For our latest issue, we look into the future of proptech and its progress against other techs. We also interviewed ARA-backed Minterest CEO Charis Liau to discuss her views on innovations in real estate financing and proptech.
KPMG Singapore’s Frederic Hoo tells us how we should start to examine proptech metrics to increase rents, optimise space use, and maximise occupancy rates, and Real Capital Analytics’ David Green Morgan talks about the evolving role of data in real estate investing. Twenty years after the rise of proptech, its adoption is continuously evolving and Admiral Investment’s Patrick Ma tells us how proptech will advance in sales, transaction, and asset management.
K Hotel Group’s CFO Noel Neo deep dives into how did real estate sector’s most famous proptech, WeWork, fail. Finally, Christian Bernasconi, Managing Director, B&I Capital, provides us with an analysis of the growth returns of REITs with exposure to technology such as data centres and cell towers.
In the US, the National Real Estate Investor said funding of US proptech companies dropped 69% in the first quarter of 2020 compared to a year earlier.
With the rapid adoption of e-commerce and digital work solutions as well as rising awareness of climate change and health, technologies such as fintech, healthtech, and greentech have seen significant investment during the pandemic. In contrast, growth in proptech, which encompasses innovations in real estate fintech, the sharing economy, and smart buildings, has seen somewhat slower progress. Undoubtedly, the broader global economic downturn and work from home arrangements have cast a shadow on the outlook for the real estate sector.
In a recent REITAsiaPac’s proptech discussion with Yardi Systems, Regional Director Bernie Devine said the sector faces two critical challenges during the pandemic: firstly, reduced funding due to an uncertain business environment; and secondly, the sector’s ability to create solutions that meet customers’ needs at a time when the market is ready to adopt such solutions.
Technology is an important enabler, however, understanding the fundamentals of finance is equally critical to create a functional algorithm, says Minterest.
Minterest, a Singapore-based company formed in 2016, is a crowdfunding platform that links corporate and individual borrowers with international lenders who are keen to invest into real estate or SME loans. It was started by Charis Liau, who currently serves as CEO, and Ronnie Chia, as COO. Both Liau and Chia are from the banking and finance industry and former colleagues at an international bank.
To date, Minterest has facilitated a cumulative origination volume of over S$145 million (US$108 million) in Singapore across its corporate and consumer businesses. It has also raised over S$43 million for three real estate products so far.
REITAsiaPac sat down with Liau to discuss her views on innovations in real estate financing and Proptech.
By Frederic Hoo, Director, Sectors and Solutions, KPMG in Singapore
“Besides financial data, we should start to examine the technology levers used to increase rents, optimise space use, maximise occupancy rates, together with a REIT’s acquisition and overall management plans.”
Human progress is inevitable. In every imaginable facet of our lives today, we are constantly bombarded by the change brought to us by technology. Technology adoption is changing our everyday expectations and is slowly shifting our behaviour towards instant gratification.
In the last decade, technology has permeated the built environment. Real estate now has to be human-centric in design—the indoor temperature must be optimal, the lighting comfortable, and the selection of shops needs to be interesting to the visitors.
In addition to design, technology is also changing the other pillars of the built industry: fabrication, construction, and asset management. Asset owners can employ cutting-edge developments in video analytics, Internet-of-Things, 5G, digital twin, and wearables to help manage the asset in ways which were not possible previously. We can now measure who is using the space and how space is used, which contributes to the customisation of the building as a service to the users in the way they want it. In short, data is now the new currency because it will enable the analytics to improve performance.
By Patrick Ma, Director of Listed Securities and Research, Admiral Investment Limited
Proptech funding reached a new peak of US$8.86 billion in 2019. Post pandemic will see more sophisticated tools as competition intensifies and funding increases.
Proptech started after the 2000s, following the dawn of the Internet era, as customers went online to search for real estate information and became more adapted to online transactions.
As the demand for digital news and real estate e-commerce starts to rise, the early-stage portals were similar to online activities and transactions in other areas of e-commerce. And so, it is no surprise that the mainstay proptech businesses that emerged at the time were online portals and aggregators for real estate markets, such as Zillow and Trulia in the US and Propertyguru.com and Lianjia.com in Asia.
As the potential of proptech application expands, investments in proptech have risen in tandem. According to CB Insights, proptech funding reached a new peak of US$8.86 billion in 2019. For the first eight months of 2020, amid the coronavirus pandemic, new funding for proptech was at US$5.22 billion.
