hong Kong since 2013.
Providing a still greater opportunity for Hong Kong-listed REITs is the development of the Greater Bay Area.
The regional economic powerhouse comprises nine cities in the province of Guangdong plus the two Special Administrative Regions of Hong Kong and Macau, with a total population of more than 70 million. Based on 2018 figures, the GBA had a combined gross domestic product large enough to rank it as the world’s 12th largest economy,
The impetus behind the GBA is evidenced by the Chinese government’s 2017 Framework Agreement and 2019 Outline Development Plan. These seek 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”.
This political willpower is being matched by economic firepower, given the Chinese government’s use of the CMC REIT deal to pilot H-REITs as a way 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.
This sponsored story was provided as a service by Deutsche Bank Trust & Agency Services.