An introduction to Asia-Pacific REITs (AP-REITs)

25 August 2021

Hui Min Ng, Portfolio Manager, Equities

Derrick Yee, Client Portfolio Manager, Asia Equities

Asia-Pacific Real Estate Investment Trusts (AP-REITs) have become increasingly popular with investors, and deservedly so. AP-REITs can offer a unique, diversified opportunity set across real-estate segments: from established Grade-A office space located in the region’s bustling cities to cutting-edge logistical facilities and the growing number of data centres that power cloud applications. This article is the first in a series of three that will provide a comprehensive introduction to this emerging asset class.

To begin with, we will examine the basic structure and benefits of holding REITs, benefits of portfolio inclusion, the fundamentals of AP-REITs, including the main sub-sectors, and their historical performance. We will then move onto to an in-depth exploration of how AP-REITs perform in different market environments (second article), focusing on movements in interest rates and inflation. Finally, we will look at how the asset class is positioned to perform in 2021 and beyond (third article).

Basic structure and benefits of holding REITs

Investors should be aware of AP-REITs’ unique holding structure. Although this section will speak generally of the structure and benefits of REITs, they are also applicable to AP-REITs.

Trusts are mandated to pay out a certain percentage of their operating income to investors in the form of dividends¹. When investing in a REIT portfolio, investors are purchasing a portfolio of real estate assets through equity shares (see Chart 1). REITs use the capital for acquisitions and management of properties; they aim at paying out the proceeds of received rental income to investors in a stable dividend stream.

With that in mind, there are numerous benefits for investors to hold AP-REITs; many investors hold them for the potential source of income, which include:

Potential source of income: Traditionally, REITs have provided a long-term source of income to investors through regular dividend payouts. Although potential price appreciation opportunities exist, dividends account for much of the asset class’s total return and can provide a cushion for investors in a downturn.
Opportunity for portfolio diversification: REITs also offer the potential for portfolio diversification. Over time, REITs have demonstrated a lower correlation with traditional assets, such as global equities and bonds, which may provide protection in an increasingly turbulent global market.
Lower minimum investment, liquidity, and preferential tax treatment: Investors often ask about the potential benefits of investing in REITs versus directly investing in a more traditional investment in private real estate (such as housing or commercial real estate). When compared to private real estate, REITs offer three main advantages:
- Lower minimum investment: AP-REITs require a lower minimum investment when compared to the significant outlay needed for direct real-estate purchases. Thus, investors can gain access to the sector, and often times a more diversified array of holdings.
- Liquidity: AP-REITs are traded daily on stock exchanges throughout the region. Investors have convenient liquidity to buy and sell their investment, as well as clarity on the market price they will receive. In contrast, investments in private real estate traditionally require significant time to complete, with final pricing normally subject to negotiation.
- Tax treatment: Finally, AP-REITs boast preferential tax treatment. Due to the trust structure described earlier, they are not subject to corporate taxation. As such, investors only need to pay tax on the income received.

AP-REITs: A diversity of opportunity for investors

Although the first AP-REIT (ex-Japan) was listed in Australia in 1971, the concept is still relatively new to the region. Singapore has since emerged as the leading REITs hub², while lesser-developed markets in Southeast Asia have gained notable momentum over the past five years.

The relative novelty of the asset class, coupled with a diverse range of opportunities, is proving particularly attractive in our view to investors. Indeed, the expanding REIT universe gives investors exposure not only to real estate in more developed economies, such as Australia and Singapore, but also emerging markets, like India and the Philippines, with the latter launching its first REIT in in 2020³). Indonesia is also currently working on changes to REIT laws that should allow for listings.

Main AP-REITs sub sectors

The diversity extends to real-estate segments that include established and newer industries. Office and retail REITs represent traditional real-estate plays around the region. Meanwhile, industrial REITs (incorporating data centres and logistics) and healthcare REITs reflect exciting innovations in the asset class. To add value, REIT management teams from these sub sectors would renovate properties and reorganise tenant contracts to generate continuous rental income.