By David Green Morgan, Managing Director, Real Capital Analytics
“A significant difference between this downturn and the GFC is the availability of capital to be invested, with most groups in a strong financial position.”
This Covid-19 period will live long in the memory, with many of us having set individual records for not leaving the house. But as the daily uncertainty extends into weeks and months and possibly even years, the need to get on and grow the business becomes ever more important. This is as true for Real Capital Analytics (RCA) as it is for any other company within the real estate industry and being a data provider who needs to provide a 24/7 service the challenges of home working has been significant. While the first few weeks were difficult, everyone has now settled into their ways of operating and continuing to provide our clients with the information and service they expect and require.
In recent years, using big data to provide predictive analytics has seen rising prominence. At RCA, our focus is on delivering reliable, accurate and timely data to our clients. The number of assumptions needed to provide forecasts is constantly increasing and changing, and thus we have decided not to move down that path at this time.
By Noel Neo, CFO, K Hotel Group
How did the real estate sector’s most famous proptech, WeWork, fail?
Venture Capital’s (VC) search for the next unicorn surprisingly led them to the staid world of property management. At its height, WeWork was valued at $47 billion. This staggering value was perhaps predicated on the perceived scalability of its business model, based on the assumption that using VC funds to quickly accumulate a vast global footprint, either bought or leased at competitive prices, would eventually translate to an extensive volume of paying clients. It could also be due to investors and the media drawing similarities with unicorns like Airbnb, which has just filed for an IPO in November and is valued at $30 billion.
Whatever the justification, the money did flow to poster-boy WeWork, where the then CEO , Adam Neumann, convinced investors they were buying into a “physical social network” replete with community managers at each of WeWork’s locations. And the flow of funds did not stop at WeWork as a slew of co-working, co-living and hospitality operator startups also benefitted from the euphoria of the shared economy.
By Christian Bernasconi, Managing Director, B&I Capital
Private equity funds have flocked to build data centres, causing potential capacity concerns, while cell towers are less affected by supply issues
The outbreak saw a further strengthening of REITs that were beneficiaries of rising data usage as more corporates outsourced data storage to cloud providers. As a result, data centres (DC) and cell towers, alongside logistics REITs, benefitting from secular growth, saw demand trends accelerate during the pandemic.
As a result of these secular trends and increased demand during the pandemic, valuations for DC have reached very high levels, and it is very likely capacity will rise as private equity, and others, rushed to raise capital to develop the facilities to meet demand.
Recently, new funds have been launched to develop greenfield sites into new DCs. However, not all DCs are created equal. REITs that own DCs span those that have “moat-and-operate” businesses, facilities that just lease racks, operators that provide simple core and shell and power to the tenant, hyperscale DC owners and edge DCs.
For our latest issue, B&I Capital Senior Analyst Matthew Schmidt explains China’s REIT structure ahead of its launch later this year. Amid Hong Kong’s unsettling outlook, we ask Timbercreek Investment Management’s Dr. Daniel Feldmann, who is based in the territory, to share his insights about the impact of China’s national security law. Admiral Investments’ Victor Yeung tells us how Covid-19 impacted property types differently. We also attempted to answer the question “Is officentricity over?“
Finally, B&I’s Managing Director Christian Bernasconi explains why J-REITs’ secondary offering process still needs improvement.
By Matthew Schmidt, Senior Analyst, B&I Capital Ltd.
The announced structure differs in many ways from established regimes in other countries, and all eyes will be on the first batch of C-REITs to be launched in the second half of this year.
China published the structure for a pilot REIT programme and its corresponding draft guidance on April 30, 2020.
In this new programme, C-REITs will be equity REITs managed by mutual funds. The structure will afford investors returns through both dividends and capital gains while providing greater trading liquidity than is currently available with the existing on-shore “pre-REIT” structures. C-REITs will be required to pay out 90% of core earnings to investors in the form of dividends.
China has come under fire from countries, including the UK, US and Japan, over its controversial national security laws for Hong Kong. Concerns are rife that the laws could jeopardise the city’s special autonomy and freedoms. The new law has contributed to worsening US-China tensions with President Trump threatening sanctions against Chinese financial institutions as well as officials who contributed to undermining Hong Kong. China has also said it plans to restrict visas for Americans whom it deemed might have gone too far on matters related to the territory.
