When a consortium of Hong Kong businessmen led by tycoon Li Kashing decided to cash in their investment in a sprawling Singapore retail-office complex called Suntec City Development, there were plenty of interested parties and one firm bidder: Ergo, a unit of German insurance giant Munich Re. But the owners rejected them all and decided to take a different route. In December, they will turn Suntec into a real estate investment trust, selling shares to the investing public for whatever the market will bear. They expect the REIT, which will yield about 7% a year, to list at $1.4 billion and the consortium will retain a 50% stake, cashing out on the other half. That's much more than they could have made selling it off to a single buyer.
Suntec will thus become Singapore's fifth -- and most valuable -- publicly traded REIT, up from none in 2002. That's a sign of how popular REITs have become as investors seek a stake in Southeast Asia's booming property markets. REITs "are the hottest new asset class in Asia," says Wong Man On, a fund manager at HSBC Asset Management (HBC ).
While REITs, which trade like stocks but provide bond-like yields, have been around for years in the U.S. and Australia, they didn't catch on in Asia until about three years ago. Japan and Korea pioneered the market at a time when banks were eager to sell property holdings attached to bad loans. Many distressed real estate assets have since been repackaged as REITs. Indeed, Japan and Korea still make up the lion's share of Asia's $23 billion in REIT assets.
Southeast Asia, however, is coming on strong. Even without Suntec, Singapore's REITs have a market cap of nearly $3 billion. And investment bankers say the complex is one of a half-dozen REITs readying to list in Singapore next year. Malaysia, Taiwan, and Thailand are also getting into the act by cutting red tape and creating tax incentives to encourage REIT listings. Malaysian conglomerate YTL Group, for example, plans to list $400 million worth of key property assets as a REIT early next year once tax treatment becomes more favorable. "Longer term, investors want to see the development of REITs across Asia so they can have more choice for investments in such products," says Soong Tuck Ying, an analyst at Macquarie Securities in Singapore.
The logic driving the growth is simple: In an era when interest rates on savings accounts from Singapore to Hong Kong to Tokyo are hovering below 1% per annum, the region's REITs are paying out an average of 5% to 9%. They can do that because of a steady stream of revenue from rents and a rise in regional property prices. What's more, Asia is aging more rapidly than in the past because of longer life spans and fewer births. And mature investors want to tuck nest eggs into assets such as REITs that are both higher-yielding than stocks and more stable historically. "As the Asian population ages, there will be a demand for high-yield products that can offer stable recurrent income," says Tan Ser Ping, CEO of Ascendas-MGM Funds Management Ltd., which runs Singapore's A-REIT.
Of course, REITs can be as volatile as any other investment. Investors who lost their shirts in speculative property booms in Hong Kong and Tokyo in the 1990s know that all too well. When property prices fall, so will REIT share prices. And if interest rates in the U.S. continue to climb or equity markets soar, that could siphon off money that might be invested in property. But for now, REITs are on a roll.
By Assif Shameen in Singapore