During the Hong Kong Book Fair this year, we published a new book on REIT strategy in association with HKEJ’s [Chinese] publishing department. The book was written with REIT investors in mind, as we hope to guide them through the analysis process of how to evaluate REIT management teams. Curiously, however, we have also been invited to speak with real-estate operators to discuss how the concepts in my book can help existing operators.
The major issue revolves around finding growth opportunities as REITs. REITs are required by law to distribute substantially all of their net income as dividends, and thus, REITs in general do not accrue capital for additional investment. This means that major investments typically require secondary placement to raise equity. The precise mechanics differ from market to market. In some markets, for instance Singapore, investors prefer larger placements that would sustain several acquisitions. Other markets such as Australia would prefer REITs to come to the market for major acquisitions.
However, no matter what the precise mechanism is adopted, it is clear that REITs must command the confidence of the market to support their continuous growth. Otherwise, neglected REITs could fall into a value trap, where their stock prices deviate much from the per share net asset value and make secondary placement prohibitively expensive. This would make it even harder to find growth, and ultimately, this could create a feedback loop.
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