REITAsiaPac talks to Dr. Daniel Feldmann, Director and Assistant Portfolio Manager, Global Listed Real Estate at Timbercreek Investment Management, which manages US$10 billion in assets, to get a grip on what is the current investment climate in Hong Kong amid these tensions and uncertainties.
REIT AsiaPac conducted a mini survey in the second quarter of this year in which we asked Asia-Pacific REIT fund managers and market participants for their thoughts on the sector’s fundamentals amid the on-going impact of the pandemic. Among the key findings were the fact that investors favour Australia and Japan with balance sheet health seen as a crucial factor for consideration.
Find out the respondents’ different perspectives.
In the second part of REIT AsiaPac’s mini survey on the REIT sector’s recovery from Covid-19, REIT fund managers and market participants shared their views on the potential for REITs to breach leverage limits and the issuance of secondary offerings intended to improve balance sheets. They also shared their different perspectives on the balance of power between landlords and tenants, rental rebates, and the future of real estate.
By Victor Yeung, Chief Investment Officer, Admiral Investments
Residential REITs claim three of the current top seven REITs on the GPR REIT 250 list. As of June, none of the top five REITs in the index is office or retail.
Global REIT prices have dropped by about 20% year-to-date. As a result, dividend yield across the board has now become more attractive. The dividend yield of the GPR Global REIT 250 index has widened from 4.0% on December 31, 2019, to 4.8% on June 30, 2020, while the GPR/APREA Investable REIT Index is trading at 4.7%, versus 4.1% at the end of 2019.
Morgan Stanley expects office rent in Asia to decline 10-15% over the next three years, but with big corporations embracing working from home set-ups, rental reductions may increase
In Tokyo’s Shibuya Ward, home to many IT firms who can easily implement teleworking, cancellation of lease contracts by tenants in large office buildings have ramped up since June, according to the August issue of the Nikkei Real Estate Market report. The vacancy rate in Shibuya Ward climbed 0.83 percentage points to 3.38% as at the end of June, the highest in the five central wards of Tokyo. In Singapore, a similar trend is emerging as a global skincare brand, among other companies, is also cutting the space it requires as it renegotiates its lease.
Mergers and acquisitions in the global tourism and leisure industry reportedly plunged 71.8% in the second quarter of this year, from the previous quarter, to $3.64 billion. The drop, compared with the last four-quarter average of $18.59 billion, was 80.4%.
The top country in terms of M&A transaction activity in Q2 2020 was the US with 35 deals, followed by the UK with 15 and China ten.
“Globally, we continue to see a limited appetite for those sectors hit hardest by the pandemic, namely retail and hotels,” JLL said in its most recent Global Capital Flows report.
By Christian Bernasconi, Managing Director, B&I Capital
In January 2019, we wrote an article titled “J-REITs Secondary Offerings Unfairly impact Issuers and Investors.” In the article, we argued that the lengthy offering periods for secondary offerings by J-REITs led to underperformance of the issuer, a higher cost of equity due to a discount and price erosion during the offering period which could impact the metrics of the transaction. We wrote that accelerated bookbuilds (ABB) would be a more efficient way for J-REITs to issue equity to fund acquisitions.
While we recognise that there are problems to include retail investors in overnight offerings, a solution, as we argued in the original article, would be to retain a portion for retail investor commensurate to the size of their holdings and to have either investors or an investment bank underwrite the portion in the case retail investors chose not to participate.
There is no assurance that EHT will be able to continue operating as a going concern, says CEO Salvatore Gregory Takoushian. Virtual AGM to be held on August 31.
Eagle Hospitality Trust (EHT), which is being investigated by the Monetary Authority of Singapore over governance and disclosure issues, posted a loss of US$38 million in the first-half of this year. The trust, which operates 18 hotels in the U.S., said in its earnings statement that “there is material uncertainty which may cast significant doubt on EHT’s ability to continue as a going concern.”
Asia Pacific REITs posted their worst performance ever in the first quarter of this year. Lockdowns and travel restrictions dealt a heavy blow to hotels and retail properties. ARA US Hospitality Trust, for instance, has shut about 28 of its 38 Hyatt-branded hotels in the U.S as occupancy fell below 40%.
For our first-quarter issue, we spoke to REIT investors and analysts regarding their thoughts on the outlook and expected dividend payments. We also interviewed Elite Commercial REIT about any potential impact in the UK because its core tenant is the country’s largest public service department.
As the global pandemic wrecked REITs’ income stream and brought previously lofty asset prices crashing, we ask the Royal Institution of Chartered Surveyors and KPMG about valuations and standards that have sparked disputes in the region.
