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REIT's An Attractive High Yield Means To Financing Property Development

Jul 16, 2008
REITs have grown in popularity in recent months, as their potential high yields are recognized by more investors. Asian REITs are performing especially well in India, and REITs in China and Indonesia are expected to be among the best placed to maximize returns over the medium term. REITs were first introduced in Japan, Singapore, Malaysia and Hong Kong, and it is said to be only a matter of time before other countries follow suit.

Asian REITs are mutual funds which pool investor money together to put into the property market in Asia, rather than the stock market, deposits or other traditional investments. They distribute dividends based on returns from rents, and return 90% of their earnings to their members.

It was recently found, through studying the cash flow of companies like Obelisk, that most investors still favour investing in developing property markets than in the stock market or other investment types. REITs are one way of investing in these markets that is becoming decidedly more popular.

REITs return 90% of the earnings to their customers, and so offer greater flexibility for the individual investor. The fact that one's finances can be leveraged along with a large number of other investors' money also provides power and flexibility. REITs are able to pick up cheap property in markets on the downturn, and can hold on to these until markets move into an upward cycle again.

Arjuna Mahendran, Head of Research at Credit Suisse, says that "REITs gain in value when broad markets are correcting and they tend to underperform when markets are on a growth track". He also feels that it "is a matter of time before stock-market regulators across Asia acknowledge the advantages of encouraging REITs to list in order to foster more rapid development of urban infrastructure. "
"Asia is a relatively crowded place in terms of population densities, and as economic growth accelerates, capital has become available for improving the quality of living spaces."
"By ensuring that 90 percent of their income is distributed, REITs are an attractive high-yield means to financing property development in most Asian countries and are bound to proliferate rapidly."

Mahendru says that REITs in Asia are attractive as a defensive ploy, because of their relatively high yields of 4-6%. His observations about their underperformance while markets are on a growth track has been borne out in Singapore recently. The economy in Singapore is booming, yet REITs appear to be struggling at the moment. This truism is further compacted in Singapore by the effect of the subprime crisis in the US, and the global credit crunch.

One market that has seen the emergence of large numbers of REITs is India. As they are listed overseas, REITs enable their constituents to enter the Indian rental markets, where demand is currently very high. The Indian real estate industry reached $57 billion in 2007, and the Eleventh Five Year plan in the country forecasts that by 2012, the real estate industry will reach $90 billion. The number of joint ventures (including REITs) seems to be increasing on a weekly basis.

Asian REITs form a sensible part of a balanced investment strategy, and allow opportunities that otherwise would not have been open to thousands of investors.
About the Author
Gregory Smyth is an independent author providing assessment and comments on leading International Property Consultants in Asia and Greater China , especially CB Richard Ellis.
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