Chart 2: Diversified sector exposure of Asia-Pacific REITs
Apart from the traditional retail malls, offices, industrial parks and hotels, AP-REITs also encompass new industries like data and logistics warehouses. We believe the emergence of e-commerce and cloud computing would benefit these new industries.

For illustration only

Retail REITs - Retail REITs own and manage retail stores and shopping malls. Despite the popularity of online shopping, successful retail centres continue to see growth in customer traffic, as contemporary retail centres offer more than just a place for shopping – they create an “experience” for their consumers which online shopping simply cannot match.
Office REITs - Office REITs own and operate office properties in commercial areas, offices in industrial areas, or new office parks outside of commercial centres. Office properties are closely related to economic and business cycles, with rentals influenced by supply and demand.
Industrial REITs - Industrial REITs own and operate industrial buildings, warehouses, or logistics centres for a wide variety of customers. The industrial segment used to encompass light industrial or traditional warehouse properties. However, in the past few years, e-commerce has quickly developed, leading to increased demand for logistics centres and data centres. Some Industrial REITs even focus on high-tech properties that play an important role in driving the e-commerce trend.
Hotels and Resort REITs - Hotel and Resort REITs own and operate hotels and resorts to generate cash flow and profits. With changes to the way people travel and more intense price competition and value offerings, hotels no longer provide just basic accommodation. Operators are adding business services and amusement activities to pursue an enhanced guest experience. They are also bundling hotels with tourist landmarks through unique architectural designs.
Diversified REITs - Diversified REITs own and operate two or more types of properties, such as offices, retail stores, hotels, and other properties in their portfolios. Due to the diversification of the properties in their portfolios, the operators of diversified REITs have access to multiple income sources. That said, the requirement of management teams is also high given the broader range of underlying properties.
Healthcare REITs - Healthcare REITs own and operate properties related to healthcare, such as hospitals and senior care facilities. Demand for healthcare services is increasing with improvements in the quality of life. The demand for healthcare services is generally price inelastic, i.e., demand remains stable even with increasing prices and changing market environments.

AP- REITs performance over the past decade

Despite the tumultuous performance of global equity markets over the past decade, AP-REITs have posted a positive total return on a cumulative basis from 2009 (as of 31 December) to 2021 (as of 30 June)⁴. Dividend payouts are the main reason: although the prices of AP-REITs have experienced volatility along with the broader market, the income element of the security has provided a cushion for investors. This defensive nature is a key reason why investors are interested in the asset class. In the next article, we will explore in more the elements contained in this chart, looking at how changes in inflation and interest rates impact AP-REITs.

Chart 3: Annual total returns of Asia ex Japan REITs (2010 – YTD 2021)

Source: Bloomberg as of 30 June 2021. Asia ex Japan REITs are represented by FTSE EPRA/NAREIT Asia ex Japan REITs Index (capped). Performance in US dollar.

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1 The percentage of statutory payout varies by jurisdiction, but generally accounts for a significant portion of the trust’s earnings.

2 Bloomberg, 22 February 2020.

3 1st REIT listing shows PHL market ready to resume business | Philippine News Agency (pna.gov.ph), 13 August 2020.

4 Bloomberg, as of 30 June 2021. Asia ex-Japan REITs = FTSE/EPRA Nareit Asia ex Japan index (capped); For illustrative purposes only. Past performance is not an indication of future results.

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Certain sub-funds invest in securities of small and medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Certain sub-funds concentrate their investments in a single country and/or a particular industry sector are subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
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Given RMB is currently not a freely convertible currency, payment of redemptions and/or dividend payment in RMB may be delayed due to the exchange controls and restrictions applicable to RMB. As offshore RMB (CNH) will be used for the valuation of RMB denominated Class(es), CNH rate may be at a premium or discount to the exchange rate for onshore RMB (CNY) and there may be significant bid and offer spreads and thus the value of the RMB denominated Class(es) will be subject to fluctuation. Any devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated Class(es) of certain sub-funds.