Finally the world of work has changed and we ask a Hong Kong REIT expert the implications on rent. Separately, we followed up with REIT developments in the Philippines prior to the country’s lockdown.
Asia Pacific REITs posted their weakest performance on record in the first quarter of this year, but experts do not expect REITs to scrap dividends, with some saying the recent sell-off might be overdone.
Here’s what some asset managers and analysts say about distributions, rentals, government austerity measures and the outlook for the sector.
Asia Pacific REITs have come of age as an established asset class after close to two decades of history. During this period, management track records and certain market practices have come under scrutiny.
In recent years, we have seen minority investors contest management’s performance and particularly their decisions to acquire assets. These debates have often centered around the valuations at which REITs acquire assets and the basis on which these valuations are concluded.
Looking into the future, would technology in the form of algorithms and digital valuations replace the need for a valuer’s expertise?
We asked Chris Nicholl, Managing Director Southeast Asia, Australasia and Japan for the Royal Institution of Chartered Surveyors, to address some of these issues.
As REITs’ valuation come under scrutiny, we look into some of the recent cases involving Asia Pacific REITs which prompted such debates.
One of the most vocal in these debates has been PAG, which had contested Hong Kong-listed Spring REIT’s proposed acquisition of Huamao Place shopping mall in China. In Singapore, retail investors have led the charge in contesting valuations at Sabana REIT. More recently, Bonitas Research issued a short sell report on Australia’s Rural Farms Group on the basis Rural Farms was holding assets at inflated value.
By Charles Isaac, Founding Partner, B&I Capital
Another year has passed without a Philippine REIT being launched and since we wrote the article, “Are REITs Finally About To Take Off In The Philippines?”
This means it has now been 11 years since REIT legislation was passed, and all we can say today is that we are certainly closer than a year ago with some positive developments. However, don’t hold your breath. A run of adverse global and Philippine-specific events has clouded the outlook culminating in COVID-19 which has put everything on hold.
COVID-19 is forcing the world of work to move online. As homes become offices, questions are asked: is part of this shift permanent, and what is the repercussions on commercial offices?
Victor Yeung, the Chief Investment Officer of Admiral Investment, discusses how Hong Kong businesses have moved online and the implications for rents in suburban and city offices.
As REITs globally brace for further fallout caused by the COVID-19 pandemic, Elite Commercial REIT remains optimistic that it could weather the downturn.
REITAsiaPac spoke with the REIT Manager’s Chief Executive Officer Shaldine Wang, Chief Investment Officer Jonathan Edmunds, Chief Financial Officer Joel Cheah and Senior Manager of Investor Relations Leng Tong Yan.
By Stephen Williams, FRICS, Director, Deal Advisory, Valuation Services with KPMG Singapore
Valuation is a necessary part of investing in real estate. The opinion of a professional valuer is used to underpin the acquisition of an asset, as well as inform ongoing decision making, financial reporting and disposal. It is fair to say that a significant level of risk is placed on the shoulders of the valuer.
An Auditor’s perspective
Over the past few years, I have reviewed valuation reports for various purposes, both as a regulator and as an auditor, covering large and small practices across the Asia Pacific and beyond. I have often come across reports that exclude various pieces of critical information, which may include comparable evidence (including the analysis), or the rationale as to why and how the valuer has adopted the various inputs and reached their conclusion. In some cases, the interest being valued has been omitted, or information about the surrounding area has been insufficient. Both are key drivers of value.
In this issue, we speak to Star Asia about their unprecedented takeover of Sakura Sogo. The J-REIT has succeeded in its bid by using for the first time a rule that allows a unitholder having a minimum of 3% stake to call for a shareholder meeting.
It remains to be seen if the takeover, which was regarded as a test of the J-REIT framework, would lead to other comparable efforts to acquire under-performing J-REITs.
Hong Kong’s protests made headlines in the last three months. We sought Admiral Investment’s insights on the future of the territory, particularly what will happen after 2047.
We also asked B&I Capital to share its views on how ESG standards affect REITs’ bottom line.
Finally, we discussed mergers and acquisitions in the Australian and Singapore markets.
The successful outcome should encourage better corporate governance and could spark similar takeovers of underperforming J-REITs.
Star Asia Group has succeeded in its bid for Sakura Sogo by using for the first time a rule that allows a unitholder having a minimum of 3% stake for a minimum of six months to call for an extraordinary meeting and propose management changes.
