Bad news from China won't derail this sector

Brent Lewin | Bloomberg | Getty Images

A prolonged property slowdown in China is one of the biggest risks financial markets face this year, but there's one sector that may be immune: Asian real-estate investment trusts (REITs).

Declining real estate activity in the world's second-largest economy could create more opportunities for acquisitions as mainland developers look to sell assets amid falling prices and tepid demand, thus boosting the REIT market, said Victor Yeung, chief investment officer at Admiral Investment.

The acquisition of a Shenzhen shopping mall by Hong Kong's Link Real Estate Investment Trust, Asia's largest REIT, is one such example. While details of the purchase haven't been released yet, Standard Chartered believes the deal will undoubtedly boost Link REIT's stock valuation.

"People may not recognize this, but half of the growth of REITS on average comes from management actions, such as mergers and acquisitions (M&A) and other forms of development and restructuring," Yeung told CNBC on Tuesday.

REITs in Hong Kong and Singapore are waiting for such acquisition opportunities, he said, which are likely increase their market cap significantly. "Much of the outperformance of our fund in 2014 came from identifying these [acquisition] opportunities. For 2015, this will also be the story," he noted.

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Furthermore, private equity funds with a vintage of 2007 or 2008 are coming towards the end of their fund lives and many are actively looking for an exit, Yeung said, adding that REITs or a portfolio sale to an existing REIT can be desirable options.

REITs, financial instruments designed to provide investors with liquid exposure to income-generating real-estate, enjoyed strong growth this past year. The MSCI AC Asia Pacific REIT Index saw gross returns of 14 percent in 2014, compared to just 4.7 percent for the global equity benchmark MSCI ACWI index.

To be sure, the outlook for China's property market seems to be improving overall, with Macquarie forecasting 5-10 percent sales growth in 2015, anticipating "an L-shaped recovery."

"Our expectation is that 2015 would be a better year than 2014 in terms of physical market sentiment, transaction volume, price and ease of sales. Policy risks are likely to be lower as well. The mortgage relaxation on in late-September is a strong boost to both homebuyers and developers. Sales picked up strongly in October while housing inventory in major cities fell," the group noted in a recent report.

Where should you look?

Hong Kong REITs boasted some of the best returns in Asia last year, with yields contracting from 2.38 percent to 1.86 percent, Macquarie observed. However, yields could expand if a U.S. interest rate hike takes place in the second half of 2015, the bank said.

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Japan's REIT sector is also poised for a promising year ahead following the Bank of Japan's (BOJ) decision in October to increase REIT purchases from 30 billion yen to 90 billion yen in 2015.

"On the supply-demand front, the sector has benefited from BOJ purchases not only in direct terms but also by reassuring a wide variety of other investors. Moreover, we think REITs have seen a strong benefit from the Nippon Individual Savings Account [Japan's tax-free investing program] because they are more of a yield instrument than regular equities," Nomura said in a report this week.

"We also think that the government pension investment fund (GPIF) could start considering REIT investment in earnest," the group added.