Papua New Guinea’s major property developers and investors recently created the PNG Property Developers Association.
Rupert Bray, Managing Director of Steamships Trading Company, is reported as saying that the Association would like to make it easier to buy and sell property in PNG. One way of achieving this is through property trust structures. He is reported as pointing out that PNG does not have the large property trusts that give overseas investors exposure to the property market.
These type of property trusts are known as Real Estate Investment Trusts, or REITs. They are the result of what is called the securitisation of property assets. That is, creating securities which can be traded on the stock exchange from an asset such as a property, which can’t be traded on the stock exchange.
A REIT will generally be the owner of one or more commercial or industrial properties which it leases to tenants and manages. These may be office buildings, hotel buildings, warehouses, factories, shopping centres or similar. REITs generally do not invest in residential property, so they are not going to impact the price of residential properties.
What does this have to do with the stock exchange? Why are REITs important for PNG investors?
REITs can be either listed or unlisted and there are advantages and disadvantages to both, but listed REITs are generally preferred as they can produce slightly higher returns. They are generally also more liquid meaning investors can sell and receive their money quicker if they need to.
In 2019 the cumulative market capitalisation of REITs globally was approaching US $2 trillion (7 trillion kina) in 35 countries with active REIT markets. Currently, ASX listed REITs have a market capitalisation of AUD 24.15 billion (60 billion kina).
REITs are common in many overseas markets and provide local retail investors with an opportunity to invest in property they would not otherwise have access to. A retail investor would not be able to buy an office tower or a shopping centre or a hotel building or a large warehouse. But for a 2,000 kina investment through a REIT they could buy and own a small portion of those properties in the same way as an investor buying shares in a company buys and owns a small portion of that company.
REITs also provide overseas investors with a mechanism to invest in local properties. This brings more investment into the property market allowing more property development to occur.
Bringing new investors to the market is important for the broader economy. For example, it is estimated that in Australia that for every million dollars of non-residential construction 2.49 million dollars of economic activity is generated. This makes property development one of the largest drivers of economic activity which means more employment and more taxation revenue. The same multiplier effect may or may not apply in Papua New Guinea, but the government should be interested in what could be achieved.