For our interviews with Sakura Sogo and Star Asia before the August 30 meeting, please click here:
Sakura Sogo: Approach taken by Star Asia creates dangerous precedents for the J-REIT sector
For the timeline of events leading to this takeover, please click here:
By Victor Yeung, Chief Investment Officer, Admiral Investment
The territory, once known as the pearl of the orient, is fast losing its shine. Hong Kong REITs have fallen 16% since the protests started.
June 2019 will go down in history as an important month for Hong Kong. Protests that initially targeted a law regarding extradition have evolved into a general movement about the political future of Hong Kong. At the time of writing, the protests are entering their third month. Multiple activities have been organised for each weekend for up to a month in advance. Because of this turmoil, we have received numerous enquiries from investors about the investment sentiment in Hong Kong.
Retail REITs exposed to large shopping centres are trading below Net Asset Value.
The Australian REIT market has seen active merger and acquisition (M&A) activities in the last two years. While views are mixed on whether the trend will persist, the consensus is that retail assets have fallen out of favour.
“Currently, REITs are trading at significant premia to net tangible assets driven by the low interest rate environment and strong investor interest. Unless we see a reversal in that trend, it will make it difficult for mergers and acquisitions between REITs to stack up in the near term,” says Angelo Scasserra, Managing Director, Head of Real Estate at Credit Suisse.
Analysts expect increased consolidation to fuel Singapore-REITs’ next phase of growth.
Mergers and acquisitions are ways to lower the cost of capital and improve performance, but not all mergers are the same.
One issue relates to the cost of the manager, says Charlene-Jayne Chang, Head of Capital Markets & Investor Relations, ESR-REIT. The industrial asset-focused REIT merged with Viva Industrial Trust last year in a deal worth about S$936.75 million (US$674.93 million).
“Acquirers tend not to want to pay for the manager,” says Chang. However, in the case of a merger between two REITs that have a common manager or sponsor, the negotiations are typically more straightforward.
By Christian Bernasconi, Managing Director, B&I Capital
Today, every fund manager is confronted with the question: “How does your firm integrate environment, social and governance (ESG) standards into your company and your investment process?”
We conduct hundreds of one-on-one meetings with REITs in our universe. These meetings give us the ability to assess management in a way that third-party ESG rating firms cannot as they often rely on self-reporting from the companies that they assess.
Our assessments here at B&I make us believe that REITs with the best corporate governance will also voluntarily invest in their properties to reduce environmental impacts. They will also invest in their employees and will support their communities as management teams understand that sustainability will lead to strong performance. These ESG frameworks translate not only to reputational value but also to the company’s bottom line.
Star Asia Group’s bid for Sakura Sogo is seen as a legal test of Japan’s REIT framework. August 30 will be a key date for Sakura Sogo unitholders and regulators. We asked fund managers for their views on the controversial merger.
“Whatever the outcome, J-REITs that are facing challenges in achieving growth on their own and have low market assessments of the value of their property holdings could also become the subjects of takeover proposals,” says UBS’s Tokyo-based analyst Kazufumi Takeuchi.
REIT AsiaPac interviewed Peter Murphy, Head of Asia — Sakura Real Estate Funds Management Inc., about his views of Star Asia Group’s unsolicited takeover bid for Sakura Sogo REIT.
“We believe this is a loophole that has been taken advantage of by Lion Partners and Star Asia. It represents the abuse of minority unitholders rights to complete a hostile takeover. The reason why minority unitholders have these rights is certainly not to achieve the outcome set out by Star Asia.”
To follow the events, please click here
The rule allows a unitholder with a 3% holding to propose changes and call for an extraordinary meeting. A separate provision regards non-votes to count as “yes” votes.
On May 10, Star Asia Group launched a takeover bid for Sakura Sogo, utilising for the first time a provision in the J-REIT legislation that allows a unitholder that has at least a 3% holding for a minimum of six months to table a proposal and call for an extraordinary meeting.
In this issue, we focused on India with a sidebar on the Philippines. We interviewed Embassy REIT and asked them about the conditions that led to them becoming the first REIT in India, and how they see the future of real estate growth in one of the world’s fastest-growing economy. For REITs to thrive, conducive regulations are critical, and we sought APREA’s views about rules on tax and governance in India’s new REIT regime and the relative pros and cons of an India-focused REIT listing versus offshore. We also asked Singapore-listed Ascendas India Trust if they would consider moving their listing to India.
