Low funding costs rates and a rise in net operating income have driven an outperformance by offshore Asian real estate investment trusts this year, according to a report by brokerage firm Jefferies.
Investor demand for incremental yield has further boosted returns, and the trend is likely to continue, the firm said.
Already, Reits with their asset base outside Singapore have delivered 30% total returns compared with 14% for the Strait Times REIT Index and only 2.4% for the FTSE Strait Times Index this year to 28 September.
Data compiled by Jefferies and Bloomberg show that the strong run is not a temporary spurt prompted by investors’ renewed enthusiasm for emerging markets. During the past three years, offshore Reits generated an annualised 16% total return versus -0.8% for the Singapore Reit index.
“We believe this is partly due to dividend growth prospects and lower cost of capital in countries [such as] India and China,” said Krishna Guha, equity analyst at US-based Jefferies.
Most significantly, the fall in bond yields and spreads in these two countries in particular and also Indonesia have caused a compression in cap rates – that is, the ratio of net operating income of a property to its market value.
Notable performers include Ascendas India, CRCT, Croesus, Fortune, Magic and Lippo Malls Trust.
Real local currency bond yields still top 4% in Indonesia, 2% in India and 1.5% in China, so Guha expects further strong returns and cap rate compression.
Opening up to Reits
However, other jurisdictions are keen to share in Singapore’s offshore Reit bonanza by attracting foreign investor flows into their nascent markets.
Last June, the Securities and Exchange Board of India (Sebi) allowed local Reits to buy more partially-constructed projects, rationalised unit-holder consent on related party transactions and removed restrictions on special purpose vehicles to cross-invest. Sebi also gave the go-ahead to foreign firms to relocate to India as eligible fund managers.
Indonesia also lowered barriers to the growth of its home grown Reits sector in March by reducing the tax rate of property sales within Reits.
And in the summer, China’s first-ever publically-listed Reit was more than 60% over-subscribed, according to Bloomberg. The RMB3bn ($483m) trust is made up of office buildings owned by China Vanke and is managed by Penghua Fund Management and trades on the Shenzhen stock exchange.
But Singapore has advantages over rival centres, including Hong Kong, as its Reits’ sponsors seek alternative assets due to the scarcity of property in the city-state.