News: Investors demand more from Asia's property trusts

(RTR 27/06/2006) Singapore - After thriving for a couple of years, Asia's young property trust markets are wobbling, with investors worried by financial trickery, expensive building valuations and murky acquisitions.

In a wider stock market downturn, real estate investment trusts (REITs) are shelving IPOs planned in Hong Kong, Singapore and Japan at a time when the markets could do with high-quality listings to bolster confidence.

Many analysts say this is a time to buy, because of cheap valuations and low volatility of REITs in a rocky equity market.

Bankers insist there is a long-term future for REITs -- the market could grow five-fold to around $150 billion over the next five years -- because investors need a half-way house between stocks and bonds. By paying rent from their buildings as dividends REITs give steady income, while a flourishing property market can help deliver capital gains.

But last month's Hong Kong share offering by Champion REIT has left a bad taste, only seven months after a frenzy over the city's first property trust, Link REIT.

Investors were put off by financial engineering that allowed landlord Great Eagle Holdings Ltd. to effectively spin off Champion at a price reflecting projected higher rents in a couple of years time, rather than current levels.

George Pavey, head of equity capital markets at HSBC in Hong Kong, said the city's REIT market can revive if landlords do not insist on top-dollar prices.

Property firms should be happy that by retaining a stake in REITs they can keep control of their buildings and collect management fees, while raising capital for expansion plans in China, he said.

"The perception among investors, rightly or wrongly, is that if developers are prepared to part with assets -- there must be something I don't know," Pavey said.

"What developers need to do is strike a balance: Give money so people make money, and think more strategically."

SHELVED LAUNCHES

For now, Hong Kong developers are pulling their REITs rather than cutting prices, with Henderson Land Development Co. Ltd. and Sun Hung Kai Properties Ltd. getting cold feet.

But around a dozen trusts are in the inception stage, said Pavey, who believes Hong Kong REITs will now be aimed at institutional investors rather than individuals.

The more established Japanese REIT market was also shaken last week when regulators called for disciplinary action against the managers of Orix J-REIT and its parent company.

The Securities and Exchange Surveillance Commission (SESC) said the trust had not conducted proper due diligence before acquiring properties from its parent, and had not held as many board meetings as it said it had.

Many analysts believe the SESC will now examine other REITs, but say investors have over-reacted, because earnings will not be hit and more scrutiny will improve the quality of acquisitions.

Orix J-REIT has fallen 13 percent since last Monday's SESC announcement while the Japanese REIT index is down 1 percent, having recovered from a 3 percent one-day slide. Ecology Reit Corp. has since postponed an IPO set for next month.

"There is a lot of conflict of interest regarding companies which sell properties into their real estate investment trusts and people out there were quite nervous that Orix may be the tip of the iceberg," said Michael Coates, director of equity sales at KBC Financial Products in Tokyo.

"But really, real estate in Japan, for me, should be leading the market higher so just the concern there is holding us back."

Japanese REITs offer investors dividends of 180 basis points over 10-year bonds, compared with 300-350 bps for Singapore REITs. After a 23 percent share price slide since its debut, Hong Kong's Champion REIT trades at 220 bps above bonds.

DEJA VU

Singapore is experiencing the least of Asia's REIT problems, with the recent slide in equity markets to blame for the postponement of a planned IPO by Cambridge REIT, which owns industrial buildings.

Fraser & Neave and City Developments are still pushing ahead with REIT listings while CapitaLand Ltd. wants to offer Chinese shopping malls to the Singapore public this year.

Analysts point to Singapore's teething pains in 2002 as evidence that Hong Kong's REIT market can still blossom. Then, CapitaLand had to return to the market with a lower price, and higher yield, for shopping centres it spun off into CapitaMall Trust after failing with its first attempt at an IPO.

Since then, thanks to tax incentives and strong income growth by REITs, the market has caught on with Singapore investors.

"What we need in Hong Kong and Japan are very good quality assets with good operating strategies, then you'll sell REITs," said Craig Parker, director of corporate ratings at Standard and Poor's in Melbourne.