Description
The report about Real Estate Investment Trusts (REITs) which are basically entities that invest in different kinds of real estate or real estate related assets.
Real Estate Assignment
Real Estate Investment Trusts (REITS)
[REAL ESTATE ASSIGNMENT]
Index
1) What is REIT………………………………………………………………..3
2) Types of REIT’s…………………………………………………………….3
3) Structure of REITs………………………………………………………….5
4) REIT features……………………………………………………………… 7
5) REIT Advantages…………………………………………………………...8
6) Globalization of REITs……………………………………………………..9
7) Global REITs own high quality properties………………………………...12
8) REITs in India……………………………………………………………...13
9) Bibliography………………………………………………………………..15
2
[REAL ESTATE ASSIGNMENT]
What is REIT?
Real Estate Investment Trusts (REITs) are entities that invest in different kinds of real estate or real estate related assets including shopping centers, office buildings, hotels and mortgage secured by real estates. REIT is an efficient way for many investors to invest in commercial and residential real estate businesses. As an investment, REITs combine the best features of real estate and stocks. They give an investor a practical and effective means to include professionally managed real estate in a diversified investment portfolio.
REIT is an investment vehicle meant/created mainly for small investors and savers to make investment in real estate through collective investment schemes. It is a method of indirect property investment, where distributions are made tax free, and which are taxed according to the tax status of the shareholders. Most REITs are publicly traded. They provide ongoing dividend income along with the potential for long-term capital gains through share price appreciation, and can also serve as a powerful tool for portfolio balancing and diversification.
Types of REITs:
REITs often are classified in one of three categories: Equity, Mortgage or Hybrid.
•
Equity REIT These REITs own and operate income-producing real estate i.e. provide equity capital for real estate by owning real estate assets & derives its revenues mainly from rent. Equity REITs increasingly have become primarily real estate operating companies that engage in a wide range of real estate activities, including leasing, development of real property and tenant services. Most Equity REITs are publicly traded.
•
Mortgage REIT
3
[REAL ESTATE ASSIGNMENT] These REITs lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities and derives revenues primarily from interest payments. Today’s mortgage REITs generally extend mortgage credit only on existing properties. Many modern mortgage REITs also manage their interest rate risk using securitized mortgage investments and dynamic hedging techniques.
•
Hybrid REIT A hybrid REIT both owns properties and makes loans to real estate owners and operators i.e. combine the investment strategies of both equity & mortgage REITs.
2% 7% Equity REITS MORTGAGE REITS HYBRID REITS 91%
Date as of June 30, 2006
4
[REAL ESTATE ASSIGNMENT]
Structure of REIT:
REITs are typically structured in one of three ways: • Traditional REIT • UPREIT • DownREIT.
A Traditional REIT is one that owns its assets directly rather than through an operating partnership.
In the UPREIT, structure, one or more individuals or partnerships owning real estate contribute their holdings to an "umbrella partnership" in exchange for limited partnership units, sometimes called operating partnership units. Contemporaneously, a REIT ' is formed and issues shares to the public. The REIT then contributes the proceeds received from the REIT shareholders to the umbrella partnership in exchange for a general partnership interest. The proceeds are used to reduce debt or acquire additional property or used for any other REIT purposes. The limited partners also receive rights to "put" their partnership interest to the umbrella partnership or to the REIT in exchange for cash or REIT shares. A diagram of a typical UPREIT structure is set forth in the figure below.
5
[REAL ESTATE ASSIGNMENT] In the DownREIT structure, a property owner becomes a partner in a limited partnership with the REIT (if no UPREIT exists), the umbrella partnership of an UPREIT, or a wholly owned subsidiary of the REIT or UPREIT, as the case may be. The newly formed limited partnership owns and operates the property and possibly other income producing property contributed by the other partner (i.e., the REIT, UPREIT or wholly-owned subsidiary thereof). A diagram of a typical DownREIT structure is set forth in the figure below.
