Description
A real estate investment trust (REIT) is a corporation or a business trust that combines the capital of many investors to acquire (or provide financing for) various real estate assets. Investors get a share of the earnings, depreciation, etc. from the portfolio of real estate holdings that the REIT owns.
YÖNET M VE EKONOM Y l:2005 Cilt:12 Say :1 Celal Bayar Üniversitesi . .B.F. MAN SA
Real Estate Investment Trusts And Fundamentals of
Real Estate Investments : A Case of Turkey
Dr. G. Cenk AKKAYA
Dokuz Eylül Üniversitesi, BF, letme Bölümü, ZM R
Dr. Nilgün Kutay
Dokuz Eylül Üniversitesi, BF, letme Bölümü, ZM R
Dr. Mine Tükenmez
Dokuz Eylül Üniversitesi, BF, letme Bölümü, ZM R
ABSTRACT
A real estate investment trust (REIT) is a corporation or a business trust that combines the
capital of many investors to acquire (or provide financing for) various real estate assets. Investors
get a share of the earnings, depreciation, etc. from the portfolio of real estate holdings that the
REIT owns. REITs were created to provide investors with the opportunity to participate in the
benefits of ownership of larger-scale commercial real estate or mortgage lending. Finally, REITs is
that they are probably the best inflation hedge around.
Keywords: Real Estates, Real Estate Investment Trusts, Real Estate Finance, Corporate
Real Estates, Financial Analysis of Real Estates
Gayrimenkul Yat r m Ortakl klar ve Gayrimenkul Yat r mlar n n
Temelleri: Türkiye Örne i
ÖZET
Gayrimenkul yat r m ortakl klar (GYO) birçok yat r mc taraf ndan olu turulan ve çe itli
gayrimenkul yat r mlar n n finansman için sermayesini sa land bir i letme ve ortakl k
bütünüdür. Yat r mc lar GYO n n olu turdu u portföyden belirli oranlarda hisse almaktad rlar.
GYO yat r mc lara s n rl sermayeleriyle büyük ticari gayrimenkul projelerine yat r m yapmalar n
ve bu projelerin sa lad faydalardan yararlanmalar n
sa lamaktad r. Bu ba lamda GYO lar
enflasyon kar s nda yat r mc lar koruyan önemli bir araçt r.
Anahtar Kelimeler: Gayrimenkul, Gayrimenkul Yat r m Ortakl klar , Gayrimenkul
Finansman , Gayrimenkul Yat r mlar n n Analizi
Introduction
Real estate ownership is a large and profitable part of economy. The real
estate management industry is becoming increasingly competitive as developers
and others enter the property management business. This industry consolidation is
still accelerating. Real estate investments are profitable vehicles for investors. The
diversification can substantially reduce the risk of a real estate portfolio. Investors
who want to implement on real estate diversification strategy have two
possibilities: they can invest directly, by buying actual buildings, and they can
invest indirectly, by buying the shares of listed property companies.
1.Features of Real Estate Investments
Several characteristics of real estate distinguish it from alternative
investments (stocks, bonds, foreign exchange, etc.). Real estate does not uniquely
G.C. Akkaya-N. Kutay- M. Tükenmez / Real Estate Investment Trusts and Fundamentals of Real Estate
Investments: A Case of Turkey
40
possess these characteristics, but they are important in determining the prices and
quantities transacted in markets. These characteristics include (Chinloy: 1987):
Differences in information: In real estate transaction, there are differences in
information between parties-buyer and seller.
Localized markets: Markets are local in scope for the physical properties, and
trading on a national bourse does not take place.
Heterogeneous properties: All properties are not the same, with numerous
differences in characteristics.
Illiquidity: Real estate is not mobile or portable, and transaction is difficult
because of legal institutions, and the large indivisibility of size .
Tax Treatment: Real estate is accorded favorable or unfavorable tax
treatment, and tax advantages can be key factors in an investment decision.
Supply restrictions: It is often noted that 'they aren't making more land.' Land
is relatively, if not perfect, inelastic supply.
2. Dimensions of Real Estate Investment Trusts
A real estate investment trust (REIT) is a corporation or a business trust
that combines the capital of many investors to acquire (or provide financing for)
various real estate assets (Deloitte & Touche;1997). Appearing first in the 1994,
there are now 9 REITs in the Turkey (The financial indicators about these REITs
are given in the appendix A).
