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Asian REITs suffer record fall in second half 2008

Although the onset of a major downward cycle in Asian property markets was observed towards the end of the year, the impact of the weakened market fundamentals on REITs has been less serious as compared to basic investor concerns over whether Asian REITs generally can continue to obtain sufficient financing to ensure their survival during this tumultuous period.

The market capitalisation of Asian REITs shrank by almost a third over the last six months of 2008 to around US$48 billion as prices took a deep dive and new listings dried up. Nearly all REITs around the region recorded a fall in value with just two recording a marginal uptick. Many plunged by over 30% during the review period.

The correction in Singapore was among the most severe with S-REIT's posting an average loss of 54% between July and December 2008. Nevertheless, with the exception of Singapore, Asian REIT markets still managed to outperform the broader stock markets. The full year saw seven new REIT listings with only one debut, Thailand's Centara Hotels & Resorts Leasehold Property Fund, taking place in the second half and bringing the total number of REITs in Asia to 115 as of the end of 2008.

Lack of available credit was the single most important issue confronting Asian REITs with some unable to obtain sufficient funds to meet their short-term debt obligations and others narrowly failing to finalise deals transacted before the onset of the market correction. The second half saw the credit crunch claim its first Asian REIT victim, Japan's New City Residence (NCR), which filed for bankruptcy protection on 9 October after failing to overcome refinancing difficulties. NCR's collapse severely battered confidence in the J-REIT investment market and heightened investors' concerns that more bankruptcies would soon follow, especially among small and midcap trusts. The TSE J-REIT Index plunged 12% on the date NCR filed for bankruptcy, its largest ever single-day fall. 

In Japan, the second half saw Nippon Residential Investment successfully dispose of a Tokyo residential building but cancel its planned acquisition of Pacific Royal Court Minato Mirai Urban Tower in Yokohama. In Korea, the Macquarie Central Office CR-REIT extended its maturity date to 2010 after it was unable to dispose of its Kukdong Building following the withdrawal of potential buyers from the acquisition of the asset. Meanwhile, Singapore-based Asian Public Real Estate Association is asking for government assistance to help refinance debt for S-REIT's. Elsewhere, the pressure to meet short-term re-financing obligations appeared less urgent.

In Hong Kong, REITs were not active in making acquisitions and were therefore not subject to any deadlines for bringing new capital to complete transactions. While REITs were finding it difficult to obtain financing, many found themselves utilised as financing tools by shareholders keen to offload stakes to improve their balance sheets or repay loans. In August, debt-laden Allco Finance Group, which has suspended trading in Australia, sold its 17.7% stake in Singapore listed Allco Commercial REIT and a 100% stake in the REIT's manager to Frasers Centrepoint Ltd for S$180 million (US$125 million) to repay debt. In November, Malaysian developer YTL acquired a 26% stake in Singapore-listed Macquarie Prime REIT (later renamed Starhill Global REIT) and a 50% stake in the REIT's manager from Macquarie Bank for a total consideration of S$285 million (US$198 million). September saw J-REIT Replus Residential Investment (REP) sell a 90% stake in its asset management firm Re-plus REIT Management to US investment fund Oaktree Group after its sponsor Re-plus Inc. filed for bankruptcy protection.

The second half saw securities policy setters in China and the Philippines reveal plans to launch REIT markets as they looked to support property developers suffering from the credit crunch and slow property sales. Following Premier Wen Jiabao's 4 December comments about the need to widen financing channels in the private sector, the People's Bank of China announced it was studying the launch of REITs in China. Meanwhile, the Philippines REITs bill reached a second reading in the Senate.

Other notable developments during the review period included the South Korean Ministry of Land, Transport and Maritime Affairs unveiling of a number of measures designed to encourage asset management companies to purchase unsold apartment units from financially distressed developers and re-package the assets into Corporate Restructuring (CR) REITs. However, launching new REITs has been extremely challenging amid the weak investment sentiment, as evidenced by the record low number of REIT IPO's in the second half. Therefore, raising funds for property developers via REITs is unlikely to be viable solution in the short-term.

The downward cycle in the Asian property markets is set to last for the remainder of 2009 and it remains difficult to predict whether a recovery will begin in 2010. Rental incomes and the asset valuations of REITs will therefore be significantly affected. However, the correction in REIT pricing, which began in mid- to late- 2007, occurred roughly 6-12 months ahead of the current downward cycle.

The second half of 2008 was a trying period for the Thai stock market and property funds. Pressured by both the global financial crisis and the worsening domestic political situation, the SET Index lost nearly half of its value in 2008. As capital market liquidity dried up there was only one new property fund listed during the second half of the year, bringing the total to 21. Total market capitalisation fell 18.5% during the same period as prices revised downwards. The formation of the new Democrat-led government gave market sentiment a small boost at the end of the year but whether it can make any lasting impact on investor confidence remains to be seen in the New Year.

Listed property funds in Thailand have performed variably during the second half with eight funds hanging within the -1% to 2% band and six others declining over 20% during the same period. The dividend yield for Thai listed property funds thus ended with a wider range of 0.4-17.8%, mainly down to the general performance of their underlying assets.

The only newly-listed fund in the second half was the Centara Hotel & Resort Leasehold Property Fund, which has invested in a 30-year leasehold in the Centara Grand Beach Resort located on Chaweng Beach in Samui. The hotel is managed by Central Plaza Hotel, a SET-listed company. The fund size is approximately THB 3.2 billion (US$92 million) and will be managed by Kasikorn Asset Management, with guaranteed dividend returns for the first four years. Ticon Property Fund raised its fund size for the third time since inception for the purpose of placing 38 factories and 8 warehouses into its portfolio.

"Some observers expect an increase in property fund listings in 2009 as developers search for alternate sources of capital. A key feature that differentiates Thai public listed property funds from other REITS in Asia is that Thai REITS have virtually no gearing," states Mr. Nabeel Hussain, Manager of CBRE Research in Thailand.

Looking ahead, Asian REITs holding income-generating properties in prime locations appear to be better placed as many have secured tenancy for the year. REITS are expected to focus on cost savings and income protection by retaining tenants in 2009. Asian REIT acquisition activities are likely to be limited in the coming months as the credit availability issue remains unresolved. However, the market may see more M&A activity involving REITs as some REIT holders cash in their positions to repay debt while property investors take advantage of the current market conditions to hunt for bargain acquisitions.