6
[REAL ESTATE ASSIGNMENT]
REIT – Features
liquidity Share price appreci tion Shareholder value
High dividend yield
Active management
Low leverage Limited liability
Disclosure obligation
7
[REAL ESTATE ASSIGNMENT]
REIT – Advantages
Predictable revenue stream
•Income is derived from rents paid to the owners of commercial properties whose tenants often sign leases for long periods •The companies’ ownership of tangible assets with established val ues tends to reduce risk
Earnings transparency
•Easily understandable business model •REITs, like other public companies, must report earnings per share on the basis of GAAP net income
Total Return
•The combination of income returns from dividends and capital gains from share value appreciation can result in healthy overall returns for REIT investor s •REITs over time have demonstrated a historical track record of pr oviding a high level of current income combined with long-term share value appreciatio n, inflation protection, and prud e nt diversification for investors across the age and investment style spectrums
8
[REAL ESTATE ASSIGNMENT]
Globalization of REIT
Governments around the world are introducing or considering the adoption of new tax-efficient property investment vehicles similar to U.S. REITs. Historically, the implementation of a REIT structure has resulted in significant market growth, as the structure promotes improved liquidity. UBS Securities estimates that the market capitalization for listed real estate will double in the next five to seven years to $1 trillion, driven by global proliferation of the REIT structure.
A combination of forces is supporting expansion of REIT-like vehicles, including: 1) A pervasive need for liquid, income-producing investments, 2) Growing investor preference for transparent ownership structures, 3) Increased tax efficiency and 4) The rising need for countries to compete for capital on a global scale.
REIT legislation has already been adopted in more than 20 countries. In March 2006, the U.K. announced a final proposal for the introduction of REITs slated for 2007, resulting in a 10% jump in U.K. real estate stocks. Germany’s GREIT is widely expected later this year, while REIT legislation in Italy, Luxembourg, Finland, Spain and India is in consideration.
Asia’s REIT market has exhibited tremendous growth, with a market capitalization expected to reach $100 billion in the next five years. Japan serves as a good example of the growth potential of the Asian real estate market. Four J-REITs went public in the fourth quarter of 2005 alone, bringing the total number of J-REITs to 32 since their introduction in 2001. Japanese REITs have a total market capitalization of $29.5 billion — which may appear insignificant on the surface,
9
[REAL ESTATE ASSIGNMENT] until one considers that it took U.S. REITs 34 years after their introduction to reach that level in 1993.
The global proliferation of REIT like structures and increasing investor demand for real estate securities uniquely positions the international real estate market for a dramatic sea change akin to that which took place in the U.S. market in the early 1990s: the movement of capital from private, non-traded markets into the publicly traded arena. In the U.S. real estate securities marketplace, continues to witness the proven benefits of participating in an expanding, increasingly securitized market.
Thus, the REIT market represents only the tip of the iceberg for investors seeking the characteristics – competitive historical returns, low correlations to other asset classes and high current income – that have made the real estate securities asset class so compelling.
10
[REAL ESTATE ASSIGNMENT]
11
[REAL ESTATE ASSIGNMENT]
Global REITS own high quality properties
12
[REAL ESTATE ASSIGNMENT]
REITs in India
Real Estate Investment Trusts or REITs are a popular form of collective investment in Real Estate. SEBI has issued a draft of Real Estate Investment Trusts Regulations, for public comments. The Draft Regulations represent the first step in the direction of formulating statutory policies for REITs and seek to define the role of various intermediaries.
The salient features relating to REITs are: • REITs to be constituted as trusts registered under the Indian Trusts Act, 1882 and to be registered with SEBI. • Instrument of trust to be in accordance with the format prescribed by SEBI and to be executed by the sponsor in favor of the Trustees. • A scheduled bank carrying on commercial activities or a Trust company which is a subsidiary of such a bank. • Minimum net worth of INR 50 million for REITs and REIMCs (net worth can initially be INR 30 million provided it is increased to INR 50 million within 3 years from the date of grant of registration). • At least 50% of the Trustees of REITs and directors of REIMCs to be independent of persons who control the REIT / REIMC, as the case may be.
