Opportunities for investors in Asian REITs amid rebound

Asian real estate investment trusts (REITs) have bounced back strongly in the first half of 2009, according to a recent analyst report by property consultancy CBRE. Their total market capitalisation rose 14.3 per cent for the period.

Analysts said on Thursday this performance was driven by improving credit conditions, government support for re-financing – especially for Japan REITs (J-REITs) – and successful rights issues as recently seen for Singapore REITs (S-REITs).

Other positive signs include the fact that many large-cap Asian REITs have managed to grow their rental income recently. In Singapore, the latest financial results of several REITs have performed up to or beyond analysts’ expectations.

Frankie Lee, head of property equities, Asia, Henderson Global Investors, said: “REITs have definitely rebounded very strongly, coming out of the issues of refinancing and also the cyclical downturn in the fiscal market. I think going into the second half, there’s still potential upside because some of the REITs are actually quite financially strong now, given some of the recapitalisation that they have done.

“REITs in Japan and also in Australia… can actually outperform further ahead because right now, the valuation is still very favourable. On the other hand, the asset markets have not really recovered as strongly as in other parts of Asia.”

Experts believe that one of the main challenges that will persist for most REITs will be to reduce their financial leverage. CBRE said this is especially so for those which have seen sharp drops in value for their assets, which may lead to potential breach in loan-to-value ratio covenants.

Another challenge is in growing distributions amid the current trend of falling rents. CBRE noted, for instance, that more than three quarters of J-REITs expect to see a drop in distribution dividends for the upcoming reporting period.

While the downturn has hurt many REITs in the region, market watchers said it has also helped investors to filter out the better buys.

Roger Tan, vice president, SIAS Research, said: “In good times, all REITs can raise debts, but it’s the bad time that determines whether the REITs are good or bad. In bad times, only the good REITs are able to repay or refinance their debts.”

Other criteria to consider include the potential of the REIT’s underlying assets and the track record of the REIT manager.

Most experts expect to see further recovery of the Asian REIT market next year, in line with a wider global economic recovery.

But they expect it to be a slow journey, with acquisitions and initial public offering activities unlikely to recover to pre-downturn levels in the near term.

Source : Channel NewsAsia – 27 Aug 2009

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