A REIT is a company that invests its assets in real estate holdings.
Investors get a share of the earnings, depreciation, etc. from the portfolio of real
estate holdings that the REIT owns. REITs are becoming a strategic business and
planning tool for a corporation's real estate (Friedman;1998). REIT vehicle is a
topic of current interest to inventors in and portfolio holders of real estate
(Meretsky;1998). A REIT is essentially a corporation or business trust that
combines the capital of many investors to acquire or provide financing for all
forms of real estate.
The investors have a much more liquid investment than this do when
directly investing in real estate. REITs are mutual funds for real estate. The REIT
industry raises important capital for the industry, the housing market and related
industries and for retail services industries.
REITs traditionally pay out all of their taxable income and, in many
cases, 90% of their funds from operations in the form of dividends and
distributions to shareholders (Landy:1996). A corporation or trust that qualifies as
a REIT generally does not pay corporate income tax. This is a unique feature and
one of the most attractive aspects of a REIT. This means that nearly all of a
REIT's income can be distributed to shareholders, and there is no double taxation
of the income to the shareholder.
A REIT must (Notification of REITs of Turkey, 2001 ):
be a corporation, business trust or similar association,
Yönetim ve Ekonomi 12/1 (2005) 39-46
41
be managed by a board directors or trustees,
have shares that are fully transferable,
initial capital not less than 1 trillion Turkish Liras,
the share of each real estate or real estate project in the portfolio must not be
less than 10 percent,
invest at least 75 percent of the total assets in real estate assets,
invest at most 10 percent of the portfolio to real estate certificates and asset
backed securities
invest at most five percent of portfolio to stocks and type A (invest at least 25
percent of the portfolio to domestic companies) mutual funds
invest at most 10 percent of portfolio to foreign real estates and real estate
backed securities
REITs were created to provide investors with the opportunity to
participate in the benefits of ownership of larger-scale commercial real estate or
mortgage lending, and receive an enhanced return, because the income is not
taxed at the REIT entity level. This means that a diverse range of investors can
realize investment opportunities otherwise available only to those with larger
resources. In addition to avoiding double taxation and requiring a small minimum
investment, REITs also offer investors (NAREIT;1998):
Current income: usually stable and often provides an attractive return;
Liquidity: shares of publicly traded REITs are readily converted into cash
because they are traded on the major stock exchanges;
Professional management: REIT managers are skilled, experienced real estate
professionals;
Performance Monitoring: a REIT's performance is monitored on a regular
basis by independent directors of the REIT, independent analysts,
independent auditors, and the business and financial media. This scrutiny
provides the investor a measure of protection and more than one barometer of
the REIT's financial condition.
An investor may invest in a publicly traded REIT, which in most cases
is listed on a major stock exchange (for instance, Istanbul Stock Exchange), by
purchasing shares through a stock broker. An investor can enlist the service of a
broker, investment advisor or financial planner to help analyze his or her financial
objectives.
3. Structures of Real Estate Investment Trusts
The REIT industry has a diverse profile; which offers many attractive
opportunities to investors. There are three different investment approaches for
REITs; equity, mortgage, and hybrid.
G.C. Akkaya-N. Kutay- M. Tükenmez / Real Estate Investment Trusts and Fundamentals of Real Estate
Investments: A Case of Turkey
42
Equity REITs: Equity REIT own real estate. Their revenue comes
principally from rent. This type of REITs are the most common. Investors have a
relatively steady dividend payout, and the real estate often provides capital
appreciation.
Traditional investments include office buildings, houses, apartments, and
shopping centers, but some new equity REITs are formed existing properties and
real estate partnerships through an Umbrella Real Estate Investment Trusts
(UPREIT) (Deloitte & Touchle; 1997). UPREITs are different from traditionally
equity REITs. UPREITs are a limited partnership structure is utilized, with the
REIT functioning as general partner. Both holders of real estate partnership
interest and REITs can benefit from the UPREIT. The REIT benefits by acquiring
real property without having to generate capital to purchase the property.
Mortgage REITs: Mortgage REITs loan money to real estate owners.
Revenues are derived from interest earned on mortgage loans. Also some
mortgage REITs invest in residuals of mortgage-based securities. Mortgage
REITs generally do not own property, and income can be affected by fluctuations
in interest rates and loan defaults.
