Real Estate Investment Trusts are normally "widow and orphan" stocks. They pay out the majority of their profits in dividends, have restrictions on how much leverage and development risk they can take on and are the ultimate examples of "rent-seeking behavior."
In Asia, we are seeing these value stocks behave a lot like growth shares, which is quite a surprise. Chalk it up to the low yield environment. Investors are chasing the stocks for their high dividend yields. The prices of the buildings in their underlying property portfolios, and therefore the net asset values of the trusts, are buoyed by the high levels of liquidity in the financial system that persist in this era of quantitative easing.
So REIT shares have shown surprising strength after central banks shifted mid-year to reverse on their plans to withdraw stimulus packages. Although the REITs would be at risk should interest rates ever, finally, start to rise, they are defensive plays if growth continues to disappoint.
Investors in pan-Asian REIT fund products are grinning again in 2019, after a very strong 2017 and a flat 2018. Last year was a relative disappointment because it appeared interest rates were beginning a coordinated rise. With Asian central banks now more than matching cuts by the U.S. Federal Reserve, REITs are back with a vengeance.
Holders of an ETF with a mouthful of a name have been richly rewarded. Asian REITs have advanced 14.6% through Friday, as judged by the performance of the Singapore-listed NikkoAM-Straits Trading Asia ex Japan REIT ETF SI:NIKK. That's with, as a kicker, a 3.7% dividend yield that may have been the original attraction, for an 18.3% total gain.
The NikkoAM ETF became the first Asia-specific REIT index fund in the world when it listed in early 2017. The fund caps any single constituent at 10%, but still ends up with a very heavy concentration (58%) in Singapore REITs, which account for nine of the 10 largest holdings. Hong Kong (21%) and China (12%) make up the bulk of the rest.
REITs in Japan, or J-REITs, have also performed well, with the Tokyo Stock Exchange REIT index up 22.8% for the first nine months of 2019. That brings J-REITs, which also average a yield of 3.8%, to their highest share prices since the 2007 crisis.
The Tokyo-listed iShares Core Japan REIT ETF T:1476 is up 23.5% to date this year, its slightly higher performance than the index offset by a slightly lower yield of 2.9%.
The J-REIT market continues to receive support from the Bank of Japan. The central bank started buying J-REIT shares in 2010 as part of its stimulus plan. The BOJ currently pledges to buy as much as 90 billion yen (US$840 million) worth of J-REIT stock per year, depending on market conditions. However, this persistent buying has left the BOJ holding more than 5% of a dozen J-REITs.
The worry is that the central bank is skewing the property market in its efforts to spur inflation. For 2018, the REIT purchase plan only amounted to 40% of the potential total. Concerns over asset inflation appear to be encouraging the BOJ to push interest rates further into negative territory rather than buy more REITs and ETFs.
U.S. investors do not at this point have an Asia-specific REIT-focused ETF. The closest they can find is the iShares Global REIT ETF (REET) , which is also notching up a nifty 23.1% gain in 2019. But that remains largely a U.S.-focused product, accounting for 74% of exposure, with only 14% devoted to Asia and another 10% to Europe.
Asia-focused REITs should be attractive for investors looking for diversification in Asia, because they are far more stable than the shares of Asian property developers.
U.S. investors can access U.S. listings of some Asian REITs themselves, although this brings stock-specific risk. The largest REIT in Asia, the Link REIT (LKREF) , is available to U.S. investors.
The Link REIT takes some guts to invest in, since it is Hong Kong-specific, and mainly focused on retail, the pariah of the property industry right now. Its chief operating officer this week said he will step down after 18 months as COO and nine years at the REIT, although that appears to be a personal choice.
The property trust spun out of a government entity, the Hong Kong Housing Authority. Its portfolio of public-housing, shopping malls and parking spaces doesn't exactly set the pulse racing, but it has been well-run to extract value out of the holdings. It has improved a lot of the malls, which sell consumer staples, and therefore raised the rents. What's more, it is 100% held by private and institutional investors.
Other Hong Kong REITs tend to remain controlled by the family that runs the developer sponsoring the REIT. Those families normally use the REIT as a means of disposal for assets they no longer want to hold; they might paint up the portfolio with one attractive signature building, with the rest of the assets lacking quality.
U.S. investors also have direct access to some other large Asian REITs, such as Singapore-based Ascendas REIT (ACDSF) . Its portfolio has 100 properties in Singapore, another 30 in Australia and three in China. Fitting the pattern for other Asian REITs, it has advanced 25.1% this year.
Investors looking for logistics and industrial exposure in Asia, currently the hottest property sector, can look to the Mapletree Industrial Trust (MAPIF) . It may be the most-attractive of the U.S. listings, given its sector focus, and is up 28.4% in 2019 and boasting a 5.0% dividend yield.