The salient features relating to REIT schemes are: • • Only close ended schemes permitted. Schemes to be launched only after obtaining rating from a credit rating agency and after being appraise by an appraising agency empanelled with SEBI for he purpose of conducting technical or financial appraisal of the schemes • Schemes not to provide guaranteed or assured returns. • Scheme offer document to be filed with SEBI. Offer document to contain such information as specified by SEBI, to contain true and fair view of the schemes and
13
[REAL ESTATE ASSIGNMENT] adequate disclosures to enable the investors to make an informed decision. In case if no modifications are suggested by SEBI in offer documents within 21 days of filing, then, the REIT may issue the offer document to the public • • Schemes to be listed on stock exchanges. Schemes to have Principal Valuers who shall value all the real estate at the time of issuance of new units, acquisition and sale of real estate and otherwise, at least once a year • REIMCs to publish Net Asset Values in the annual report and disclose NAV to unit holders at such frequency as may be specified by SEBI • Basis of calculation of all costs and charges payable from scheme’s property to be clearly stated in the offer document. Percentage based transaction fees payable to REIMCs may be disallowed
Conclusion The Draft Regulations reflect the initiative taken by SEBI to broaden investment opportunities for institutional and retail investors and channelize collective investment in real estate. The initiative is a welcome step in institutionalizing REITs and will be appreciated by participants in capital market and real estate sectors.
14
[REAL ESTATE ASSIGNMENT]
Bibliography:
1) National Association of Real Estate Investment Trusts 2) PWC-Worldwide REIT Regime. Country Summaries Report 3) www.pwc.com/realestate 4) PWC News alert Dec 31,07 5) Report: Global REIT Market Trends & Outlook by-W. STEVENS CARROLL and Raymond Torto 6) www.nareit.com 7) Real Estate Investment Trusts: The REIT Experience in the U.S.: Lessons and Opportunities- By Steven A. Wechsler (President & Chief Executive Officer) 8) www.wikipeia.com 9) www.indiareit.com/whitepaper.pdf 10) www.reitnet.com
15
doc_645767603.pdf
The report about Real Estate Investment Trusts (REITs) which are basically entities that invest in different kinds of real estate or real estate related assets.
Real Estate Assignment
Real Estate Investment Trusts (REITS)
[REAL ESTATE ASSIGNMENT]
Index
1) What is REIT………………………………………………………………..3
2) Types of REIT’s…………………………………………………………….3
3) Structure of REITs………………………………………………………….5
4) REIT features……………………………………………………………… 7
5) REIT Advantages…………………………………………………………...8
6) Globalization of REITs……………………………………………………..9
7) Global REITs own high quality properties………………………………...12
8) REITs in India……………………………………………………………...13
9) Bibliography………………………………………………………………..15
2
[REAL ESTATE ASSIGNMENT]
What is REIT?
Real Estate Investment Trusts (REITs) are entities that invest in different kinds of real estate or real estate related assets including shopping centers, office buildings, hotels and mortgage secured by real estates. REIT is an efficient way for many investors to invest in commercial and residential real estate businesses. As an investment, REITs combine the best features of real estate and stocks. They give an investor a practical and effective means to include professionally managed real estate in a diversified investment portfolio.
REIT is an investment vehicle meant/created mainly for small investors and savers to make investment in real estate through collective investment schemes. It is a method of indirect property investment, where distributions are made tax free, and which are taxed according to the tax status of the shareholders. Most REITs are publicly traded. They provide ongoing dividend income along with the potential for long-term capital gains through share price appreciation, and can also serve as a powerful tool for portfolio balancing and diversification.
Types of REITs:
REITs often are classified in one of three categories: Equity, Mortgage or Hybrid.
•
Equity REIT These REITs own and operate income-producing real estate i.e. provide equity capital for real estate by owning real estate assets & derives its revenues mainly from rent. Equity REITs increasingly have become primarily real estate operating companies that engage in a wide range of real estate activities, including leasing, development of real property and tenant services. Most Equity REITs are publicly traded.