Hybrid REITs: A combination of equity and mortgage REITs, hybrid
REITs own property and also loan funds to owners of real estate. Hybrid REITs
has all advantage of equity REITs and mortgage REITs. While it has the potential
for both capital appreciation and loss, it also provides income but does not mature
with a repayment of principal. It can provide the long term investor with an
attractive yield at relatively low risk, and an opportunity to diversify into income-
generating commercial real estate (Irwin;1998).
4. The Financial Model of Real Estate Investment Trusts
An interesting thing about REITs is that they are probably the best
inflation hedge around. Far better than gold stocks, which give almost no return
over long periods of time. They almost always lack the potential for tremendous
price appreciation (and depreciation) that the investors get with most common
stocks.
Real estate looks attractive for some macroeconomic reasons. Because of
high interest rates and construction costs, real estate a profitable investor tool for
investors. Real estate revenues are much more than foreign exchange and stock
exchange markets.
Investors would be hurt by interest rate increases. But interest rates
usually rise with inflation, and inflation could result in higher asset values for the
properties held in the REIT. An economic slide that would adversely affect the
ability of tenants to pay their rent is a risk. There is a stock market downturn.
While some real estate as an industry independent of the stock market, the REIT
market remains dependent on the continuing inflow of capital through unit
purchases. If the broader market began to trend downward, the REIT market
could go with it (Irwin;1998).
Yönetim ve Ekonomi 12/1 (2005) 39-46
43
Figure.1. Real Estate Revenues
1998 1999 2000 2001 2002 2003
Time
Reference: Tusiad,2002
___ : Istanbul Stock Exchange
___: Foreign Exchange
___: REITs revenues
There are two different type of real estate funds, open end funds and close
end funds. Open end real estate funds advantage is liquidity. New investors can
acquire interests in properties purchased with additional capital. The
value of the portfolio is adjusted, usually quarterly, based on outside appraisals or
on a internally-provided determination of value. New investors buy a fund at the
adjusted portfolio values.
Close end funds were first available in the late 1970s in United States. As
investors became apprehensive about using property appraisal to value funds units
when money was moved in and out of the fund. With a close end fund, an
investor buys into the fund at real estate market values, holds the units for a
predetermined period and receives proceeds from the sale of properties at the end
of the period. The illiquidity of this close end structure is justified because of the
long term nature of real estate investments and because it is a means of
overcoming the appraisal problem involved in open end funds. The illiquidity
issue is also somehow diffused by the market for the sale of close end funds units
that exists (Raijen;1998).
Revenues
(billion
TL)
700
600
500
400
300
200
G.C. Akkaya-N. Kutay- M. Tükenmez / Real Estate Investment Trusts and Fundamentals of Real Estate
Investments: A Case of Turkey
44
The benefits from this form of REIT include: increased predictability of
return, as there is no risk of dilution of security holder's interest; a guarantee that
security holders will receive the current benefits of property ownership, as all
cash flow is distributed; and, the ability of security holders to participate in any
appreciation in the portfolio properties on a current basis (Meretsky;1998).
REITs provide a suitable investment vehicle for investors of limited
financial means who can pool their resources and invest in real estate properties
without the major commitment of time and capital required for direct ownership.
There are three different ways of estimating real estate values for REITs.
Market approach; The value of a particular property should not differ greatly
from realistic asking prices and recent sale prices of similar real estate. Thus a
check of the market and recent transactions should give some guide to what a
particular property is worth. The cost approach; real estate values may also be
based on the cost of equivalent land and construction. The construction cost
should include the cost of funds tied up while property is being built and allow for
the differential values of new versus used structures. Thus valuations based on
replacement costs (Branch;1989). The income approach; this valuation based on
expected future dividend and rental income of the real estate.
The Income Approach: An Example
Borrowing cost : 18%
Alternative yield on low-risk investment: 14%
Percent down payment required: 25%
Weighted average cost of capital: 0.25 x 14% + 0.75 x 18% = 17%
Risk premium : %7
Total cost of capital : 17% +7% =%24
Current rental income : $ 3000 or $ 36.000 per year
Estimate current and future property expenses
Property taxes : $ 5000 per year
Repairs : $ 300 per year
Total $ 5300 Per year
Expected holding period : 4 years
Expected selling price : $ 150.000 ( a modest increase over the
current asking price of $ 140.000)
Net income per year : $ 36.000 - 5300 = $ 30.700
Net yearly income Constant
*
Year 1 $30.700 x 0.806 = $ 24. 744
Year 2 30.700 x 0.650 = 19. 955
Year 3 30.700 x 0.524 = 16. 086
Year 4 30.700 x 0.423 = 12.986
Total $ 73.771
*
: From the 24% column in present value table
Yönetim ve Ekonomi 12/1 (2005) 39-46
45
Present value of expected sales price : $ 150.000 x 0.423 = $ 63.450
$73.771 + $ 63.450 = $ 137.221
The present value is less than asking price ( $ 137.221 versus $140.000),
and thus the property seems relatively unattractive.