As the REIT structure continues to gain global investor favour, B&I Capital looks what has been holding back REIT development in the Philippines,. Other stories include the return of funds to Australian REITs and the impact of Japan’s potential consumption tax hike.
The 47.50 billion rupee ($690 million) initial public offering by the Embassy Office Parks REIT. India’s first REIT, was approximately 2.6 times oversubscribed on the last day of the offer on March 20, 2019. The REIT’s unit price has since risen over 10% from its debut price on the National Stock Exchange and the Bombay Stock Exchange.
A joint venture between India’s Embassy Group and Blackstone Group, the REIT owns offices and business parks that house multinational tenants such as JP Morgan, IBM, Wells Fargo, and Google.
REIT AsiaPac spoke to Mike Holland, CEO of the Manager to the Embassy Office Parks REIT, and asked him about the REIT’s leverage strategy, dividend payouts and potential growth.
Chief Executive Officer Sanjeev Dasgupta remains positive about growth in India as a-iTrust aims to expand its commercial space in the country by 60% in the next 3-4 years. However, a-iTrust, listed in Singapore in 2007, has no immediate plans to move its listing to India because the process will entail considerable risks and costs.
India’s first Infrastructure Investment Trusts (InViTs) was listed in 2017. While India’s REIT market has growth potential, it “still has to ride the wave of teaching people what REITs are,” says Sigrid Zialcita, APREA’s newly appointed CEO.
In this interview, she elaborates on the tax implications for investors and the relative pros and cons of an India-focused REIT listing in India versus offshore.
By Charles Isaac, Founding Partner, B&I Capital
REIT legislation was passed in the Philippines ten years ago. However, to-date, no REITs have been launched due to two major hurdles that developers have not been willing to accept. Firstly, a 12% property transfer tax, and secondly, a 67% required minimum public ownership (MPO).
There has been a flurry of activity in the last six months with most commentators expecting these hurdles to be finally cleared. The latest regulatory move was on March 22nd when the Philippine Stock Exchange issued a public consultation paper on proposed amendments to the REIT listing rules, suggesting there is ongoing momentum.
Japan looks set to go ahead with a controversial rise in consumption tax in October after its economy unexpectedly grew by an annualised 2.1% in the first quarter of 2019. Although speculation remains that Prime Minister Shinzo Abe could postpone the hike, which is aimed at reducing the national debt for a third time, as economic conditions deteriorate due to the U.S.-China trade war. The Japanese central bank will release the quarterly business confidence survey on July 1. The report, among other indicators, will shed light on market conditions, which will help the central bank decide if it should go ahead with the hike.
REITs’ performance decoupled with the underlying property sector in the fourth quarter of 2018, but have since bounced back.
The Australian office sector is a tale of two halves with Sydney and Melbourne seeing strong growth while in Perth, the vacancy rate recently peaked at 25%. Meanwhile, the retail and residential sectors have remained in the doldrums with industrial properties showing robust performance as rent climbed above historic highs. APN Property Group explains the return of funds to the REIT sector.
By Tan Kok Keong, Co-Founder, FundPlaces
Blockchain has come under scrutiny following recent security breaches at Bitcoin exchanges. However, its proponents would regard the incidents as a blip in the journey of a technology whose use would eventually become the norm. For instance, developments in tokenisation—the process of converting an asset into a token that can be transacted on a blockchain—have continued to gain pace.
A tokenized property would be to a REIT with much more flexibility and minimal fees for intermediaries. Tan Kok Keong, Co-Founder of FundPlaces, explains how to finance, build, and lease a hotel with three types of tokens.
As businesses continue to decentralise from Hong Kong’s CBD, REIT managers are re-branding and refurbishing their assets in the outskirts with a focus on environment and wellness to attract demand.
Sunlight REIT discusses their strategies as professional services companies, including banks and law firms, no longer see areas such as Hong Kong East as back-office locations. With improved transportation infrastructure, accessibility, lower rent, and advanced technology, the tenant profiles in the decentralised zones are increasingly aligned with those in Central Hong Kong. Meanwhile, co-working operators are adding to demand growth.
We went heavy on shareholder activism in our fourth-quarter 2018 issue. We interviewed PAG and Spring REIT about their recent takeover battle. While PAG’s bid did not succeed, the process put the spotlight on imperfections in the Asia Pacific REIT structure.
Among the issues raised were related-party transactions and links between sponsor and manager. In this issue, Japan’s Invincible also explained its rationale on dilutive-share offerings. B&I Capital provided us with an analysis of how J-REITs units fall on secondary offerings.
