From a low of around 20 per cent 10 years ago, Asia Pacific now represents around 35 per cent of the global listed real estate market, according to a report commissioned by APREA.
The report, which uses the TR/GPR/APREA Composite Index, shows that dedicated Asian listed real estate funds are under-represented relative to European and US funds, representing only around 13 per cent of regional funds by assets under management.
With the exception of the period around the Asian financial crisis in the late 1990s, the Asian listed sector has performed consistently well, in both local currency and USD terms against a global benchmark.
Since 2002, investment in the region has proved to be performance-enhancing to a global portfolio.
In addition, the report highlights the importance of Asian real estate in providing diversification benefits with both stocks and bonds. Emerging Asian markets provide stronger diversification benefits with both asset classes, whereas developed Asian markets provide similar benefits as the Australia, UK and US markets.
Given the dominance of the US in the global listed market, the decision to go global requires evidence that Asian funds can contribute to performance. In only two of the ten years in the study (2005 and 2011) did Asian funds underperform US funds. The correlation of Asian funds to European and US funds is lower than for US funds, and below 72 per cent to Japanese funds. By contrast, US funds have a correlation of 90 per cent with European Funds. An exposure to Asian listed real estate is therefore justified on both performance and diversification grounds.
One of the potential areas of concern for investors is the REIT-sponsor relationship which occurs in Asian markets. Overall, existing studies appear to suggest that investors do not need to be concerned with potential agency conflicts associated with REIT-sponsor relationships. This is because the interest of REIT managers and sponsors is likely to be significantly aligned with that of other unitholders as most sponsors hold significant amounts of unitholdings in their REITs. In addition, given the development-driven nature of the Asian REIT market, the support provided by the sponsors (especially developers) is of particular significance. This has seen strong sponsor backing as one of the important drivers of the growth of Asian REIT markets in the past decade.
One of the key elements to a successful REIT market is that the regulators continually revise legislation to maintain growth in the market and reflect trends in international practices. The report concludes that the current proposed developments in the region (particularly proposed changes to the Hong Kong REIT regulations) would increase the attractiveness of Asian REITs to global investors and facilitate further development of the Asian REIT markets in the future.