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.
As the protests in Hong Kong escalate with no end in sight, we asked Victor Yeung, Chief Investment Officer, Admiral Investment, about the implications for the real estate market and the longer term future of the territory.
“In 2047, many of the readers of this magazine and I will be retired. But the 13-year-old boy who bought the construction helmet will only be 40 years old, and he will be in his professional prime then. He is, on top of the immediate triggers, trying to seek an exact clarification on the arrangements after 2047.”
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.”
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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.