The headlines on Evergrande – one of China’s largest property developers and the world’s most indebted one – scream distress, bankruptcy, contagion, impending collapse and widespread economic malaise.
Comparisons have been made with the Lehman Brothers collapse that led to the Global Financial Crisis (GFC) of 2009/2010. Global financial markets have been shuddering at the very thought of it.
The good news for our investors in the APN Asian REIT Fund is that property developer stocks like Evergrande are not part of the Fund’s investment universe, nor will they ever be. In fact, the stocks we own in the Fund couldn’t be more different.
The REITs we own are primarily passive asset owners of high quality commercial real estate in Singapore, Hong Kong and Japan. Examples include skyscrapers in the Singapore CBD, community shopping centres in Hong Kong and logistics facilities in Japan servicing the ecommerce market.
The earnings and income from these REITs are primarily derived from high-quality tenants that have long-term leases in buildings owned by the REITs. We like the security and predictability of this income stream.
This is quite different to the activities of property developers like Evergrande – their earnings come from home sales, which may be variable both in price and volume, and deposits on yet-to-be-built homes.
We specifically exclude property developers such as Evergrande from the investment universe of the Asian REIT Fund for these reasons.
Another key difference is the mountain of debt that Evergrande carries – some US$300bn on which it is now struggling to meet interest payments. In our Asian REIT portfolio, leverage levels are not only modest but, in some cases like Singapore and Hong Kong listed REITs, highly regulated. The REIT legislation in these markets imposes an absolute debt ceiling.
With the lessons that came out of the GFC, REITs globally have kept a tight rein on their balance sheets – their liquidity levels are healthy and closely monitored by the companies and investors alike.
We cannot predict the extent of the fallout from Evergrande or whether the Chinese government steps in to assist. But we do believe that investors are right to fear its potential impact.
China isn’t just a cog in the wheel of global financial markets – the sheer size of its economy and banking system has the potential to move markets and shake confidence.
What we can take comfort in is that our investments in the APN Asian REIT Fund will continue to deliver the dividend income that it has done so consistently over the last decade.