Since its formal adoption into the Uniform Prudent Investor Act of 1992, the Prudent Investor Rule (PIR) has been adopted by many institutional investors around the world. One central tenet of the PIR is that investors should diversify their holdings. Within the real estate world, this typically means a diversification into different geographies and asset classes.
Geographical diversification makes sense because real estate markets are ultimately based on the local supply and demand. Since a building cannot be moved to another location, it can only cater to demand in a fixed vicinity. Due to that characteristic, though the Hong Kong and Singapore are both city economies in the Asia Pacific, the real estate market in both economies differ due to, among other factors, the relative difference of demand.
As such, we are encouraged to see major Singapore REITs expanding abroad. For example, at the time of writing, Ascendas REIT announced a round of completed acquisitions in the UK which would make up eight percent of the REIT’s asset base. Investors invested in these REITs, therefore, gain exposure to international assets that are professionally managed. For retail investors, this could probably be the most cost-effective way to diversify their real estate holdings.
Alternatively, retail investors can also invest in foreign REITs directly. A typical Asia Pacific REIT index normally has one third of the portfolio exposed to Australia, one third to Japan, and the remaining third in Singapore and Hong Kong. Slightly more sophisticated investors and institutional investors may prefer to allocate their international exposure directly to international REITs.
A direct allocation allows investors to customise their allocation. For instance, a Singapore investor already owning a significant portfolio of Hong Kong stocks can choose to add or reduce exposure when considering the effects of his overseas real estate exposure to his overall investment portfolio. Moreover, by directly allocating capital to foreign REITS, investors can also pick the REIT with the top local management teams. For example, Hong Kong’s Link REIT is the largest Asian REIT by market capitalisation, and investors may appreciate it by the value creation brought by its management team.
Another way to diversify abroad is to buy enbloc real estate. Within the last 24 months, multiple Chinese, Hong Kong, and Singaporean groups have invested in enbloc assets in Australia, for instance. Acquiring an enbloc asset requires significant input of time and expertise, but once completed, the investor can maintain complete control of the asset. For institutional investors, acquiring directly can allocate significant capital in a location of their choice.
Often these projects include the element of value-add. By renovating, refurbishing and rebranding an asset, investors may improve the offering of the asset. If executed correctly, a better building benefits both the tenants and the community and hence unlocks investment value for investors.
Obviously, investing in enbloc buildings requires significant capital and this is probably limited to only the large investors. Normal investors may consider building individual flats. For example, Hong Kong sees a vibrant oversea property industry, with property projects from the UK, Japan, Australia, and various economies of Southeast Asia regularly engaging Hong Kong buyers.
These projects also attract a diverse range of investors. Pure investors are interested mainly in investment returns, while others may be interested to have an asset in their favorite vacation spots. Sometimes, retirees and students may buy to support their plans to live or study abroad. Each group of buyers has different needs, and thus, different property offerings will appeal to each target group.
This is why events like sales expo are appealing to both developers and buyers, as these events facilitates and lowers the search cost of both parties. In Hong Kong, these events are often hosted every week during the sales season. We believe that this is a natural development as wealth level rises and more citizens are becoming more resourceful in purchasing international assets.