In the last 18 months, REITs reeled from a combination of debt exposure, an illiquid asset base in a falling market and an increasing cost of funding. Having substantial debt maturities in an illiquid market was a wholesale global issue.
While underlying property values lagged the wider economy amid the downturn, REIT stocks led other asset classes as prices declined and investors quickly sold down their positions.
REIT markets lead the way
Property is often a lagging indicator of economic downturns since investors flee falling equity markets to the perceived safe haven of real estate. Only later, when unemployment threatens, does the property market feel the pinch.
In this downturn, however, while underlying property values lagged the wider economy, REIT stocks led other asset classes as prices declined and investors quickly sold down their positions. Perhaps the catalyst for this downturn — a dislocation of credit markets — holds the key.
Country comparison table
REITs are the public face of a very capital-intensive industry that requires substantial levels of financing. The evaporation of credit simply exposed the vulnerability of an illiquid asset class — and the liquidity of the public markets provided investors with an exit, albeit at a price.
But just as they led the market into the downturn, global REITs are leading the way out. Share prices have rebounded sharply since March 2009, with many markets surging 60% – 100% from their lowest points (although prices remain below the peaks of a few years ago). Since then, REITs have reallocated the billions in capital raised through secondary offerings to reduce their debt, recapitalize their balance sheets and position themselves for growth.
Asia, excluding Japan: the outperformer
While REITs experienced significant drops in market capitalization and negative rates of return globally, the Asian REIT markets, excluding Japan, had a milder decline and have recovered. Rates of return in South Korea, Malaysia and Hong Kong are overall in positive territory at the end of three years.
Global market capitalization
comparison
Of the Asian markets analyzed (excluding Japan), only Singapore recorded a negative three-year rate of return of -4%. Compared with Australia, the UK and the US (-26%, -25% and -14%, respectively), Asia has performed remarkably well. In fact, South Africa was the only REIT market outside of Asia that recorded a positive three-year return.
We speculate this positive performance is attributed to several factors:
- Asian REITs continued to follow a more passive investment model (and therefore a perceived lower risk profile) than some other global markets.
- Many investors see Asia as a region with a promising long-term growth story.
Perhaps the global REIT market is becoming a barometer of broader risk-return sentiment around the world.