•
Mortgage REIT
3
[REAL ESTATE ASSIGNMENT] These REITs lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities and derives revenues primarily from interest payments. Today’s mortgage REITs generally extend mortgage credit only on existing properties. Many modern mortgage REITs also manage their interest rate risk using securitized mortgage investments and dynamic hedging techniques.
•
Hybrid REIT A hybrid REIT both owns properties and makes loans to real estate owners and operators i.e. combine the investment strategies of both equity & mortgage REITs.
2% 7% Equity REITS MORTGAGE REITS HYBRID REITS 91%
Date as of June 30, 2006
4
[REAL ESTATE ASSIGNMENT]
Structure of REIT:
REITs are typically structured in one of three ways: • Traditional REIT • UPREIT • DownREIT.
A Traditional REIT is one that owns its assets directly rather than through an operating partnership.
In the UPREIT, structure, one or more individuals or partnerships owning real estate contribute their holdings to an "umbrella partnership" in exchange for limited partnership units, sometimes called operating partnership units. Contemporaneously, a REIT ' is formed and issues shares to the public. The REIT then contributes the proceeds received from the REIT shareholders to the umbrella partnership in exchange for a general partnership interest. The proceeds are used to reduce debt or acquire additional property or used for any other REIT purposes. The limited partners also receive rights to "put" their partnership interest to the umbrella partnership or to the REIT in exchange for cash or REIT shares. A diagram of a typical UPREIT structure is set forth in the figure below.
5
[REAL ESTATE ASSIGNMENT] In the DownREIT structure, a property owner becomes a partner in a limited partnership with the REIT (if no UPREIT exists), the umbrella partnership of an UPREIT, or a wholly owned subsidiary of the REIT or UPREIT, as the case may be. The newly formed limited partnership owns and operates the property and possibly other income producing property contributed by the other partner (i.e., the REIT, UPREIT or wholly-owned subsidiary thereof). A diagram of a typical DownREIT structure is set forth in the figure below.
6
[REAL ESTATE ASSIGNMENT]
REIT – Features
liquidity Share price appreci tion Shareholder value
High dividend yield
Active management
Low leverage Limited liability
Disclosure obligation
7
[REAL ESTATE ASSIGNMENT]
REIT – Advantages
Predictable revenue stream
•Income is derived from rents paid to the owners of commercial properties whose tenants often sign leases for long periods •The companies’ ownership of tangible assets with established val ues tends to reduce risk
Earnings transparency
•Easily understandable business model •REITs, like other public companies, must report earnings per share on the basis of GAAP net income
Total Return
•The combination of income returns from dividends and capital gains from share value appreciation can result in healthy overall returns for REIT investor s •REITs over time have demonstrated a historical track record of pr oviding a high level of current income combined with long-term share value appreciatio n, inflation protection, and prud e nt diversification for investors across the age and investment style spectrums
8
[REAL ESTATE ASSIGNMENT]
Globalization of REIT
Governments around the world are introducing or considering the adoption of new tax-efficient property investment vehicles similar to U.S. REITs. Historically, the implementation of a REIT structure has resulted in significant market growth, as the structure promotes improved liquidity. UBS Securities estimates that the market capitalization for listed real estate will double in the next five to seven years to $1 trillion, driven by global proliferation of the REIT structure.
A combination of forces is supporting expansion of REIT-like vehicles, including: 1) A pervasive need for liquid, income-producing investments, 2) Growing investor preference for transparent ownership structures, 3) Increased tax efficiency and 4) The rising need for countries to compete for capital on a global scale.
REIT legislation has already been adopted in more than 20 countries. In March 2006, the U.K. announced a final proposal for the introduction of REITs slated for 2007, resulting in a 10% jump in U.K. real estate stocks. Germany’s GREIT is widely expected later this year, while REIT legislation in Italy, Luxembourg, Finland, Spain and India is in consideration.
