The latest APREA research aims to promote greater understanding of Asian REITs among Asian pension funds, Peter Mitchell explains
The Asia Pacific Real Estate Association (APREA) commissioned Professor Graeme Newell of the University of Western Sydney to produce a report on the performance of both listed and non-listed real estate in the area. ‘The Benefits of an Allocation to Real Estate for Institutional Investors' follows an earlier report by Newell, which looked at Asian pension fund allocations to the asset class (see page 20). The two reports aim to create greater confidence on the part of Asian pension funds and institutional investors to invest in the sector.
The latest report, covering listed and unlisted real estate, analyses the performance of Asian real estate investment trusts (REITs) against equities, both before and since the global financial crisis of 2008-09.
Since 2001, Asia REITs have provided listed real estate investment exposure and now account for $100bn (€760m) in market capitalisation, representing 12% of the global REIT markets. There are REIT markets in seven Asian countries, including Japan, Singapore, Malaysia and Hong Kong, with significant, high-quality real estate portfolios. Asian REITs offer attractive investment features including liquidity and high yields, as well as unique features such as Islamic REITs in Malaysia. They also include investment-grade real estate in China and India, which currently do not have REIT markets.
The performance of each of the seven markets was analysed by Newell for the period since each was established until June 2011, as well as being assessed against its respective stock market and bond market. The average annual return, annual risk and risk-adjusted returns (via Sharpe ratio) were assessed, as well as the portfolio diversification benefits of REITs with the respective asset classes of stocks and bonds (via correlations).
Several Asian REIT markets had lower risk than their respective stock markets, including developed markets (Hong Kong) and emerging markets (Malaysia, Taiwan). This reinforces the defensive characteristics of REITs, with their strong focus on yield. Japanese REIT risk was comparable to its stock market (20% versus 18%). Singapore REIT risk was higher than its stock market (26% versus 20%), but this was not considered excessive. Overall, Asian REITs risk levels were generally below or comparable to their stock markets.
For risk-adjusted returns, Japan and Hong Kong REIT markets showed superior risk-adjusted performance to their stock markets, while Singapore REITs' risk-adjusted performance was comparable to its stock market performance. Among the emerging markets, Taiwan delivered superior risk-adjusted performance, with Malaysia, Thailand and South Korea showing lesser risk-adjusted performance compared with their respective stock markets.
Overall, the developed Asian REIT markets have shown the best risk-adjusted performance compared with their respective stock markets. Taiwan REITs also delivered strong risk-adjusted returns. In Malaysia, there were strong risk-adjusted returns but even stronger stock market risk-adjusted returns were recorded.
Asian REITs provide some degree of diversification benefits with stocks. Among the developed markets, this benefit was most evident with Hong Kong and Japan REITs, while there was lesser benefit from Singapore REITs. There were also diversification benefits from REITs in the emerging markets, particularly South Korea and Taiwan. With their respective bond markets, each Asian REIT market showed strong diversification benefits - for example, Japan (-0.12), Singapore (-0.04), Hong Kong (-0.11). These benefits with bonds were even more evident in the emerging markets such as Malaysia and Taiwan.
Overall, this performance analysis highlights the risk, risk-adjusted performance and
portfolio diversification benefits of the Asian REIT markets. Given that this analysis included the excessive stock-market volatility of the global financial crisis, it highlights the superior risk-adjusted performance by the developed market Asian REITs and some of the emerging market Asian REITs, as well as the important diversification benefits of Asian REITs with stocks and bonds.
In order to present an analysis of the performance of Asian REITs since the crisis, the report looks at risk, risk-adjusted returns and portfolio diversification benefits since June 2009. Major changes in performance are clearly evident, most being in favour of Asian REITs. Risk levels were significantly reduced, being below their respective stock-market risk (ex South Korea), and often significantly below (Hong Kong, Taiwan and Thailand).
Coupled with enhanced returns for Asian REITs post-crisis (set out in detail in the report), this amounts to superior risk-adjusted performance compared with their respective stock markets (except South Korea). In Japan, Hong Kong, Singapore, Taiwan and Thailand in particular, this superior performance was clearly evident. This presents a very positive perspective for the Asian REIT markets post-crisis.
Similarly, in that period, diversification benefits are evident with stocks in most cases, especially in the emerging market REITs, with the developed markets of Singapore and Japan showing lesser diversification benefits. Strong benefits were seen for Asian REITs with bonds in each case; in the range of -0.37 (Hong Kong) to 0.04 (Malaysia). This further adds to the performance of Asian REITs in the post-crisis environment.
Since the crisis, in most cases Asian REITs have experienced reduced risk levels of 50% or more. This reduction in risk was more significant than the reduction in risk for their respective stock markets, in most cases. This paints a positive performance picture post-crisis.
The report shows that diversification benefits are clearly evident across all Asian REIT markets, with an average correlation of 0.52. This highlights the added-value benefits of a pan-Asia REIT strategy versus a single-country REIT strategy, with the pan-Asia REIT portfolio risk being 21.2%. These benefits have been further enhanced in every Asian REIT market in the post-crisis period, with the average correlation reducing to 0.28 and the portfolio risk level reducing to 13.2%.
To summarise, the report presents a comparison around the following performance issues:
• Have Asian REITs delivered superior returns?
• Have Asian REITs experienced lower risk?
• Have Asian REITs delivered superior risk-adjusted returns?
• Have Asian REITs enhanced portfolio diversification benefits with stocks markets?
The report concludes that the performance of developed market REITs has shown added value post-crisis. While the emerging market REITs have generally shown lower returns than their stock markets, the lower risk levels for these REITs have resulted in superior risk-adjusted returns in all cases (ex South Korea). Importantly, all REIT markets showed enhanced diversification benefits with stocks, except Malaysia where a marginal reduction in diversification benefits was evident.
Overall, the composite performance analysis profile for Asian REITs is very positive. Along with the attractive characteristics of REITs (liquidity and yield), this highlights the potential benefits of Asian REITs that an institutional investor can expect in its real estate portfolio.
The Asian REIT market has recovered strongly from the global financial crisis, with strong recent added-value performance, particularly in comparison with local stock markets and the lesser performance of the mature REIT markets in the US, Australia and UK.
This study of Asian REIT performance is a significant addition to the body of knowledge on Asian real estate performance as a whole, and with the Asian REIT industry now a decade old, our capacity to reliably analyse performance benefits will only increase and add to the attractiveness of this asset class.
Peter Mitchell is CEO at the Asia Pacific Real Estate Association