5. Corporate Trends and Real Estate
There are several possibilities a corporate has when investing in direct
real estate, which includes undeveloped land, residential rental properties, office
buildings, shopping malls and industrial properties.
Although real estate usually is the biggest financial investment companies
make, in the past firms seldom though of it as a strategic asset. Generally,
companies should sell their property if the return from investing profits from a
sale is greater than the cost of leasing the property. Selling provides other
financial and accounting benefits (Schriner;1997). It provides cash income and
tax benefits.
Most of the companies expect a return on capital of between 10% and
30%. Therefore, if company invested 100 TL billion in a facility, it'd expect an
annual return of between 10 TL billion and 30 TL billion on it.
But real estate investors, usually expect a lower return, between 8% and
%15 annually for their investment (Schriner;1997). If the return from investing
the profit from the sale is higher than the cost of leasing the facility, the investor
should sell.
Most companies invest to REITs for diversification (Geurts, Nolan;
1997). REITs protect firms against risk. There are two elements of investment
risk: systematic and unsystematic. Systematic risk is nondiversifiable. But
unsystematic risk is diversifiable. Therefore REITs can protect against
unsystematic risk via diversification. Examples of diversifiable risks are events
such as lawsuits, strikes and unsuccessful marketing programs. These risks are
specific to a particular company, and thus by investing in REITs, companies can
reduce risk.
Conclusion
The real estate management industry is becoming increasingly
competitive as developers and others enter the property management business. A
real estate investment trust (REIT) is a corporation or a business trust that
combines the capital of many investors to acquire (or providing financing for)
various real estate assets.
The investor gets a share of the earnings, depreciation from the portfolio
of real estate holdings that the REIT owns. Thus, the investor gets many of the
same benefits of being a landlord without too many of the hassles. The investors
G.C. Akkaya-N. Kutay- M. Tükenmez / Real Estate Investment Trusts and Fundamentals of Real Estate
Investments: A Case of Turkey
46
also have a much more liquid investment than the investor do when directly
investing in real estate.
REITs provide a suitable investment vehicle for investors of limited
financial means who can pool their resources and invest in real estate properties
without the major commitment of time and capital required for direct ownership.
Finally, REITs is that they are probably the best inflation hedge around.
Companies and investors can invest this profitable investment tool.
REFERENCES
Branch Ben; Investments Principles and Practices, Longman Financial Services, Second Edition
1989
Chinloy Peter; Real Estate Investment and Financial Strategy; 1987
Deloittle & Touche, Understanding REITs, Personal Finance Advisor, July 1997
Friedman M. Steven; The REIT as a Strategic Real Estate Tool, Commercial Investment Real
Estate Journal,1998
Geurts G. Tom, Nolan Hilary; Does Real Estate Have A Place in the Investment Portfolio of
Tomorrow, Review of Business, Vol.18 Issue.4, 1997
GYO, Esaslar Tebli i, 2004
Irwin Hal; REITS and The Real Estate Resurrection; CMHC Mortgage Market Trends Th rd
Quarter,1998
Landy W. Eugene; Benefits of Dividend Re nvestment Plans and Shareholder Investment Plans for
Shareholders, Real Estate Investment Trusts and the Economy; 1996
Meretsky Jason, Real Estate Investment Trusts: An Analysis of the Investment Vehicle and Income
Tax Implications, University of Toronto Faculty of Law Review vol.53 No.1,1998
NAREIT, NAREIT/PREA Property Investment Strategy, Real Estate Symposium, 1998
Raijen Van Laura; Real Estate Investment Structures, Working Paper, 1998
Schriner A. James; Real estate: hidden wealth for a company? It might be smart to sell your
property- and lease instead, Industry week, Vol.246 No.18; 1997
Tacirler Menkul De erler A. ., 2004, www.tacirler.com.tr
Tusiad, Türkiye Ekonomisi 2002 Raporu, 2003
doc_893633199.pdf
A real estate investment trust (REIT) is a corporation or a business trust that combines the capital of many investors to acquire (or provide financing for) various real estate assets. Investors get a share of the earnings, depreciation, etc. from the portfolio of real estate holdings that the REIT owns.
