Bangkok--15 Mar--CB Richard Ellis
Asian REITs continued to recover in the second half of 2009 as the stock markets in Asia improved overall and conditions in the credit market became more relaxed. According to CBRE Research Asia, the total market capitalisation of Asian REITs rose 17.6% in the second half and 34.5% for the whole of 2009 thanks to the recovery in prices and the issuance of new shares. The market size of Asian REITs has yet to recover to pre-crisis levels, with their market capitalisation as of the end of 2009 still 17.4% lower than that recorded at year end 2007.
Second Half of 2009 Sees Increase in Refinancing and Consolidation Activity
The review period saw a rise in corporate activity in the Asian REIT market, mostly involving mergers and consolidation or refinancing. In Japan, four mergers involving J-REITs were announced following revisions to the tax code that clarified the definition of distributable profit, thereby clearing a former obstacle to acquisition or consolidation.
Nippon Residential Investment, sponsored by the bankrupt Pacific Holdings, agreed to merge with Advance Residential Investment, while the failed New City Residence J-REIT selected Daiwa House Industry Co as its new sponsor and will merge with BLife Investment Corporation. LaSalle Japan REIT agreed to be absorbed by Japan Retail Fund while Tokyo Growth REIT and LCP REIT also announced plans to combine. The above mergers are scheduled to be completed within the first half of 2010.
In Singapore, Australia-based investor AMP Capital acquired a 19.2% stake in MacarthurCook Industrial REIT (subsequently renamed AIMS AMP Capital Industrial REIT) and a 50% holding in the REIT’s management company for THB 1.27 billion (S$54.1 million). The portfolio of MacarthurCook Industrial REIT was valued at approximately THB 11.64 billion (S$494 million) as of 30 September 2009, reflecting a substantial discount on the acquisition price.
In the second half, the overall credit condition of Asian REITs improved as most managed to refinance or extend their loan obligations and advance their unit prices. The review period saw several J-REITs seek to collectively raise over THB 23.69 billion (JPY 65 billion) capital through new share issuances. In October, Nippon Accommodations REIT announced plans to raise a maximum of THB 7.47 billion (JPY 20.5 billion) through the issue of 42,000 shares, while November saw Kenedix REIT raise roughly THB 3.09 billion (JPY 8.5 billion) through a public stock offering. December saw Japan Real Estate REIT announce a public offering of 42,000 new units to raise approximately THB 9.15 billion (JPY 25.1 billion), while Nomura Real Estate Residential Fund raised THB 4.19 billion (JPY 11.5 billion). The establishment of the Kanmin Fund, a Public-Private Real Estate Market Stabilisation Fund, during the review period also helped boost public confidence in the J-REIT sector. The Kanmin Fund is expected to have total capital of THB 145.8 — 182.2 billion (JPY 450-500 billion).
REITs in Singapore also saw a flurry of fund raising activity via the placement of new units and rights issues. Through the private placement of new shares, Suntec REIT raised gross proceeds of THB 3.6 billion (S$153 million) at THB 28.03 (S$1.19) per unit while Ascendas REIT raised THB 7.1 billion (S$301.6 million) at THB 38.4 (S$1.63) per unit. In December, CapitaMall Trust completed a rights issue at THB 19.31 (S$0.82) each to raise a gross amount of THB 28.97 (S$1.23 billion).
However, despite the improvement in Asian stock market overall in the second half, the IPO market for Asian REITs remained sluggish, with just four new real estate funds listed in Thailand and 12 new REITs established as non-listed trusts in South Korea.
Overall Real Estate Fundamentals Weaken
Notwithstanding the overall improvement in the Asian regional economy in the second half of 2009, the commercial property sector in many cities around the region continued to see declines in rentals and occupancy. Hence, the performance of Asian REITs varied over the second half of 2009. REITs in Singapore and Hong Kong generally outperformed the overall stock market, but the J-REIT Index saw 8.2% decline over the review period compared to a minor 5.9% increase in Nikkei 225 Index. The weaker performance of J-REITs was due to a combination of factors including fragile Japanese economic and real estate fundamentals, the strong yen and dilution through public offerings.
The period saw a number of Asian REITs announce plans to cut distribution payouts due to weaker real estate fundamentals. In Singapore, Saizen REIT suspended distribution payouts following its fiscal second quarter because of credit problems. In Hong Kong, Champion REIT reduced its dividend payout ratio from 100% to 90% and expressed concern over potential tenant relocation to newly completed office buildings in decentralised areas. A number of Taiwanese REITs also reported a modest fall in distributable income. Fubon No. 2 REIT recorded a 5.5% q-o-q decrease in rental rates while Gallop No. 1 REIT saw a significant drop in occupancy following the relocation of a major tenant from the CTCI building.
Selected Asian REITs Ee-emerge as Real Estate Buyers
As most Asian REITs resolved their refinancing problems and managed to raise fresh capital during the second half, several began to acquire properties ahead of the full recovery of the real estate market. In the largest transaction recorded during the second half, Japan Real Estate acquired a 30% stake in the Shiodome Building in Minato-ku, Tokyo for THB 19.9 billion (JPY 54.6 billion) at a 5.5% NOI cap rate on in-place rents. The final quarter of 2009 saw residential J-REITs make significant acquisitions. In October, the Nippon Accommodations Fund acquired 18 apartment buildings in Tokyo, Sendai, Sapporo and Fukuoka for a total of THB 15.5 billion (JPY 42.6 billion).
Elsewhere, Singapore’s Fortune REIT acquired the Metro Town and Caribbean Coast retail podiums in Hong Kong from its parent company for THB 6.13 billion (US$187 million), while K-REIT acquired six floors of the Prudential Tower for US$75 million. Korean REITs were also active. KORAMCO launched KOCREF 15 CR-REIT to acquire the Insong building for THB 3.33 billion (KRW 115 billion) for its initial portfolio forehead of an IPO planned to take place in the first half of 2010.
Asian REIT Market Should Continue to Improve in 2010
With concerns over the financial condition of Asian REITs largely alleviated, investors will renew their focus on portfolio expansion and growth in distributable income. “Further acquisitions are likely in the coming year as Asian REITs look to enhance their portfolio quality ahead of the full recovery of the real estate market. 2010 will probably see the resumption of the IPO market for REITs.” commented Andrew Ness, Executive Director of CBRE Research Asia. Among the major REIT markets in the region, it appears that Singaporean REITs are making better progress in returning to growth while the non-listed portion of the Korean REIT market will also see robust expansion. The J-REIT sector could see further consolidation following the regulatory change regarding tax treatment of REIT-related M&A transactions but the overall outlook is now much more positive as compared to six months ago.