We also looked at Lippo Group’s troubles in Indonesia and asked Malaysian REITs how they have been coping in the current bearish environment.
On 26 September 2018, alternative investment management firm PAG launched a takeover to acquire all the units it doesn’t already own of Hong Kong-listed Spring REIT. PAG’s final offer was HK$5.30 for each unit of Spring REIT, a 76.7% premium to Spring REIT’s 24 September 2018 closing price. PAG’s offer was rejected and the company has also expressed concerns about Spring REIT’s performance and management.
To bring unique insights into this milestone in shareholder activism about the REIT structure in Asia Pacific, we spoke to PAG Real Estate Partner and Managing Director Broderick Storie. Please also see responses from Spring REIT below.
Following our interview with PAG, we spoke to Spring REIT Managing Director Kevin Leung to ask about his views of PAG’s concerns over Spring’s related third-party transactions and the company’s management and its recent share price performance.
“If you consider our performance relative to peers, we are trading at about a 40% discount to a NAV (Net Asset Value), in line with many other property investment companies in Hong Kong. This may not be satisfactory for some of our investors, and while we would like to narrow the gap, the emphasis has always been to improve the REIT’s cash flow,” says Leung.
Links between the manager of the REIT and its major shareholder (sponsor) spark management fee and related party-transaction debate.
While companies such as GLP J-REIT, Ichigo Hotel REIT, and Kenedix Retail REIT have focused on improving their Environmental, Social and Governance (ESG) standards, others have remained less prominent in their efforts in integrating these factors into their investment process.
“An example is a tendency for some J-REITs to issue dilutive equity to fund property acquisitions often under the influence of heavyhanded sponsors,” explains Rico Kanthatham, Managing Director and Portfolio Manager at Barings.
(Please see Invincible’s response about their dilutive offerings below.)
REITS’ Tendency to Issue Dilutive Equity for Acquisitions Hurts Shareholders.
Fund managers whom REIT AsiaPac Media spoke with say Invincible Investment Corporation, among others, has a track record of sponsor-driven dilutive issuances. These dilutive offerings have led to investors abandoning the J-REIT, causing the discount to NAV for the company to worsen. This, in turn, makes it more difficult for the REIT to fund future acquisitions.
One of the cheapest J-REITs, Invincible Investment Corporation’s shares trade at a 7.4% dividend yield – 350 basis points (bps) wider than the J-REITs’ average and 260 bps higher than the Hotel J-REIT average.
By Christian Bernasconi, Managing Director, B&I Capital
J-REIT secondary offerings often involve an unnecessarily lengthy process which negatively impacts both the issuer and existing investors.
In most markets, REITs can suspend their units for the day on which they decide to issue new units, and a book of demand is built overnight or even within a few hours. Bookbuilding is a process through which a company generates and records investor demand when raising capital to achieve the best price. Generally, the discounts are quite small, and the units resume trading the following day.
Given the issues raised about J-REITs’ corporate governance, we asked what should be done, and what has been the impact for those who have embarked on ESG initiatives. Below are the responses from analysts, J-REITs and fund managers:
“In most governance matters, JREITs have operated under soft rules rather than hard rules. Therefore, it is difficult for shareholders and external party to judge whether the REIT’s management is making any endeavours to avoid conflict of interests…”
Proceeds from Lippo Karawaci’s asset sales said to provide only temporary relief.
The recent bribery probe by the Indonesian anti-graft agency into Lippo Group Deputy Chairman James Riady involving a $21 billion Meikarta’s construction project, touted as the “Shenzhen of Indonesia,” has shaken investor confidence about the performance of the group’s related companies.
Notably, risk is seen in Singapore-listed Lippo Malls Indonesia Retail Trust (LMIRT) and First REIT because their sponsor – Indonesian-listed PT Lippo Karawaci, which owned companies in charge of Meikarta’s development, had also been downgraded several times by credit rating agencies as a result of stretched liquidity.
Longer-term, the establishment of the world’s first airport REIT will be game-changer for the industry.
Malaysian Real Estate Investment Trusts, or M-REITs, may see an increase in transaction volume in 2019 as some funds dispose of properties to de-leverage and improve cash flow while others seek acquisitions at a more attractive yield in an oversupplied commercial real estate market.