YÖNET M VE EKONOM Y l:2005 Cilt:12 Say :1 Celal Bayar Üniversitesi . .B.F. MAN SA
Real Estate Investment Trusts And Fundamentals of
Real Estate Investments : A Case of Turkey
Dr. G. Cenk AKKAYA
Dokuz Eylül Üniversitesi, BF, letme Bölümü, ZM R
Dr. Nilgün Kutay
Dokuz Eylül Üniversitesi, BF, letme Bölümü, ZM R
Dr. Mine Tükenmez
Dokuz Eylül Üniversitesi, BF, letme Bölümü, ZM R
ABSTRACT
A real estate investment trust (REIT) is a corporation or a business trust that combines the
capital of many investors to acquire (or provide financing for) various real estate assets. Investors
get a share of the earnings, depreciation, etc. from the portfolio of real estate holdings that the
REIT owns. REITs were created to provide investors with the opportunity to participate in the
benefits of ownership of larger-scale commercial real estate or mortgage lending. Finally, REITs is
that they are probably the best inflation hedge around.
Keywords: Real Estates, Real Estate Investment Trusts, Real Estate Finance, Corporate
Real Estates, Financial Analysis of Real Estates
Gayrimenkul Yat r m Ortakl klar ve Gayrimenkul Yat r mlar n n
Temelleri: Türkiye Örne i
ÖZET
Gayrimenkul yat r m ortakl klar (GYO) birçok yat r mc taraf ndan olu turulan ve çe itli
gayrimenkul yat r mlar n n finansman için sermayesini sa land bir i letme ve ortakl k
bütünüdür. Yat r mc lar GYO n n olu turdu u portföyden belirli oranlarda hisse almaktad rlar.
GYO yat r mc lara s n rl sermayeleriyle büyük ticari gayrimenkul projelerine yat r m yapmalar n
ve bu projelerin sa lad faydalardan yararlanmalar n
sa lamaktad r. Bu ba lamda GYO lar
enflasyon kar s nda yat r mc lar koruyan önemli bir araçt r.
Anahtar Kelimeler: Gayrimenkul, Gayrimenkul Yat r m Ortakl klar , Gayrimenkul
Finansman , Gayrimenkul Yat r mlar n n Analizi
Introduction
Real estate ownership is a large and profitable part of economy. The real
estate management industry is becoming increasingly competitive as developers
and others enter the property management business. This industry consolidation is
still accelerating. Real estate investments are profitable vehicles for investors. The
diversification can substantially reduce the risk of a real estate portfolio. Investors
who want to implement on real estate diversification strategy have two
possibilities: they can invest directly, by buying actual buildings, and they can
invest indirectly, by buying the shares of listed property companies.
1.Features of Real Estate Investments
Several characteristics of real estate distinguish it from alternative
investments (stocks, bonds, foreign exchange, etc.). Real estate does not uniquely
G.C. Akkaya-N. Kutay- M. Tükenmez / Real Estate Investment Trusts and Fundamentals of Real Estate
Investments: A Case of Turkey
40
possess these characteristics, but they are important in determining the prices and
quantities transacted in markets. These characteristics include (Chinloy: 1987):
Differences in information: In real estate transaction, there are differences in
information between parties-buyer and seller.
Localized markets: Markets are local in scope for the physical properties, and
trading on a national bourse does not take place.
Heterogeneous properties: All properties are not the same, with numerous
differences in characteristics.
Illiquidity: Real estate is not mobile or portable, and transaction is difficult
because of legal institutions, and the large indivisibility of size .
Tax Treatment: Real estate is accorded favorable or unfavorable tax
treatment, and tax advantages can be key factors in an investment decision.
Supply restrictions: It is often noted that 'they aren't making more land.' Land
is relatively, if not perfect, inelastic supply.
2. Dimensions of Real Estate Investment Trusts
A real estate investment trust (REIT) is a corporation or a business trust
that combines the capital of many investors to acquire (or provide financing for)
various real estate assets (Deloitte & Touche;1997). Appearing first in the 1994,
there are now 9 REITs in the Turkey (The financial indicators about these REITs
are given in the appendix A).
