REITs Center

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are conceptually like mutual funds in that funds are raised (backed by a sponsor) from institutional and retail investors which is then invested in infrastructure or real estate projects. The income earned from such projects is periodically distributed (at least 90% of net distributable cash flows (NDCF)) to unitholders. However, unlike mutual funds, they also have characteristics of a business enterprise considering they also raise debt and through a Trustee and an Investment Manager, are actively involved in projects to maximize returns to unitholders.

The rising emergence and popularity of REITs/InvITs in India is a welcome development for capital thirsty sectors, e.g., infrastructure (roads and highways, ports, railways, etc.), power, real estate, etc. With a view to increasing private participation supported by favorable government policies (e.g., enabling investment by foreign portfolio investors) and long- term investment outlook, many marquee investors including sovereign and pension funds are continuing to raise their stakes in such assets. Investors benefit from generating regular cash distributions, stable yield and an opportunity for sponsor(s) to expand their asset base.

Following two decades of success and growth in some of its markets, what can we expect for Asia-Pacific REITs in the 2020s?

As the REIT regime has been expanding globally, corporate governance practices in emerging REIT markets have become a major concern for domestic and international investors alike. Idiosyncrasies stemming from the ownership models applied in Asian economies and the fact Asian REITs are often externally managed “captive entities” make issues pertaining to corporate governance of the listed real estate sector in Asia all the more important. To address these issues, the paper introduces an original framework that can be used to estimate the quality of corporate governance among externally managed Asian REITs. As a pilot study, the framework is applied to define a corporate governance index of REITs listed on the Singapore Stock Exchange (S-REITs). The index called R-Index enables the ranking of S-REITs’ corporate governance practices. It is then used to examine the relationship between corporate governance and the performance of S-REITs. The empirical tests based on several performance-related metrics provide evidence supporting a positive correlation between corporate governance practices identified in the R-Index and stock performances. However, we find no positive correlation with operating performance proxied by accounting measures. In other words, S-REITs with higher corporate governance tend to register better risk-adjusted returns but do not outperform operationally. To test for market efficiency, the study shows that S-REITs with the best corporate governance practices also have less information asymmetry.

Conducive global developments placed financial markets on a risk-on mode in the final month of 2020. The prospect of widely available coronavirus vaccines, the US bipartisan agreement on fiscal stimulus, and the EU-UK post-Brexit trade agreement’s conclusion provided the necessary fillip to sentiment, sustaining momentum for real estate stocks to conclude on a positive note.
However, for the whole of 2020, real estate stocks continued to lag the wider equity markets, which have been supported by tech and pharma counters. Property cycles will eventually chart the sector’s own way out of the crisis, which although historically it lags an economic recovery, will be longer-lived, sustained by the region’s enduring structural fundamentals.

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