In China, Indonesia, the Philippines and Pakistan,
REITs are no longer a distant prospect thanks to the help of APREA. Peter Mitchell reports

The real estate investment trust (REIT) markets in Asia (ex-Australia) have been dominated by Japan and Singapore (and to a lesser extent Hong Kong) since the launch of the first J-REIT in 2001.

Market capitalisation of the sector is now approaching US$90bn (€63bn). Japan accounts for about 67% of this and Singapore 19%. We can expect to see Singapore's share of the pie increasing in the near term.

There continue to be many exciting and significant developments in both the more mature and the nascent Asian markets.

While we may not see too many more J-REITs in the near term (there are currently 42), there is talk of consolidation activity, and many J-REITs are seeking more foreign investors on their registers. Most significant is the emergence of Japanese sponsored REITs offshore. At the time of going to press, two are about to list on the SGX and more are on the way in Singapore. There are various reasons for this, including a desire of some to use Singapore as a platform for regional fund management business (replicating what a number of Australian groups have done). Why go offshore to do this? At the moment J-REITs cannot invest offshore and, even if they could, the extent of regulation, tax and fee levels make it difficult to build property fund management operations in Japan.

Singapore is not only attracting Japanese sponsors and Japanese asset REITs. There are currently REITs consisting of Hong Kong, Chinese and Indonesian properties. In the pipeline are Indian asset REITs and more from China and Indonesia. There may also be a Vietnamese asset REIT in 2008. In addition, there will be more multi-jurisdictional REITs listed in Singapore. There are currently 17 REITs in Singapore. With this interest from Japan, China and India, the number could exceed 30 by the end of next year.

Hong Kong has the potential to develop as a regional cross-border REIT centre as Singapore has and thereby attract more capital into the region. To date it has not done so but APREA is working at changing this.

One of the most significant things happening in Asia at the moment is the likely emergence of new REIT markets and the likelihood of improvement in some of the existing smaller ones. New REIT markets are likely in five countries and three of the smaller markets are in various stages of reform which may lead to significant growth.
One reason why the big REIT markets, such as Japan and Singapore, work well is that they are based on solid regulatory foundations. Conversely, one reason why markets in other countries that have REIT laws have not flourished is because of flaws in regulation.

Tax and foreign ownership restrictions have hindered Malaysia's growth but over the last few months significant strides have been made to open up the sector and make it more attractive to foreign investors. For example, the withholding tax rate has been reduced and it is now possible for a foreigner to hold a majority stake (70%) in a fund management company.

The REIT (or property fund) law in Thailand is essentially something that has been grafted on to existing mutual fund laws, some of which are not appropriate to REIT structures. For example, borrowing is not permitted. There is now increasing awareness that things need to change and a push for reform is developing at both industry and government levels. APREA conducted an industry round table in Bangkok in September to assist in this process, and an industry task force has been established to drive reform forward.

South Korea's regulations provide for a variety of structures - CR-REITs (corporate recovery REITs), K-REITs (conventional REITs) and three other securitisaton-type structures. K-REITs have not taken off (there are none) but plans for reform are under way.

There are five countries where REIT laws are likely to be introduced:

China. A number of industry groups have been involved in their own REIT programmes and, in one case, the development of a model REIT. APREA has been involved in this process. Where all this is heading is not clear. However, as a quite separate development it has recently been announced that Shanghai might introduce its own REIT law in the next few months; India. An outline real estate mutual fund law was prepared a couple of years ago. However, despite periodic predictions that the detail of the law will be fleshed out and enacted, there is currently no sign of when this law will become operative. Like the Chinese authorities, the Indians have been reluctant to promote REITs because they see them, as they see property developers, as adding fuel to already overheated real estate markets. Efforts to convince the authorities that REITs actually can have the reverse effect and act as price stabilisers seem to be taking effect; Philippines. A REIT bill was filed with both the Senate and Congress in July 2007. APREA has assisted the authorities in the development of this bill. Enactment of the bill is uncertain, but could be next year. This is coming at a time of buoyancy in the Philippines real estate market; Pakistan. Draft REIT regulations were prepared for public comment in July. Again, APREA was involved in the development of these regulations and liaised with the Securities and Exchange Commission. It is likely that the regulations will become operative next year; Indonesia. A draft law has been prepared and APREA is currently in consultation with the authorities on a policy level. The Indonesian authorities are confident that the law will be enacted early next year.

For the foreseeable future we can expect Japan and Singapore (with perhaps Hong Kong) to dominate the Asian REIT scene. However, Asia remains at the start of the REIT journey with only around 5% of investment grade real estate around the region held in REIT type structures. With the evolution of other REIT markets, many countries in the region have the potential to benefit and share in an ever-growing pie.

Peter Mitchell is CEO of the Asian Public Real Estate Association

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