SIGNIFICANT ROLE OF THE GROWING SINGAPORE REIT MARKET

Within a year, the Singapore property scene has changed with the focus, shifting from the typical and traditional capital appreciation paradigm to one that is yield based and taps into the capital market for its funding. Pioneered by CapitaLand by its launch of CapitaMall Trust (CMT), the real estate investment trust (REIT) is now an important feature not only in the property market but also as the new asset class for investors. The three REITs in the market are CMT, raising $1.1 billion in July 2002; A-REIT by Ascendas, raising $573 million in November 2002; and Fortune REIT, by Cheung Kong Holdings raising $500 million (based on five Hong Kong retail mall properties and denominated in HK$) in June 2003.

Reuters News Agency reported recently that governments in Asia are keen to revive the property markets and spur jobcreating construction projects via REITs. In Japan, since 2000, there have been seven REITs while there have been three each in South Korea and Singapore. This year, Hong Kong and Taiwan changed laws to create a REIT market in their respective countries. The upshot is that the Asian real estate are now following the US, UK, Europe and Australia counterparts where there will be greater differentiation between the developer, the investor as well as the property manager. In this trend, like in the West, public real estate capital markets in Asia will grow. There will be a shift from the over-focus on capital growth and appreciation to a focus on yield.

GREATER CAPITAL MARKET FINANCING

From the financing perspectives, real estate financing will now see a shift from banks to capital markets - as has happened in the US. The capital market investor demands performance based on yields and looks upon real estate as an asset class that has to deliver acceptable returns consistently. As such, capital markets expect real estate companies to be professionally managed, transparent and to have strong corporate governance. With the shift towards capital markets, real estate securitisation will become important vehicles for investment in Asian real estate . Real estate securitisation can in fact be an effective solution to the current financial woes of the Asian real estate industry. It paves the way for capital markets to fund real estate, and provide liquid and efficient instruments for investors to invest in real estate. For the real estate firms, securitisation allows them to diversify their funding sources, lower financing costs as well as take the risks off balance sheets. This is important as real estate projects have now become larger. Securitisation also allows real estate firms to tap international investors, and this is particularly important for companies in developing economies or small markets. In addition, securitisation provides a vehicle for the many Asian firms that own non-core real estate assets to divest of these assets.

AN IMPORTANT ASSET CLASS FOR INVESTORS

With REIT now an accepted asset class in Singapore and with more companies contemplating going in that direction, it will be appropriate to recapitulate its attributes: Less volatile than equities - REIT provides an income stream with low volatility because of the contractual nature of rental contracts; Able to diversify risks - due to its low correlation with stocks and bonds; and Has favourable total returns, between equities and bonds.

There is other supporting evidence that it will takeoff in Asia. There is a demand for Asian real estate backed securities that is driven by the high saving rates in Asian countries and also the lack of suitable investment options. It is an excellent instrument for the pension fund category. With an ageing population in Singapore and the more developed Asian economies, there is increasing demand for higher-yield long-term investment instruments by both individuals and institutional investors. REIT's steady income stream matches the drawdown profile of an ageing population. International investors are also under-represented in Asian real estate and will be keen to invest if the yields are acceptable.

Moreover, the regulators have been looking favourably at this investment instrument. Monetary Authority of Singapore (MAS) has drawn up its guidelines along the practices of the Australian Listed Property Trust model. There are other Western practices to look at. The National Association of Real Estate investment Trusts (NAREIT) in the US and the Property Council of Australia, for example, categorise equity REIT by property sector and therefore sector specific REITs are important to provide better diversified portfolios. With CMT a pure play retail fund, AREIT in industrial properties and Fortune REIT being cross border, Hong Kong retail properties, the Singapore equities market is cut out to have more diversified sector specific REITs, going forward.

The article is contributed by the REDAS Research & Statistics Committee. Slides are by courtesy of Ascendas-MGM Funds Management Limited and CapitaLand Limited.

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