A REIT is a company that invests its assets in real estate holdings.
Investors get a share of the earnings, depreciation, etc. from the portfolio of real
estate holdings that the REIT owns. REITs are becoming a strategic business and
planning tool for a corporation's real estate (Friedman;1998). REIT vehicle is a
topic of current interest to inventors in and portfolio holders of real estate
(Meretsky;1998). A REIT is essentially a corporation or business trust that
combines the capital of many investors to acquire or provide financing for all
forms of real estate.
The investors have a much more liquid investment than this do when
directly investing in real estate. REITs are mutual funds for real estate. The REIT
industry raises important capital for the industry, the housing market and related
industries and for retail services industries.
REITs traditionally pay out all of their taxable income and, in many
cases, 90% of their funds from operations in the form of dividends and
distributions to shareholders (Landy:1996). A corporation or trust that qualifies as
a REIT generally does not pay corporate income tax. This is a unique feature and
one of the most attractive aspects of a REIT. This means that nearly all of a
REIT's income can be distributed to shareholders, and there is no double taxation
of the income to the shareholder.
A REIT must (Notification of REITs of Turkey, 2001 ):
be a corporation, business trust or similar association,
Yönetim ve Ekonomi 12/1 (2005) 39-46
41
be managed by a board directors or trustees,
have shares that are fully transferable,
initial capital not less than 1 trillion Turkish Liras,
the share of each real estate or real estate project in the portfolio must not be
less than 10 percent,
invest at least 75 percent of the total assets in real estate assets,
invest at most 10 percent of the portfolio to real estate certificates and asset
backed securities
invest at most five percent of portfolio to stocks and type A (invest at least 25
percent of the portfolio to domestic companies) mutual funds
invest at most 10 percent of portfolio to foreign real estates and real estate
backed securities
REITs were created to provide investors with the opportunity to
participate in the benefits of ownership of larger-scale commercial real estate or
mortgage lending, and receive an enhanced return, because the income is not
taxed at the REIT entity level. This means that a diverse range of investors can
realize investment opportunities otherwise available only to those with larger
resources. In addition to avoiding double taxation and requiring a small minimum
investment, REITs also offer investors (NAREIT;1998):
Current income: usually stable and often provides an attractive return;
Liquidity: shares of publicly traded REITs are readily converted into cash
because they are traded on the major stock exchanges;
Professional management: REIT managers are skilled, experienced real estate
professionals;
Performance Monitoring: a REIT's performance is monitored on a regular
basis by independent directors of the REIT, independent analysts,
independent auditors, and the business and financial media. This scrutiny
provides the investor a measure of protection and more than one barometer of
the REIT's financial condition.
An investor may invest in a publicly traded REIT, which in most cases
is listed on a major stock exchange (for instance, Istanbul Stock Exchange), by
purchasing shares through a stock broker. An investor can enlist the service of a
broker, investment advisor or financial planner to help analyze his or her financial
objectives.
3. Structures of Real Estate Investment Trusts
The REIT industry has a diverse profile; which offers many attractive
opportunities to investors. There are three different investment approaches for
REITs; equity, mortgage, and hybrid.
G.C. Akkaya-N. Kutay- M. Tükenmez / Real Estate Investment Trusts and Fundamentals of Real Estate
Investments: A Case of Turkey
42
Equity REITs: Equity REIT own real estate. Their revenue comes
principally from rent. This type of REITs are the most common. Investors have a
relatively steady dividend payout, and the real estate often provides capital
appreciation.
Traditional investments include office buildings, houses, apartments, and
shopping centers, but some new equity REITs are formed existing properties and
real estate partnerships through an Umbrella Real Estate Investment Trusts
(UPREIT) (Deloitte & Touchle; 1997). UPREITs are different from traditionally
equity REITs. UPREITs are a limited partnership structure is utilized, with the
REIT functioning as general partner. Both holders of real estate partnership
interest and REITs can benefit from the UPREIT. The REIT benefits by acquiring
real property without having to generate capital to purchase the property.
Mortgage REITs: Mortgage REITs loan money to real estate owners.
Revenues are derived from interest earned on mortgage loans. Also some
mortgage REITs invest in residuals of mortgage-based securities. Mortgage
REITs generally do not own property, and income can be affected by fluctuations
in interest rates and loan defaults.
