Real estate revivals allow REITs to rake in profits

Real estate investment trusts, or REITs, which allow investors to pool their funds to invest in real estate in a liquid way, is booming these days.

According to market analysts, trusts that invest in real estate in Japan, North America and Hong Kong are doing well thanks to growing hopes for economic recovery in the first two places.

Hong Kong’s property market has been hot for several years.

Zeroin, a local fund evaluation company, said real estate investment trusts in Korea enjoyed average gains of 20.3 percent in 2012 alone.

Market analysts said REITs gained attention from investors in the second half of last year when demand for leases in commercial and residential buildings, which sunk or froze after the 2008 global financial crisis triggered by U.S. subprime mortgage crisis, began to rise.

Rents are rising in the United States, Canada, Japan and Hong Kong, which have become a boon for REITs.

Hanwha Japan REITs 1 fund, run by Hanwha Asset Management, has had the largest gain of 9 percent from Jan. 2 to Feb. 5 followed by J-REITs 1, which is run by Samsung Asset Management. It rose 8.4 percent. Real estate investment trusts that have heavy investments in U.S. real estate in their portfolios gained an average of 5 percent over the period, according to Zeroin.

Market observers said the prospect of improvement in Japanese real estate has boosted trusts that invested there.

Japan’s real estate market has been lousy since the late 1980s and was made even worse after the March 2011 tsunami and nuclear plant accident in Fukushima. But the frozen market has started to thaw with the weakening yen.

“As Japanese exporters prosper thanks to a weaker Japanese currency, they began to expand their offices and this has increased demand for leases in the real estate market,” said Kim Seon-hee, an asset manager at Hanwha Asset Management. “The office vacancy ratio is Tokyo has dipped to mid-8 percent recently from mid-9 percent last year.”

Analysts said the Japanese government’s pledge to stimulate the economy under new Prime Minister Shinzo Abe has helped gains in real estate investment trusts.

But some experts warn investors that a boom in REITs doesn’t necessarily indicate a fundamental economic recovery.

“If the economy seems like it’s recovering quickly, companies would have bought real estate instead of renting,” said Lee Chul-hee, an analyst at Tongyang Securities. “The fact that companies prefer renting instead of buying shows they still lack confidence in the economic recovery.”

Other market observers forecast investors will keep their eyes on REITs, especially those invested in Japan.

“Real estate investment trusts own hot office buildings that global enterprises want to move in,” said Kim of Hanwha Asset Management.

Real estate investment trusts are also benefitting from the low interest rates available on regular savings, which investors try to avoid.

Experts warn investors not to expect the high gains of last year to continue.

“It is reasonable to expect between 6 and 10 percent in annual gains from real estate investment trusts,” said Hong Ui-seok, an asset manager at Samsung Asset Management.

By Kwon Hyuk-joo [mijukim@joongang.co.kr]