The top two performing M-REITs last year were Axis REIT and Pavilion REIT, whose total return gained 9.4% and 7.1% respectively. The top losers, measured by total return, were CapitaLand Malaysia Mall Trust (- 37.9%), Tower REIT (-18.1%) and AmFIRST REIT (-14.2%).
By Victor Yeung, Chief Investment Officer, Admiral Investment
“Hong Kong and Singapore faces pressures from a less open global trade landscape,” says Victor Yeung. However, Hong Kong Office REITs with exposure to non-CBD locations and Singapore Industrials are seen likely to withstanding any headwinds in the wider economy.
Admiral’s top country picks are Australia and Japan.
By Bernie Devine, Regional Director (Asia), Yardi Systems
Tokenisation is the most radical innovation in the real estate industry since the introduction of REITs in 1960. It is a way of using a Blockchain to represent ownership.
Tokenisation is maturing with some ventures succeeding in the most challenging aspect — compliance. But what are the hurdles preventing its full-scale adoption? Here, Bernie Devine compares the attributes of REITs, private equity and tokens.
Grant Kelley, the former CEO of Singapore’s City Developments Limited, joined Vicinity Centres in January 2018. Since then, the company has embarked on an ambitious three-pronged strategy focused on creating destination assets, expanding its wholesale funds’ platform by around A$1 billion and realising an estimated A$1 billion upside in value from mixed-use projects. So far, the company has sold more than A$2.5 billion of non-core assets, significantly reshaping its portfolio. With some A$27 billion in assets under management across approximately 70 shopping centres, Kelley discusses the company’s future, Amazon’s entry into Australia and the benefits of sustainability.
While industrial facilities are in demand, office, retail and hotels are in the doldrums.
Amid challenges in the Malaysian real estate market, REITs in the country are looking towards Prime Minister Mahathir Mohamad’s first budget since his return to power for supportive policy initiatives.
By Christian Bernasconi, Managing Director, B&I Capital
Abenomics has triggered share buybacks by J-REITS—a move welcomed by fund managers and shareholders. But what happens after the end of Quantitative Easing and are buybacks a good use of capital?
Japan’s REIT market has been a beneficiary of Abenomics. Besides a significant yield pick-up in an era of Quantitative Easing (QE), which pushed short-term interest rates into the negative, J-REIT equity has gained from Bank of Japan’s (BOJ) asset purchase programme. The BOJ buys 90 billion yen (US$809 million) of REIT units annually as part of its stimulus programme.
Asset management firms have cut down on brokerage services and are organising client meetings and roadshows using in-house investor relations teams.
Asia Pacific has seen a fall in investment research headcount, and the region’s REITs have reported reduced investor meetings since the revised Markets in Financial Instruments Directive, also known as MiFID II, came into effect on January 3 this year.
Chinese and U.S. firms operating in sectors subject to tariffs occupy about 20% of Grade A office space in mainland China. However, leasing remains unscathed.
The U.S.-China trade conflict has prompted some occupiers in mainland China’s industrial sector to consider shifting production to Southeast Asia. However, the impact on the local office market has stayed relatively benign so far.
By Paul Chen, Head of Asia for RealFoundations
In August, I helped run “Asia PropTech Innovathon (www.innovathon-asiaprop.tech),” a hackathon held in Hong Kong. Participants were expected to come up with technology-based solutions for a given problem within 24 hours. Teams were vying for cash prizes of HK$20,000 (US$2,500), HK$15,000, and HK$5,000, along with a multitude of mentorship opportunities.
Participants were grouped into 15 teams, and they were asked to tackle three challenges:
1) Address the land and housing supply shortage in Hong Kong.
2) Optimise retail operations to enhance convenience and accessibility.
3) Improve residential operations to enhance the end-to-end customer experience.
By Victor Yeung, Chief Investment Officer, Admiral Investment
Australian and Japanese REITs are adopting solar panels as core to their investment plans.
On October 6, 2018, the International Panel on Climate Change (IPCC) released a special report in support of a global response to keep global warming to less than 1.5 degrees Celsius above pre-industrial levels. Energy production and use is the largest source of greenhouse-gas emissions, and our industry is a significant energy user. According to the U.S. Environmental Protection Agency (EPA), the sector is responsible for approximately 50% of greenhouse gas emissions and about 75% of electricity consumption.
Using Hong Kong as an example, according to the “Hong Kong Energy End-Use Data 2017” report published by the Government’s Electrical and Mechanical Services Department, residential and commercial activities contribute 21% and 43% of overall energy usage respectively.