REIT ASIAPAC
L E G I S L AT I O N
(both primary and secondary), and continued elevated vacancy
rates in both markets. The acquisition growth story has lost its
lustre, and this has led to investors searching for internal growth
rather than equity-led acquisition growth. However, one could
start to make a case for this sector due to its defensive nature and
long term potential on the back of increasing demand for modern
logistics facilities from third-party logistics, manufacturing and
other e-commerce businesses. Supply will peak in the coming
year, and given the high cost of land and construction, this
should help to bring the supply and demand of the sector back
into balance. For value investors with a longer time horizon, the
sector has started to look attractive.
arrivals to Japan are repeat visitors, and they are seeking new
experiences in Japan and visiting areas that they have yet to
visit before. Their focus is more on experience and less on
purchasing of consumables. REITs with exposure outside of
Tokyo, Osaka and Kyoto where most of the new development
has been occurring are seeing decent RevPAR growth due to this
new trend from repeat visitors and limited new supply of hotels
in those locations. We think there will continue to be pressure
on certain J-REITs with predominately Tokyo, Osaka and Kyoto
based hotels despite the strong arrival growth and prefer the
regional plays that also typically have strong domestic visitor
demand as well.
Legislation
ASIA’S INVESTMENT
RESEARCH DEPARTMENTS
SHRINK 70% ON MIFID II
Asset management firms have cut down on brokerage services and are organising
client meetings and roadshows using in-house investor relations teams.
Retail J-REITs have like REITs elsewhere struggled due to
concern about the viability of large format department stores
and concern about closures. The J-REITs with suburban malls
have been particularly impacted by this concern, and we also
feel that the risk/reward in suburban malls is not attractive.
On the other hand, urban retail located next to train stations
and on high streets like Tokyo’s Omotesando and Ginza or
Osaka’s Shinsaibashi are performing well. Like hotels, they have
benefited over the last year due to inbound tourism, and this has
helped landlords achieve strong rental increase on renewals or
on turnover rents. We also like neighbourhood shopping centres
that tend to cater to daily necessities like grocery, services and
other products that are not disrupted by e-commerce players.
The yields on these assets are typically very high, and there is
often some re-development or expansion potential. In addition,
these types of centres could form part of the last mile for
e-commerce deliveries and even provide some logistic support
to retail operators.
We continue to prefer J-REITs over other
markets due to strong leasing conditions
especially in office and regional office and
see limited risk of higher interest rates or
refinancing risk due to the lenient stance
of the Bank of Japan on the sector.
RESIDENTIAL REITS HAD ITS RUN
Residential REITs have performed reasonably well over the last
year. Those with Tokyo concentration have seen strong uplift on
tenant replacements and renewals. Cities like Nagoya and Osaka
are not seeing the same increase due to the conversion of some
small office buildings into multifamily apartments or hotels. The
sector offers defensive growth, but asset prices have increased
significantly so we are less positive despite the improving
fundamentals because actual internal growth is typically much
less than the office or urban retail markets. M&A (mergers and
acquisitions) will continue to be an interesting angle though, and
we would not be surprised to see more combinations as we have
seen over the past decade, which will lead to larger, more liquid
trusts and some scale benefits. It is also likely that some other
asset types like senior housing or student accommodation will
find their way into residential REIT portfolios, which could offer
some exciting opportunities.
REGIONAL HOTELS TO BENEFIT
F R O M R E P E AT V I S I TO R S
Lastly, the hotel sector offers promise going into the Tokyo
Olympics. A recent change in the Minpaku law (private residence
rental) that negatively impact home-sharing platforms like
Airbnb, has led to a recovery in overnight hotel stays by foreign
visitors. Before the change, there was a discrepancy between
inbound arrivals and overnight stays. It is well known that
inbound numbers continue to rise and are likely to exceed the
government’s upwardly revised target of 40 million visitors.
However, due to the strong growth in arrivals, there has also
been an increase in limited service hotels that cater to tourists.
As mentioned above, in many cases office buildings are being
converted into hotels due to the higher expected returns, and
this has led to a stagnation in RevPAR growth.
Overall, we continue to prefer J-REITs over other markets due to
strong leasing conditions especially in office and regional office
and see limited risk of higher interest rates or refinancing risk
due to the lenient stance of the Bank of Japan towards the sector.
Japan’s economy continues to perform well, and we believe this
will provide a tailwind to the sector even if interest rates start to
edge up.
However, there are some bright spots. Roughly half of the
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Asia Pacific has seen a fall in
investment research headcount,
and the region’s REITs have
reported reduced investor meetings
since the revised Markets in
Financial Instruments Directive,
also known as MiFID II, came into
effect on January 3 this year.
According to sources close to REIT
AsiaPac, investment research departments
in Asia have shrunk by as much as 70% as
the industry adjusts to research that is now
separately chargeable. Departures include
high-profile executives from Macquarie
and UBS. REITs in Asia are also facing
increased difficulty in securing investor
meetings.
“We have to be more proactive and
think away from conventional channels
to generate awareness and in reaching
out to investors. For existing investors,
we can easily arrange calls or meetings.
The greater challenge is accessing new
investors on our own,” says Ho Mei Peng,
head of investor relations at CapitaLand
Commercial Trust. “Pre-MIFID II, many of
these connections were through analysts
and their corporate access teams,” she
says, adding that the company has seen an
increase in the number of direct meetings
and query requests from investors, both
local and overseas.
We have to be more
proactive and think away
from conventional channels
to generate awareness and
in reaching out to investors.
Ho Mei Peng
Head of Investor Relations at CapitaLand
Commercial Trust.
MiFID II is the updated version of MiFID
which had been in place in the European
Union since November 2007. The updated
ruling covers wide-ranging areas including
market transparency, product governance,
transaction reporting, investor protection
and new rules on inducements such as
commissions and rebates for independent
advisors.
15
Specifically, the new ruling requires banks
to charge for research separately from
broking services to improve transparency.
Previously, brokers might bundle research
with the fee they charged for executing
trades. Another aspect of MiFID II is
that it puts a price on the brokers’ role
in facilitating discussions and meetings
between fund managers and the companies
in which they invest — known as corporate
access. In short, the revised ruling aims to
prevent conflicts of interest and ensure
that fund companies aren’t induced to
trade.
While the updated regulation has sweeping
implications, especially for investment
banks and brokerage firms, the real estate
industry in Asia too has not been spared
from the effects. In general, MiFID II