A rivalry is brewing over which city will dominate the growing activity of REITs in Asia. The stakes are high as both Singapore and Hong Kong attempt to become the preferred means of REIT investment in the region and in mainland China, which has no REIT structure of its own.

“There are about 15 REITs in the pipeline this year,” says real estate attorney Christine Kim, a partner in the Hong Kong office of Jones Day. “Singapore and Hong Kong compete, as to who is better to host these REITs,” adds Kim.

Singapore is clearly the frontrunner with its booming economy and status as a center of international trade. “Singapore has been pushing the REIT concepts hard,” says John Kriz, managing director of real estate finance at Manhattan-based Moody’s Investors Service. “You will find REITs domiciled in Singapore that have many or most of their assets outside Singapore,” he says.

Since its inception in 2002, Singapore’s REIT market has grown to include 16 REITs with a capitalization of nearly $20 billion. Singapore’s REIT market has also become more sophisticated. Just this year, for example, Singapore amended its REIT legislation to allow mergers and acquisitions, including language to protect shareholders. That opens the door for accelerated growth through takeovers, which some market watchers say is imminent. “Singapore is positioning itself as a regional financial center, with REITs as one arrow in its quiver,” Kriz says.

In the other camp is Hong Kong, which currently lists seven REITs and has a market capitalization around $9 billion. Hong Kong just launched its first REIT in 2005, or three years behind Singapore. Unlike Singapore, however, Hong Kong doesn’t enjoy much positive investor sentiment these days, due to a recent emphasis on dividend yield. Recent REIT offerings promised guaranteed yields, but did so by hedging those dividends through swaps and then passed the swap fees on to shareholders. Investors quickly caught on and those REITs have suffered as a result. Shares of Prosperity and Champion – two Hong Kong REITs launched late last year – have been trading below their IPO prices.

“That tainted the market, and investor sentiment in Hong Kong has soured,” says Steve Carroll, managing director of CB Richard Ellis Global Real Estate Securities, referring to the swap arrangement situation.

Carroll isn’t alone in his prognosis. Steve Buller, portfolio manager of the Fidelity International Real Estate Fund, says Hong Kong’s REIT market has been slow to recover from its recent weak IPOs because Chinese investors are more interested in achieving higher returns in the broader equities market. Says Buller: “I would deem Hong Kong a failure so far in introducing REIT-like structures.”

Even so, Hong Kong is a strong financial center and has a geographic advantage over Singapore as the two markets jockey for position in regard to the mainland. “One of the issues for Hong Kong going forward is real estate activities on the mainland and how they will participate,” says Kriz of Moody’s.

REITs seem destined to take a stronger hold in Asia, with the number of non-Japanese REITs projected to double in the next two years. Japanese REITs, while more of a passive investment than their western counterparts, have a capitalization of around $50 billion and number 41. Malaysia and South Korea have 11 and 6 REITs, respectively. Australia, with 72 trusts and a market capitalization of $124 billion, is the largest REIT market outside of the United States, which has a $344 billion market cap.

“Securitization of real estate is growing very rapidly in Asia, following the trend of the U.S. REIT market,” says Chris Leophard, REIT portfolio manager in the Sydney office of The Principal Financial Group. “The Australian REIT market is quite mature and sophisticated, having been through several structural changes over the past 10 to 15 years,” he says.

REITs invariably become part of a maturing real estate market, according to Kim, the Jones Day attorney. While mainland China presents plenty of development opportunities today, developers will demand efficient exit strategies in coming years, she says. If China doesn’t answer that demand by creating its own REIT structure, then other markets will be happy to provide that liquidity.

Says Kim: “Somewhere, there will be major listings of Chinese property companies, or if they don’t, there will be more cross-boarder listings in Singapore or Hong Kong.”