Asia’s REIT market has exhibited tremendous growth, with a market capitalization expected to reach $100 billion in the next five years. Japan serves as a good example of the growth potential of the Asian real estate market. Four J-REITs went public in the fourth quarter of 2005 alone, bringing the total number of J-REITs to 32 since their introduction in 2001. Japanese REITs have a total market capitalization of $29.5 billion — which may appear insignificant on the surface,
9
[REAL ESTATE ASSIGNMENT] until one considers that it took U.S. REITs 34 years after their introduction to reach that level in 1993.
The global proliferation of REIT like structures and increasing investor demand for real estate securities uniquely positions the international real estate market for a dramatic sea change akin to that which took place in the U.S. market in the early 1990s: the movement of capital from private, non-traded markets into the publicly traded arena. In the U.S. real estate securities marketplace, continues to witness the proven benefits of participating in an expanding, increasingly securitized market.
Thus, the REIT market represents only the tip of the iceberg for investors seeking the characteristics – competitive historical returns, low correlations to other asset classes and high current income – that have made the real estate securities asset class so compelling.
10
[REAL ESTATE ASSIGNMENT]
11
[REAL ESTATE ASSIGNMENT]
Global REITS own high quality properties
12
[REAL ESTATE ASSIGNMENT]
REITs in India
Real Estate Investment Trusts or REITs are a popular form of collective investment in Real Estate. SEBI has issued a draft of Real Estate Investment Trusts Regulations, for public comments. The Draft Regulations represent the first step in the direction of formulating statutory policies for REITs and seek to define the role of various intermediaries.
The salient features relating to REITs are: • REITs to be constituted as trusts registered under the Indian Trusts Act, 1882 and to be registered with SEBI. • Instrument of trust to be in accordance with the format prescribed by SEBI and to be executed by the sponsor in favor of the Trustees. • A scheduled bank carrying on commercial activities or a Trust company which is a subsidiary of such a bank. • Minimum net worth of INR 50 million for REITs and REIMCs (net worth can initially be INR 30 million provided it is increased to INR 50 million within 3 years from the date of grant of registration). • At least 50% of the Trustees of REITs and directors of REIMCs to be independent of persons who control the REIT / REIMC, as the case may be.
The salient features relating to REIT schemes are: • • Only close ended schemes permitted. Schemes to be launched only after obtaining rating from a credit rating agency and after being appraise by an appraising agency empanelled with SEBI for he purpose of conducting technical or financial appraisal of the schemes • Schemes not to provide guaranteed or assured returns. • Scheme offer document to be filed with SEBI. Offer document to contain such information as specified by SEBI, to contain true and fair view of the schemes and
13
[REAL ESTATE ASSIGNMENT] adequate disclosures to enable the investors to make an informed decision. In case if no modifications are suggested by SEBI in offer documents within 21 days of filing, then, the REIT may issue the offer document to the public • • Schemes to be listed on stock exchanges. Schemes to have Principal Valuers who shall value all the real estate at the time of issuance of new units, acquisition and sale of real estate and otherwise, at least once a year • REIMCs to publish Net Asset Values in the annual report and disclose NAV to unit holders at such frequency as may be specified by SEBI • Basis of calculation of all costs and charges payable from scheme’s property to be clearly stated in the offer document. Percentage based transaction fees payable to REIMCs may be disallowed
Conclusion The Draft Regulations reflect the initiative taken by SEBI to broaden investment opportunities for institutional and retail investors and channelize collective investment in real estate. The initiative is a welcome step in institutionalizing REITs and will be appreciated by participants in capital market and real estate sectors.
14
[REAL ESTATE ASSIGNMENT]
Bibliography:
1) National Association of Real Estate Investment Trusts 2) PWC-Worldwide REIT Regime. Country Summaries Report 3) www.pwc.com/realestate 4) PWC News alert Dec 31,07 5) Report: Global REIT Market Trends & Outlook by-W. STEVENS CARROLL and Raymond Torto 6) www.nareit.com 7) Real Estate Investment Trusts: The REIT Experience in the U.S.: Lessons and Opportunities- By Steven A. Wechsler (President & Chief Executive Officer) 8) www.wikipeia.com 9) www.indiareit.com/whitepaper.pdf 10) www.reitnet.com
15
doc_645767603.pdf