Hong Kong-based alternatives investment manager PAG’s HK$5.24 billion ($670 million; €580 million) takeover bid for Spring REIT is the first voluntary takeover attempt by a non-controlling shareholder in a Hong Kong-listed REIT.

PAG’s conditional cash offer of HK$4.85 for each unit of Spring REIT, which formally opened on October 2, comes over a year after the firm made a public critique of the REIT, whose portfolio  includes two office towers and approximately 600 car parking spaces in Beijing, requesting the trust’s board to hold an extraordinary general meeting and vote on resolutions to address underperformance and poor governance standards. Some of the main areas of concern expressed by PAG include the performance of Spring REIT, with Broderick Storie, managing director and partner at PAG, terming it as the “worst performing REIT stock on the exchange”. Then, there are issues surrounding the REIT’s acquisition of 84 UK automotive repair shops as well an intended acquisition of a shopping center in Guangdong.

PAG, and the parties acting in concert with it, own about 14.8 percent of Spring REIT. Should PAG’s takeover offer receive more than 50 percent of the unitholders’ acceptance, Spring Asset Management Limited would be terminated as the manager. PAG will then act to vote down the Guangdong acquisition and proceed with undertaking a “strategic review” of the REIT. Storie told PERE this process might “not necessarily be a take-private opportunity.” A broad range of options would be considered in the strategic review, he noted, which could encompass acquisitions programs, dispositions or mergers.

The outcome of PAG’s long battle with Spring REIT’s manager is yet to be determined. But it comes at a time when industry experts are predicting an increase in the number of REIT takeovers in Asia, especially by opportunistic managers.

A report published in January 2018 by property services firm CBRE has estimated Asia-Pacific opportunistic real estate funds to have over $39 billion in capital to deploy over the next three years. According to CBRE, privatization of REITs will become one of the creative deployment strategies used by the opportunistic managers in this region. New York-based alternative asset manager Blackstone, for instance, led two take-private deals in Asia last year, when it took over the Singapore-listed Croesus Retail Trust and Australia’s Astro Japan Property Group.

Though reasons for takeovers differ in each case, a key draw is the performance of REITs. As PwC and Urban Land Institute highlight in their 2018 Emerging Trends in Real Estate report for Asia-Pacific, “the bloom has come off regional real estate investment trust (REIT) markets this year as higher interest rates dim the attraction of an asset class that tends to trade in line with fixed-income assets.”

In Hong Kong and Singapore, for instance, REITs are trading at an average 40 percent and 20 percent discount to their net asset value, respectively, according to Henry Chin, head of Asia-Pacific research, at CBRE.

“The dynamics in Asia-Pacific are changing, he noted. “In the past, when investors wanted to invest in liquid real estate, the only way they could do that in Asia-Pacific was via investing in real estate stocks and REITs,” he explained. “Since the global financial crisis, however, the performance of REITs has become highly correlated to the overall stock markets. So, investors looking for liquidity are choosing instead to invest in open-end vehicles, which offer a dividend pay-out, inflation hedge and stable returns.”

Many REITs are also struggling with economies of scale. For inclusion in the regional indices or the MSCI World REITs Index, REITs need to be of a certain size, and must adhere to specific free-float rules and not have a huge sponsor stake.

“Once the REIT is included in the indices, its success is much more certain. It is picked up by major analysts, gets capital from equity investors, gets volume and the unit price stays on the right trajectory, explained Philip Levison, managing partner at Singapore-headquartered real estate advisory firm Penmount Partners and formerly chief executive at the Singapore-listed Cromwell European REIT. “However, many REITs are not there yet. They have high overhead costs and little chance of developing into a major REIT. So, the REITs, with their well-managed portfolio of stable, income-producing assets, geared to 35 to 40 percent, become an interesting opportunity for private equity investors to take private.”

To be sure, privatization of REITs has long been a viable strategy for managers in the US and Europe. However, the structure of the REITs’ ownership in Asia, particularly in Hong Kong and Singapore, continues to pose a challenge for opportunistic managers. Many REITs are sponsored either by the government or major developers that may not want to cede control. In addition, as Levison pointed out, some of the large sponsor stakes are embedded within the boards of many REITs, making it difficult for a hostile takeover.

Another issue, as the PwC report highlights, is that even though REITs trading at huge discounts to NAV are takeover targets, it is difficult to accumulate sufficient stock to execute a sufficient takeover unless the firm is willing to pay a recognizable premium to the current valuation.

This makes PAG’s offer, which equates to a 61.7 percent premium over Spring REIT’s closing price on October 1 and 27 percent premium above the HK$3.81 IPO price in December 2013, a notable exception. If successful, it could set a new benchmark for takeover bids in the region.