Manulife Advanced Fund SPC

Manulife Advanced Fund SPC is an umbrella fund comprising a number of sub-funds investing primarily in equity and bond securities, each of which has a different investment objective and risk level.
The sub-funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. A sub-fund may at its discretion pay dividend out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share of the respective share classes after the distribution date.
Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
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Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
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Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.

General Risk Disclosure

This website is not intended for use by any individual in any jurisdiction where, due to their nationality, residence, foreign exchange control or other circumstances, the publication or access to this website is restricted or prohibited. It shall be the sole responsibility of the investor to acquaint themselves with, and to comply with, all applicable laws and regulations of any relevant jurisdiction.
Funds offered on this platform may invest in equity, fixed income securities, exchange-traded funds, collective investment schemes and/or other instruments, including derivatives, and each of which has its specific investment objective/ policy with its specific features and different risk profile.
Distribution of dividends, the frequency of distribution and the amount/rate of dividends are not guaranteed. Dividend of certain share/unit classes, at the fund or the investment manager’s discretion, may be paid out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share/unit of the respective share/unit classes after the distribution date.
Some funds may invest in bonds or debt securities which may be subject to credit, liquidity, counterparty and market risks.
Some funds may invest in non-investment grade bonds and unrated securities which may be subject to greater credit and liquidity risks, and may be more volatile than higher rated securities. Some funds may invest in investment grade debt securities, which may be subject to ratings downgrades by the rating agencies that may affect the net asset value of the fund.
Some funds may invest in derivative instruments which may involve additional risks. (For example, leverage may cause greater volatility.)
Some funds may make extensive use of derivatives including more complex derivative instruments or strategies to achieve the investment objective, this may give rise to additional exposure in that performance may rise or fall more than it would have done otherwise. In adverse situations, the fund’s use of derivative instruments may become ineffective and the fund may suffer significant losses. The use of derivatives may give rise to leverage, liquidity, counterparty and valuation risks.
Some funds may invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Some funds may invest in securities of small and/or medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Some funds may invest in a single country/region and/or a particular industry sector which may be concentrated and subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Some funds may invest directly in certain China A shares via the Stock Connect, which may involve risks related to investments via the Stock Connect and Mainland China investment.
Some funds may have significant exposure to Renminbi ("RMB") bonds/equity/assets or emerging markets, which will be subject to debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with more established markets.
Some funds with significant exposure to RMB bonds/equity/assets may hold a significant portion of assets in deposits if there are not sufficient RMB instruments to invest in. This may adversely affect the funds’ return and performance.
Some funds using Qualified Foreign Institutional Investor (“QFII”) quota to invest directly in debt instruments/shares in Mainland China may be subject to various requirements and restrictions under the laws of Mainland China related to QFII investment and custodial risks.
Some funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
As RMB is not freely convertible, currency conversion is subject to exchange controls and restrictions. There can be no assurance that RMB will not be subject to devaluation. Insufficient amount of RMB for currency conversion or devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated class(es) of certain funds. The “Dim Sum” bond market is still a relatively small market which is more susceptible to volatility and illiquidity. Due to RMB concentration risk, the value of the funds with substantial RMB exposure may be more volatile than that of a fund having a more diverse portfolio of investments.
Some funds’ performance will be closely tied to the economic, political, regulatory, geopolitical, market, currency or other conditions in the European Economic Area and may be subject to increased liquidity, price, and foreign exchange risk.
Some funds may invest in Russia and some investments in Russian securities may be unlisted securities not dealt on a regulated market. The Russian market presents specific risks in relation to the settlement and safekeeping of securities.
Investment involves risk. Investors may expose to capital loss and should not invest solely based on the information on this website alone and should read the offering documents for details including the associated risk factors, charges and features of the funds and their share/unit classes. Past performance information is not indicative of future performance.

