Whether a Real Estate Investment Trust (REIT) should acquire foreign assets is an eternal debate within the REIT circle. On the one hand, successful REITs may seek additional opportunities abroad to broaden their portfolio and to provide additional growth for their investors. In some situations, investing abroad may benefit higher income yield and, if acquired properly, additional risk-adjusted returns. Given the interest rate cycle, for example, cap rates in Singapore are now significantly lower than that in Australia, providing Singapore REITs some incentives to investigate the Australian market.
In addition, some REITs are listed in a different market from where the assets are located. Several Hong Kong REITs, for example, have a dual listing in Singapore, mainly because of historical reasons. Both Singapore and Hong Kong, moreover, have Chinese and Indonesian REITs listed on their stock markets. Some of these REITs have most of their management teams in the asset location, making the listing just a foreign listing similar to the ones in other industries. These REITs may pick a foreign market to access a larger investor pool or seek better regulatory regimes.
However, real estate is a highly localised business. A foreign REIT, even if it is exceptionally successful in its home market, may not have the management infrastructure to profit from investing in foreign markets. This is especially apparent in retail, where local preference can make a material difference in what brands a mall should offer.
Many countries that set up their own REIT regimes also provide tax incentives for local listings. A REIT vehicle, at its core, is a legal construct mandated by law to own real estate and to distribute rental income. The initial policy goal, when the United States passed the first REIT legislation in 1960, was to create a vehicle that approximates the cash flow and return characteristics of holding a physical rental property.
Tax incentives were originally provided to REITs to neutralize tax liability. For example, without any tax concession, REITs in the jurisdiction with a dividend tax will be subjected to double taxation, once when the REIT reports income and again when the REIT shareholders receive the dividends. Tax neutralization allows the total tax levelled on REIT cash flow to be competitive with that of a rental real estate held privately. Foreign REITs may or may not enjoy these preferential tax treatments.
Examples from around the world show mainly two ways of how REIT operators may expand internationally.
First, leading multi-national REITs tend to focus their efforts in a handful of countries. Westfield, for example, is a highly successful retail REIT from Australia, and its international expansion focused mainly in the United States, the United Kingdom, and Brazil. A selective international deployment allows a REIT to capture a large enough investment universe for its capital strategy, while encouraging the REIT to build local teams have the managerial capability to be successful in each of its markets.
For the most successful REITs, their foreign operations are as substantial as the operations of their top local competitors. To justify the expenses of a substantial operation, the REITs will need to hold a substantial portfolio in each country that it decides to compete in. This often means a conscious decision to stay away from other countries, even if these countries may show promises in initial, top-down analyses.
Another way to expand internationally is to operate foreign subsidiary REITs. Some Malaysian REITs, for example, are managed by listed Singaporean companies or their subsidiaries. One of the top three New Zealand REITs also has an Australian management. In these arrangements, the subsidiary REIT complies with the REIT protocols of the hosting country, which provides the appropriate tax benefits. Moreover, an appropriately structured subsidiary REIT can be a good way to navigate through foreign ownership restriction legislation in countries where these laws exist.
The local team, as in the multi-national REIT example listed above, will probably be substantial enough to handle localized management, but the parent entity provides overall direction. This arrangement provides investors with an opportunity to customize their exposure by having a chance to invest in the listed vehicles in both countries.
Investing abroad is a natural evolution of the real estate sector, and REITs have a variety of ways to implement their investment plans. Investors wanting international exposure can investigate the foreign REITs listed locally, REITs with international market exposure and the subsidiary foreign REITs.
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