The REIT business has long been a fruitful source of securitization activity in the U.S., Australia and Japan. In the ex-Japan Asia market, however, CMBS deals off the back of REITs have been non-existent outside of Singapore, which has seen several transactions completed in the past few years. The good news is that other markets could soon come into play.
Recent legal and regulatory developments in Hong Kong and Malaysia indicate both countries are ripe for REIT activity. With attractive pricing levels available through CMBS issuance, many of the region's ABS professionals are confident securitization will play an important part in financing the purchase of properties transferred into REITs.
According to the latest reports, Hong Kong Link REIT, which would be the first from the territory, has received approval from the Securities and Futures Commission and is due to list on Nov. 24. The $3 billion program, jointly coordinated by Goldman Sachs, HSBC Securities and UBS, will see the sale by the Hong Kong Housing Authority of 151 shopping malls and 79,000-car parking spaces into the REIT. The state-controlled agency needs funds to finance new housing projects.
The deal was supposed to be completed last year, but was blocked by a late legal challenge. Having secured $36 billion of retail orders and $40 billion from institutional investors, the cancellation of the transaction was a huge let-down to all parties.
However, the case opposing the deal was finally thrown out of the Hong Kong courts this July. With confidence restored, there should be no impediment to a successful re-launch next month. With the mega $7 billion Hong Kong listing of China Construction Bank expected around the same time, the order book for Link REIT might not be quite as big the second time around. However, the presence of a government entity has always been a strong selling point in Hong Kong, and investors will no doubt also be attracted by expected annual yields of between 6% and 7%.
A well-placed source said initial financing of properties by Link REIT would be done via a secured loan, adding that although there would be no immediate CMBS transaction tied to the deal, there was a good chance any refinancing would be done through securitization
"At the moment, refinancing options are being kept open, but as far as pricing and structuring goes, CMBS makes obvious sense," the source said. "The CMBS business is very different in Asia to the rest of the world because essentially it is a secured loan held over one or a small number of properties. The only difference is that it is rated, which gives the issuer access to a broader base of investors and has obvious pricing benefits. You only have to look at Singaporean CMBS transactions done this year [which have priced in the 16 to 26 basis points spread range] to highlight this."
Another hot topic is that Cheung Kong Holdings - controlled by local tycoon Li Ka-Shing - has also applied to the Securities and Futures Commission for a proposed HK$2 billion ($386.6 million) REIT that would own seven commercial properties. It would not be the firm's first REIT venture.
Due to the uncertain framework at the time, Cheung Kong in 2003 listed the Fortune REIT in Singapore, although it invests exclusively in Hong Kong property. Fortune completed in July a HK$2.385 billion CMBS, launched out of the Triumph Assets SPV. The transaction, arranged by HSBC, financed the acquisition of six new properties (see ASR 7/11/05).
Bankers are also talking up the possibility of Hong Kong listed REITs investing in real estate in mainland China. With banks in the People's Republic tightening credit controls, property developers are finding it increasingly difficult to fund new projects through loan facilities. One solution to free up capital would be for developers to sell existing assets to an offshore REIT. Hong Kong, a special administrative region of China, would clearly be in a prime position to exploit this situation.
There are, however, some issues that would need clarification from Chinese regulators for this to happen. The biggest potential obstacle would appear to be the 10% withholding tax imposed on properties held offshore. "There are a number of deals already in the works for holding China properties," commented one banker. "If, and it is still a big if, the legal and currency issues can be resolved, the withholding tax situation might not be an issue so long as the REITs can acquire assets at discounted prices."
Elsewhere, Malaysia has already taken its first steps along the REIT path. Axis REIT, a first for the country, was listed in August. Bankers say there could be as many as nine others in the works, including one being worked on by HSBC and an imminent offering by KPJ Healthcare.
According to a banker in Kuala Lumpur, the explosion of interest in Malaysian REITs should lead to a surge in CMBS activity. "The REIT pipeline is definitely promising," he said. "In addition to complimenting REIT structures, it should not be forgotten that CMBS could be used as a direct competitor in monetizing properties. In my view, CMBS is a more efficient funding structure at the moment due to competitive pricing, although both methods achieve different objectives."
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