Asian funds seeing big potential for returns from local, U.S. REITs

Asian pension funds are turning increasingly to U.S. and Asian real estate investment trusts, and that interest is only expected to grow.

In Japan, interest in REITs and REIT mutual funds has increased dramatically. "Since last summer, Japanese investment in REIT mutual funds have taken off," said Tony M. Edwards, senior vice president of the National Association of Real Estate Investment Trusts, Washington. "For several years (Japanese markets) have had severe deflation and negative yields, and investors are appreciative of any instrument with predictable and steady yields."

The pools of available assets is not small. In Japan alone, pension plans have about $2.14 trillion, according to data from local-country sources provided by Mercer Human Resource Consulting, New York. In Singapore and South Korea, the pension markets are centered around the $56 billion Central Provident Fund and $77.3 billion National Pension Scheme, respectively.

And while the standard target allocation for real estate among U.S. pension plans is 10% to 15%, outside the United States a 20% allocation to real estate is becoming standard, said Maury R. Tognarelli, president and chief executive officer of Chicago-based Heitman LLC, which manages $2 billion in REITs.

For example, assets in U.S. REIT mutual funds have climbed to more than $1 billion since mid-October from Japanese investors alone, according to data provided by NAREIT, which only tracks assets REIT mutual fund investments.

Since the first Japanese REIT was launched in Tokyo in 2001, the Asian REIT market has grown to $10 billion, with Japanese REITs — or "JREITs" — accounting for 90%, according to a recent study by Prudential Real Estate Investors, Parsippany, N.J. Currently there are 11 REITs in Japan, seven in South Korea and three in Singapore. Hong Kong created its first REIT last year.

So far, individuals have been the primary Asia REIT investors. But Asian pension plans are beginning to seek out REITs in Asia and in the United States as a way of providing a source of annuities consisting of rental income with equitylike returns in the form of dividends, the Prudential report stated. Officials in pay-as- you-go pension systems like those in Japan and South Korea estimate that in about 20 years, the number of workers might not be large enough to support pension benefits to the aging work force.

What's more, a regulation in Japan that kept all investors away from U.S. REITs was changed last summer. The old regulation prohibited Japanese investors from investing REITs and funds of funds, but the rule was changed last summer, NAREIT's Mr. Edwards said. Since October, six companies have raised $1.5 billion in real estate mutual funds that invest in REITs, he added.

Expected to further stimulate growth is a treaty was ratified by the United States and Japan on March 30. This reciprocal treaty recognizes lowers the withholding rate for ordinary dividends for Japanese and U.S. pension funds to zero from 15% and dividends for REIT mutual funds to 10% from 30%. If ratified, the treaty would go into effect in July.

The United States has similar treaties with the United Kingdom, the Netherlands, Canada and Mexico, Mr. Edwards said.It is possible that Japanese pension plans might find REITs or REIT mutual funds attractive as a result of treaty changes, much as Dutch pension plans have invested billions since the Dutch treaty changes in 1988, he said.

"Building and growing pension savings has become a policy priority in Asia," the Prudential report stated. Japan and Singapore are in the midst of pension reform, with the Singapore government proposing that pension money be privately managed.

"A change in laws is making investment in U.S. public securities such as REITs much more attractive," said Tim Pire, managing director at Heitman. Last month, Heitman was hired by Tokyo-based Nomura Securitiesto subadvise its Nomura US-REIT Open Fund. Heitman also was selected by another institutional money manager, which Mr. Pire would not identify, to offer U.S. REITs for pension plans in Japan, and the deal is expected to be closed in the second quarter.

Initial proceeds for the Nomura REIT was $125 million, Mr. Pire said.

"We're not alone. Some of our competitors have similar relationships" with Asian firms, Mr. Tognarelli said.