Manulife Global Fund

Manulife Global Fund is an umbrella fund comprising a number of sub-funds investing in equity and/or fixed income securities, each of which has a different investment objective and risk profile and may involve equity market, geographical concentration, sovereign debt, liquidity, volatility, credit downgrade, interest rate, counterparty risks. Certain investors may also be subject to the risk relating to RMB hedged share class.
The relevant distributing class of the sub-funds does not guarantee distribution of dividends, the frequency of distribution and the amount/rate of dividends. Dividends may be paid out of income, realized capital gains and/or out of capital of certain sub-funds in respect of Inc share class(es). Dividends may be paid out of realized capital gains, capital and/or gross income while charging all or part of their fees and expenses to capital (i.e. payment of fees and expenses out of capital) in respect of MDIST (G), R MDIST (G) and F MDIST (G) share class(es). Dividends paid out of capital of these sub-funds amounts to a return or withdrawal of part of the amount of an investor’s original investment or from any capital gains attributable to that original investment and may result in an immediate decrease in the net asset value per share in respect of such class(es) of the sub-funds. Fixed yield share classes pay out a pre-determined annualized fixed percentage of their NAV, which can be adjusted by the Directors with at least one month’s prior notice, do not entirely reflect the actual or expected income or performance of the Fund. These distributions may exceed the actual income, leading to capital erosion, especially during negative returns or losses, and may reduce future capital growth. A positive distribution yield does not guarantee a positive return, and the absolute distributions vary with the NAV, resulting in fluctuating monthly payouts for investors.
Certain sub-funds invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Certain sub-funds invest in securities of small and medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Certain sub-funds concentrate their investments in a single country and/or a particular industry sector are subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
Investment involves risk. The sub-funds may expose their investors to capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds and their share classes.
Each sub-fund intends to use financial derivative instruments (“FDIs”) for investment, efficient portfolio management and/or hedging purposes. The use of FDIs exposes the Fund to additional risks, including counterparty/credit risk, liquidity risk, valuation risk, volatility risk and over-the-counter transaction risk.
Given RMB is currently not a freely convertible currency, payment of redemptions and/or dividend payment in RMB may be delayed due to the exchange controls and restrictions applicable to RMB. As offshore RMB (CNH) will be used for the valuation of RMB denominated Class(es), CNH rate may be at a premium or discount to the exchange rate for onshore RMB (CNY) and there may be significant bid and offer spreads and thus the value of the RMB denominated Class(es) will be subject to fluctuation. Any devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated Class(es) of certain sub-funds.

Manulife Advanced Fund SPC

Manulife Advanced Fund SPC is an umbrella fund comprising a number of sub-funds investing primarily in equity and bond securities, each of which has a different investment objective and risk level.
The sub-funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. A sub-fund may at its discretion pay dividend out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share of the respective share classes after the distribution date.
Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
Investment involves risk. The sub-funds may expose to a high risk of capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds.

Manulife Hong Kong Series

Manulife Hong Kong Series (“the Series”) is an open-ended unit trust comprising a number of funds primarily investing in equities, debt securities, exchange-traded funds and/or collective investment schemes, each of which has a different investment objective and risk level.
The funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. Dividends may be paid out of capital and/or out of gross income of certain funds in respect of Inc classes, while charging/paying all or part of certain funds’ fees and expenses to/out of capital of certain funds. This represents a return or a withdrawal of part of an investor's original investment amount or capital gain attributable to that amount. Distributions will result in an immediate decrease in the net asset value of the relevant units. Class AA (RMB) Inc Hedged Unit of certain funds is subject to higher distribution risks than other non-hedged unit classes.
Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
Certain fund is subject to the risks relating to investment in exchange traded funds, Strategic and Tactical Asset Rebalancing Strategy (“STARS”), small- and mid-capped companies, convertible bonds and the risks associated with securitised debt instruments and investments in loss-absorption features. Certain fund is a feeder fund that invests all or substantially all of its assets in another collective investment scheme (the “master fund”) and is therefore subject to the risks of investing in the master fund.
Certain fund will not have direct investments other than cash, cash equivalents and financial derivative instruments (such as futures, options and forwards).
Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.