Fuelled by buoyant equity markets and robust economies, Asia's REIT markets expanded briskly, with a total of 27 new REITs/ property trust funds being floated during the first eleven months of 2006, pushing the total market capitalisation to US$63 billion, as compared to an estimated US$38 billion at the end of 2005. The Japanese REIT market set new records in 2006, with the number of J-REITs topping 40 and average market prices reaching new highs in November. The Singapore REIT market was also positive, with sentiment boosted by the flurry of IPOs and the encouraging post-listing performance of recently launched REITs, as well as the sustained high levels of acquisition activities within and outside Singapore. Relatively speaking, Hong Kong, South Korea and Thailand were laggards in the region, each with only one listed REIT/property trust fund coming on stream in the year to November.
The trends towards sectoral diversification and cross-border listings with overseas assets have become deeply entrenched in the Asian REIT market. Singapore's conducive REIT regulatory regime and relatively competitive tax system favourably positioned Singapore to draw an increasing number of cross-border REIT listings, further consolidating its status as the regional REIT hub. Recent regional listings include the CapitaRetail China Trust (CRCT), comprised of seven retail malls in China, and First REIT, a healthcare REIT backed by Indonesian properties, both listed in early December. CRCT's institutional tranche was 196 times subscribed and its share price surged 59.3% on its first trading day. As the Asian REIT market evolves, REITs consisting of hotels, hospitals or even infrastructure project are being offered, diversifying the asset types beyond the conventional office, retail and industrial-focused REITs.
J-REITs have rebounded significantly since the May/June correction this year, with the JREIT Index surging to a historical high of 1,841.51 on 28 November 2006. Three mega listings, Japan Excellent REIT, Nippon Commercial REIT and Mori Hills REIT helped lift the J-REIT market capitalisation by 30%. The weighted average dividend yield for the 40 listed J-REITs was 3.6%, a steady spread of nearly 200 bps over 10-year Japanese government bonds. REITs have been the bright spot in Singapore's capital markets, registering 20% growth on average in the seven-month period to November, significantly outperforming the Straits Times Index, which rose 9% in the period. Excluding the Cambridge Industrial Trust, S-REITs now trade at an average yield of 4.7%, a drop of about 40 bps from April, but remain attractive as compared to the 3% 10-year government bond yield.
Turning to Korea, most of the listed REITs saw their unit prices rise. The outlook of the Korean REIT market is positive given the attractive average yield of 7.7%, the region's
highest, and the recent easing of regulations. Despite the prevailing bullish mood, Hong Kong REITs have underperformed the stock market as investors have focused their attention on the busy IPO market and the mainland enterprises. With the exception of the Link REIT, H-REITs ended the period 1% to 24% below their IPO offer prices, while the Hang Seng Index rose 14% between May and November. Sunlight REIT, listed on 21 December, fell 11.5% during its first two days of trading. Investors’ continued cool response towards H-REITs may prompt other developers to review their REIT listing plans as well as product and pricing strategies in order to revive interests in this relatively new investment vehicle.
Unwilling to lag behind, Taiwan and Malaysia have both enacted new policies or introduced incentives to stimulate development of their REIT markets. The two markets
have seen a total of four new listings, increasing market capitalisation by 39% and 11% respectively, within the review period. Samui Airport Property Fund was the only new
property fund listing in Thailand this year, while most existing funds either fell slightly or remained unchanged during the review period.
Asian REITs will likely follow their present expansionary trend in 2007, as robust economic conditions support the continued demand for property, and a more benign interest rate outlook. However, investors should be cautious of the volatility in the equity market and the increasing divergence in REIT performance. The defensive characteristics of Asian REITs against market downturns have been somewhat undermined by investors' perception of REITs as a vehicle for speculation and the use of financial engineering by some REITs.