The modern REIT era has delivered remarkable growth, with equity market capitalization of listed REITs globally jumping from about $10 billion in 1990 to more than $2.5 trillion today. Yet that current market size could be just the tip of the iceberg as the REIT model continues to make inroads around the world.
The global REIT regime currently spans some 865 listed REITs operating in 41 countries and regions. Much of the recent REIT expansion has been concentrated in the Asia Pacific region, and new REIT legislation approved in China in 2021 could propel growth over the next decade.
“China is an enormous market from an overall commercial real estate perspective, and there is an awful lot of growth potential there to the extent that the government wants it to happen. And that’s probably the gating factor,” says Greg Kuhl, portfolio manager, global property equities at Janus Henderson Investors.
The Chinese government is using REITs to drive growth in strategic sectors. Its initial REIT legislation was limited in scope to include primarily infrastructure, ports, logistics, and data centers. The country’s first batch of pilot REITs debuted in June 2021, and the government modified REIT rules at the end of last year to also include residential.
“We would expect, over time, for the Chinese REIT regime to include more of the traditional real estate property types, but this is certainly an important first step in terms of China embracing the REIT structure,” says Brian Jones, portfolio manager at Neuberger Berman.
There are already many publicly traded real estate companies in China that are either listed on the Hong Kong Stock Exchange or the Shanghai Stock Exchange. The Chinese government is trying to encourage some of those listed companies to either sponsor REITs or potentially convert to REITs over time, as well as encouraging private owners to embrace the REIT structure, Jones notes.
India also announced changes to its REIT legislation in 2019 that has made the REIT structure more attractive to real estate owners in terms of listing their assets and taking advantage of that legislation.
The significance of these two countries embracing the REIT structure is that they have very large individual investor pools. “As REITs become more understood and appreciated by investors in China and India, there is potential for that interest in REITs and publicly listed real estate to flow through into other real estate markets and begin to influence flows into the REIT sector on a global basis,” Jones says.
Asia Pacific Accelerates
Although North America represents the majority of REIT market capitalization, there is growing momentum across Asia Pacific. According to Nareit data, North America accounts for 57% of global market capitalization, followed by Asia Pacific at 25%, and Europe, the Middle East, and Africa (EMEA) at 18%.
In Asia Pacific, the deepest REIT markets have traditionally been Australia, Singapore, and Japan. Those nations have had REIT structures for a number of years, and Japan and Singapore in particular have done a good job of offering a diverse universe of REITs, notes Ji Zhang, portfolio manager, global real estate, at Cohen & Steers.
South Korea is another important market, although one that is less talked about. “From a listed investment perspective, South Korea is a lot friendlier than China is to foreign investors, and in Korea, only about 1% of commercial real estate is listed today,” Kuhl says.
The Philippines has also seen growth recently, following government changes to its REIT framework in 2020. There are a number of REITs that listed in 2021 or are in the pipeline for 2022. For example, one of the largest property developers in the Philippines, Filinvest Land, debuted the Filinvest REIT Corp. last August.
Indonesia, meanwhile, has had REIT regulation since 2007. The market has been slow to gain momentum because the sponsor has to pay high transaction taxes when adding assets into the REIT, but there is potential for tax reform that could really help the expansion of Indonesia’s REIT market, Zhang says.
REIT expansion across these regions has occurred in property sectors where there are strong secular tailwinds, such as data centers. “I think a lot of that is driven by the capital formation, but also the investor demand in those areas,” Zhang says. On the demand side, there is a trend of larger technology companies making investments in data centers in those regions. As a result, capital expenditure has followed and investor appetite has increased because investors want exposure to some of these new economy sectors where they see strong growth, she adds.
Opportunities for Existing REITs
North American REITs have certainly leveraged the global REIT regime, forming joint ventures and tapping into fresh capital sources to fuel growth. Prologis, Inc. (NYSE: PLD) for example, has listed REITs in Japan and Mexico.
“You’re seeing more interaction between the global markets, both in terms of REITs that operate on a global basis using local REIT markets to own assets in those markets or finding ways to list assets in their home markets in foreign REIT structures,” Jones says. “It is happening from different angles in terms of how individual REITs are taking advantage of the growing global demand for real estate and global demand for REIT investing.”
Singapore, for instance, has a regime that allows companies to list non-domestic assets on the Singapore Exchange. Last December, Digital Realty (NYSE: DLR) listed a portfolio of U.S. data centers on the Singapore Exchange, creating Digital Core REIT. “This is an opportunity for Digital Realty to diversify their funding sources and really tap into the Singapore REIT market, which is a very established market in Asia, and offer an entity that invests in U.S. data centers,” Jones says.
Given the growing global interest in REITs, market participants see plenty of runway ahead. “I think we’re really far away from being oversaturated,” Kuhl says. For example, listed REIT penetration into overall commercial real estate is around 15% in the U.S. and lower than that in most other markets.
“The listed REIT vehicle is the most logical and efficient vehicle for owning commercial real estate for a number of reasons,” Kuhl says. The daily liquidity via the exchanges is one notable benefit. Listed vehicles also have an infinite life, and theoretically, so does quality real estate. “So, it’s a good match of time horizon between the ownership vehicle and the assets they own compared with a private fund that might have a 5- to 7-year life,” he says.
Regional Variations
When it comes to developing REIT regimes, it isn’t a one-size-fits-all approach. Often, the biggest stumbling blocks to regimes gaining traction include the tax structure and any constraints that impede the ability to grow. For example, a REIT’s ability to access debt financing and the cost of capital for borrowing can restrain external growth prospects. Other important factors are whether the stock offers sufficient liquidity and participation from institutional investors.