Hybrid REITs: A combination of equity and mortgage REITs, hybrid
REITs own property and also loan funds to owners of real estate. Hybrid REITs
has all advantage of equity REITs and mortgage REITs. While it has the potential
for both capital appreciation and loss, it also provides income but does not mature
with a repayment of principal. It can provide the long term investor with an
attractive yield at relatively low risk, and an opportunity to diversify into income-
generating commercial real estate (Irwin;1998).
4. The Financial Model of Real Estate Investment Trusts
An interesting thing about REITs is that they are probably the best
inflation hedge around. Far better than gold stocks, which give almost no return
over long periods of time. They almost always lack the potential for tremendous
price appreciation (and depreciation) that the investors get with most common
stocks.
Real estate looks attractive for some macroeconomic reasons. Because of
high interest rates and construction costs, real estate a profitable investor tool for
investors. Real estate revenues are much more than foreign exchange and stock
exchange markets.
Investors would be hurt by interest rate increases. But interest rates
usually rise with inflation, and inflation could result in higher asset values for the
properties held in the REIT. An economic slide that would adversely affect the
ability of tenants to pay their rent is a risk. There is a stock market downturn.
While some real estate as an industry independent of the stock market, the REIT
market remains dependent on the continuing inflow of capital through unit
purchases. If the broader market began to trend downward, the REIT market
could go with it (Irwin;1998).
Yönetim ve Ekonomi 12/1 (2005) 39-46
43
Figure.1. Real Estate Revenues
1998 1999 2000 2001 2002 2003
Time
Reference: Tusiad,2002
___ : Istanbul Stock Exchange
___: Foreign Exchange
___: REITs revenues
There are two different type of real estate funds, open end funds and close
end funds. Open end real estate funds advantage is liquidity. New investors can
acquire interests in properties purchased with additional capital. The
value of the portfolio is adjusted, usually quarterly, based on outside appraisals or
on a internally-provided determination of value. New investors buy a fund at the
adjusted portfolio values.
Close end funds were first available in the late 1970s in United States. As
investors became apprehensive about using property appraisal to value funds units
when money was moved in and out of the fund. With a close end fund, an
investor buys into the fund at real estate market values, holds the units for a
predetermined period and receives proceeds from the sale of properties at the end
of the period. The illiquidity of this close end structure is justified because of the
long term nature of real estate investments and because it is a means of
overcoming the appraisal problem involved in open end funds. The illiquidity
issue is also somehow diffused by the market for the sale of close end funds units
that exists (Raijen;1998).
Revenues
(billion
TL)
700
600
500
400
300
200
G.C. Akkaya-N. Kutay- M. Tükenmez / Real Estate Investment Trusts and Fundamentals of Real Estate
Investments: A Case of Turkey
44
The benefits from this form of REIT include: increased predictability of
return, as there is no risk of dilution of security holder's interest; a guarantee that
security holders will receive the current benefits of property ownership, as all
cash flow is distributed; and, the ability of security holders to participate in any
appreciation in the portfolio properties on a current basis (Meretsky;1998).
REITs provide a suitable investment vehicle for investors of limited
financial means who can pool their resources and invest in real estate properties
without the major commitment of time and capital required for direct ownership.
There are three different ways of estimating real estate values for REITs.
Market approach; The value of a particular property should not differ greatly
from realistic asking prices and recent sale prices of similar real estate. Thus a
check of the market and recent transactions should give some guide to what a
particular property is worth. The cost approach; real estate values may also be
based on the cost of equivalent land and construction. The construction cost
should include the cost of funds tied up while property is being built and allow for
the differential values of new versus used structures. Thus valuations based on
replacement costs (Branch;1989). The income approach; this valuation based on
expected future dividend and rental income of the real estate.
The Income Approach: An Example
Borrowing cost : 18%
Alternative yield on low-risk investment: 14%
Percent down payment required: 25%
Weighted average cost of capital: 0.25 x 14% + 0.75 x 18% = 17%
Risk premium : %7
Total cost of capital : 17% +7% =%24
Current rental income : $ 3000 or $ 36.000 per year
Estimate current and future property expenses
Property taxes : $ 5000 per year
Repairs : $ 300 per year
Total $ 5300 Per year
Expected holding period : 4 years
Expected selling price : $ 150.000 ( a modest increase over the
current asking price of $ 140.000)
Net income per year : $ 36.000 - 5300 = $ 30.700
Net yearly income Constant
*
Year 1 $30.700 x 0.806 = $ 24. 744
Year 2 30.700 x 0.650 = 19. 955
Year 3 30.700 x 0.524 = 16. 086
Year 4 30.700 x 0.423 = 12.986
Total $ 73.771
*
: From the 24% column in present value table
Yönetim ve Ekonomi 12/1 (2005) 39-46
45
Present value of expected sales price : $ 150.000 x 0.423 = $ 63.450
$73.771 + $ 63.450 = $ 137.221
The present value is less than asking price ( $ 137.221 versus $140.000),
and thus the property seems relatively unattractive.
