REIT - May/June 2010

nomic rebound helped generate an 82.6 percent total rate of return for investors, according to the F TSE EPRA/NAREIT Global Real Estate Index. Hong Kong generated a 88.7 percent return.

Over the past year, a few factors have helped fuel the increases. The Asia/Pacific region is leading the world in terms of economic recovery, helped in part by government stimulus programs, steady exports and healthier financial systems. As was the case in the U.S., Asia’s REITs successfully raised capital to help allay investor fears of illiquidity, repairing balance sheets and reducing leverage. Some analysts expect this to lead to new REIT offerings in the region in 2010, particularly in Singapore.

However, last year’s dip in the markets did expose some weak-nesses in the Asian REIT models. The requirement to distribute most of their cash put them in a bind, as banks clamped down on lending and asset values fell. The Asian Public Real Estate Association (APREA) is urging governments to allow REITs more ways to raise capital. For example, in Japan, REITs can’t issue convertible bonds and buy back their own shares.

“We have made a number of submissions with the purpose of enabling J-REITs and other Asian REITs to expand their capital tool kit to put them more on par with operating companies,” says Peter Mitchell, chief executive of Singapore-based APREA.

Singapore has been able to adopt measures through regulations allowing S-REITs more tools to raise capital; in Japan it will require legislation. That difference has been a contributing factor in the difference in performance of Singapore and Japan, according to Mitchell.

Yet, overall, with Asia taking the lead in the global economic
recovery, things are looking much brighter than a year ago.
In most major cities, declines in office rents are slowing or are
hitting bottom. “From a REIT perspective, the market is vi-
brant,” says Lok So, operations director at APREA. “As with
REITs everywhere, the global financial crisis—and the drying
up of both debt and equity sources—highlighted some pressure
points with Asian REITs.”
Regulators, especially in Japan and Singapore, have been quick
to respond. “Over time we expect to see strong regulatory struc-
tures as a result,” So adds.

REIT.com Video: To watch a video with APREA Chief Executive Peter Mitchell, visit REIT.com.

● AUSTRALIA

Back to Basics

In the last three years, Australian REITs have posted a loss of 25 percent, second worst among global REIT markets. A-REITs’ market cap plunged 51 percent during 2008 as a result of the financial crisis. However, the sector rebounded in 2009. Last year, Australian REITs posted a total return of 33. 4 percent.

While the 2009 rebound was encouraging, the depth of the declines in 2008 came as somewhat of a surprise, as Australia’s

5 Goodman Group Source: FTSE EPRA/NAREIT Global Index

economy fared relatively well in the global recession. That was due in part to rising commodity prices, which have aided the resource-rich nation. But A-REITs had strayed over the years from the traditional property ownership model of mainly collecting rents to taking on development, funds management and overseas investment.

Roberto Fitzgerald, executive director of international and capital markets with the Property Council of Australia, says Australian REITs’ overseas assets grew from 10 percent of total assets in 1997 to 40 percent at the peak in 2007. At the same time, he says, non-rental revenue from development and funds management rose to almost 20 percent.

When the credit crisis hit, “these public REITs were not a very good proxy for real estate exposure,” Anvil Capital’s Learmonth says. As a result, investors fled.

The 2009 reporting season reflected millions of dollars of unrealized devaluations but also the real impact of write-downs of capitalized goodwill, losses on asset disposals and expensive unwinding of foreign exchange derivatives, Fitzgerald says.

Australian REITs have since worked to reduce leverage on the balance sheet, using capital raises to lower debt ratios to the 30 percent level, down from around 45 percent, according to Learmonth. A-REITs also cut staff, and many companies have unloaded business units ranging from development teams to passive investment divisions to get back to original core specialties, Learmonth says.

For instance, GP T Group (ASX: GPT) announced the sale of its remaining U.S. malls in its portfolio in December, asserting its focus on Australia going forward; Stockland Group (ASX: SGP) is looking to sell its assets in the United Kingdom in the next three years, the company said in a report to shareholders in February.

Learmonth says investors on the sidelines might find a good value at hand: “For those investors sitting on the fence, they can say, ‘ Well it’s not a perfect proxy for real estate, but obviously the sector is going to survive now, it’s deleveraged and the current prices look like a reasonable value.’”