Investing in cross-border REITs may prove advantageous in the face of divergent growth patterns in property markets worldwide
The USA leads the global REIT industry and has been the most adventurous in terms of the assets the REITs there offer.
Equity REITs constitute the bulk of today’s US REIT market. Stock exchange-listed Equity REITs account for 70% of all US-listed REIT assets, and 90% of the approximately USD700 billion equity market capitalisation of the listed REIT marketplace is represented by Equity REITs. There are approximately 150 listed Equity REITs, almost all of which are traded on the New York Stock Exchange.
Listed Equity REITs own more than USD1 trillion of real estate assets in the US, including more than 40,000 properties in all 50 states and the District of Columbia. The assets of Equity REITs account for an estimated 15% of total US commercial real estate assets.
The holdings of these REITs take the form of properties including apartments, shopping centres, warehouses, hotels, storage facilities, hospitals and clinics, senior living facilities, offices, data centres, telecommunications towers and timberlands.
In the US, the diversity is quite astounding – under Economic Assets, you have Oil Rigs, Terminal facilities, Telco Towers, Airports, Gas/ Electrical Transmission lines, Car Parks, Self- Storage, Data Centres, Solar/Wind Farms, Railways and even Bill Boards!
The ones we are familiar with are Industrial/Logistics facilities, Hotels, Offices, Theme Parks, Housing and Shopping Malls.
Among those categorised under Social asset classes are Prisons, Educational facilities/Colleges, Social Housing, Aged Care, Childcare, Student Housing, Seniors Housing and Healthcare.
The ‘right REIT’
Before we dive in to these newer asset classes, we must realize that not all real estate is created equal. Some REITs with these exotic assets classes may not be able to produce the strong capital gains, dividends and share price growth that come from the more traditional REIT sectors like Shopping Malls, Offices and Industrial facilities. These remain popular with mainstream investors and are directly linked to the performance of an economy.
We must also be wary of those REITs with hugely diversified portfolios as the Manager may not have the requisite skills to understand the different sectors sufficiently to capitalize on the real estate contained in the REIT.
My view is that REITs have been a conservative investment and should remain so. In determining what we should invest in, may I suggest that you treat REIT as a long-term investment as in the words of Warren Buffet:
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”
In Asia, Singapore’s REIT landscape is pretty interesting. There you can find REITs that have assets from Germany, China, Japan, Australia and Hong Kong, to name a few. These REITs still invest in the more traditional asset classes such as Industrial/Logistics facilities, Hotels, Offices, Housing and Shopping Malls.
Some listed SREITs (Singapore REITs) have also decided to diversify their Singapore-based portfolios by adding assets from other countries in order to boost the size of their fund and earnings. Others are pure foreign portfolios that have decided to list in Singapore.
These REITs do provide an opportunity for a seasoned REIT investor to take positions in the assets of a certain country they feel could have an upside in the wake of a real estate boom there.
For example, we can see interest in investing in emerging markets like Myanmar and Cambodia but as an individual investor, one cannot get easy access to properties in such markets. On the other hand, if a REIT is taking a position in these countries and looks to gain from a real estate boom there, such REITs may be a candidate for investment as it de-risks an individual investing directly in such a jurisdiction.
The advantage of investing in this type of REITs – called Cross Border REITs – is that the REIT Managers have optimised the tax structure of their portfolios to maximise returns to the fund – something the individual investor could not possibly achieve.
Further, the investment will be in Singapore Dollars and the dividend income paid is denominated in Singapore dollars as well despite the fact that the REIT is getting their returns in a foreign currency and has to take the risk of currency volatility. There is subsequently no need for an investor to hedge their returns.
Another advantage of an SREIT investment is that there is no tax on dividend income if you are an individual. Additionally, for Malaysians, you may bring it home to Malaysia tax-free.
It gets more complicated when the investor decides to move his or her investment to REITs in the UK, Australia, Japan or the US. If that is a strategy, then there will be an increase in risk as we need to be able to manage any currency risks and tax structures that may not be as accommodating as in Malaysia or Singapore.