5. Corporate Trends and Real Estate
There are several possibilities a corporate has when investing in direct
real estate, which includes undeveloped land, residential rental properties, office
buildings, shopping malls and industrial properties.
Although real estate usually is the biggest financial investment companies
make, in the past firms seldom though of it as a strategic asset. Generally,
companies should sell their property if the return from investing profits from a
sale is greater than the cost of leasing the property. Selling provides other
financial and accounting benefits (Schriner;1997). It provides cash income and
tax benefits.
Most of the companies expect a return on capital of between 10% and
30%. Therefore, if company invested 100 TL billion in a facility, it'd expect an
annual return of between 10 TL billion and 30 TL billion on it.
But real estate investors, usually expect a lower return, between 8% and
%15 annually for their investment (Schriner;1997). If the return from investing
the profit from the sale is higher than the cost of leasing the facility, the investor
should sell.
Most companies invest to REITs for diversification (Geurts, Nolan;
1997). REITs protect firms against risk. There are two elements of investment
risk: systematic and unsystematic. Systematic risk is nondiversifiable. But
unsystematic risk is diversifiable. Therefore REITs can protect against
unsystematic risk via diversification. Examples of diversifiable risks are events
such as lawsuits, strikes and unsuccessful marketing programs. These risks are
specific to a particular company, and thus by investing in REITs, companies can
reduce risk.
Conclusion
The real estate management industry is becoming increasingly
competitive as developers and others enter the property management business. A
real estate investment trust (REIT) is a corporation or a business trust that
combines the capital of many investors to acquire (or providing financing for)
various real estate assets.
The investor gets a share of the earnings, depreciation from the portfolio
of real estate holdings that the REIT owns. Thus, the investor gets many of the
same benefits of being a landlord without too many of the hassles. The investors
G.C. Akkaya-N. Kutay- M. Tükenmez / Real Estate Investment Trusts and Fundamentals of Real Estate
Investments: A Case of Turkey
46
also have a much more liquid investment than the investor do when directly
investing in real estate.
REITs provide a suitable investment vehicle for investors of limited
financial means who can pool their resources and invest in real estate properties
without the major commitment of time and capital required for direct ownership.
Finally, REITs is that they are probably the best inflation hedge around.
Companies and investors can invest this profitable investment tool.
REFERENCES
Branch Ben; Investments Principles and Practices, Longman Financial Services, Second Edition
1989
Chinloy Peter; Real Estate Investment and Financial Strategy; 1987
Deloittle & Touche, Understanding REITs, Personal Finance Advisor, July 1997
Friedman M. Steven; The REIT as a Strategic Real Estate Tool, Commercial Investment Real
Estate Journal,1998
Geurts G. Tom, Nolan Hilary; Does Real Estate Have A Place in the Investment Portfolio of
Tomorrow, Review of Business, Vol.18 Issue.4, 1997
GYO, Esaslar Tebli i, 2004
Irwin Hal; REITS and The Real Estate Resurrection; CMHC Mortgage Market Trends Th rd
Quarter,1998
Landy W. Eugene; Benefits of Dividend Re nvestment Plans and Shareholder Investment Plans for
Shareholders, Real Estate Investment Trusts and the Economy; 1996
Meretsky Jason, Real Estate Investment Trusts: An Analysis of the Investment Vehicle and Income
Tax Implications, University of Toronto Faculty of Law Review vol.53 No.1,1998
NAREIT, NAREIT/PREA Property Investment Strategy, Real Estate Symposium, 1998
Raijen Van Laura; Real Estate Investment Structures, Working Paper, 1998
Schriner A. James; Real estate: hidden wealth for a company? It might be smart to sell your
property- and lease instead, Industry week, Vol.246 No.18; 1997
Tacirler Menkul De erler A. ., 2004, www.tacirler.com.tr
Tusiad, Türkiye Ekonomisi 2002 Raporu, 2003
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