Real estate investment trust


A real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of real estate, including office and apartment buildings, studios, warehouses, hospitals, shopping centers, hotels and commercial forests. Some REITs engage in financing real estate. REITs act as a bridge from financial markets and institutional investors to housing and urban development. They are typically categorized into commercial REITs and residential REITs, with the latter focusing on housing assets, such as apartments and single-family homes.
Most countries' laws governing REITs entitle a real estate company to pay less in corporation tax and capital gains tax. REITs have been criticised as enabling speculation on housing, and reducing housing affordability, without increasing finance for building.
REITs can be publicly traded on major exchanges, publicly registered but non-listed, or private. The two main types of REITs are equity REITs and mortgage REITs. In November 2014, equity REITs were recognized as a distinct asset class in the Global Industry Classification Standard by S&P Dow Jones Indices and MSCI. The key statistics to examine the financial position and operation of a REIT include net asset value, funds from operations, and adjusted funds from operations.

History

Creation

REITs were created in the United States after President Dwight D. Eisenhower signed Public Law 86-779, sometimes called the Cigar Excise Tax Extension of 1960. The law was enacted to allow all investors to invest in large-scale, diversified portfolios of income-producing real estate in the same way they typically invest in other asset classes – through the purchase and sale of liquid securities. The first REIT was American Realty Trust founded by Thomas J. Broyhill, cousin of Virginia U.S. Congressman Joel Broyhill in 1961 who pushed for the creation under Eisenhower.
As of 2021, at least 39 countries around the world have established REITs. A comprehensive index for the REIT and the global listed property market is the FTSE EPRA/Nareit Global Real Estate Index Series, which was created jointly in October 2001 by the index provider FTSE Group, Nareit and the European Public Real Estate Association. As of 29th January 2021, the global index included 490 stock exchange listed real estate companies from 39 countries representing an equity market capitalization of about $1.7 trillion.

Evolution

Around the time of their creation in 1960, the first REITs primarily consisted of mortgage companies. The industry expanded significantly in the late 1960s and early 1970s. The growth primarily resulted from the increased use of mREITs in land development and construction deals. The Tax Reform Act of 1976 authorized REITs to be established as corporations in addition to business trusts.
The Tax Reform Act of 1986 also affected REITs. The legislation included new rules designed to prevent taxpayers from using partnerships to shelter their earnings from other sources. Three years later, REITs witnessed significant losses in the stock market.
Retail REIT Taubman Centers Inc. launched the modern era of REITs in 1992 with its UPREIT, in which the parties of an existing partnership and a REIT become partners in a new "operating partnership". The REIT typically is the general partner and the majority owner of the operating partnership units, and the partners who contributed properties have the right to exchange their operating partnership units for REIT shares or cash. The industry struggled during the 2008 financial crisis, after which listed REITs responded by paying off debt and re-equitizing their balance sheets by selling stock for cash. Listed REITs and REOCs raised $37.5 billion in 91 secondary equity offerings, nine IPOs and 37 unsecured debt offerings as investors continued to act favorably to companies strengthening their balance sheets following the credit crisis.
REIT dividends have a 100 percent payout ratio for all income at lower rates. This inhibits the internal growth of the REIT and causes investors to not tolerate low or non-existent yields as the interest rates are more sensitive. Economic climates characterized by rising interest rates can cause a net negative effect on REIT shares. The dividends paid by REITs look less attractive when compared to bonds that have
increasing coupon rates. Also, when investors shy away from REITs, it makes it
difficult for management to raise additional funds to acquire more property.

Africa and Middle East

Kenya

The first REIT in Kenya was approved by the Capital Markets Authority in October 2015. The REIT is issued by Stanlib Kenya under the name Fahari I-Reit scheme.
The REIT scheme will provide unit holders stable cash inflows from the income generating real estate properties.
The unrestricted IPO will be listed on the main investment market segment of the Nairobi Securities Exchange.

Ghana

REITs have been in existence in Ghana since 1994. The Home Finance Company, now HFC Bank, established the first REIT in Ghana in August 1994. HFC Bank has been at the forefront of mortgage financing in Ghana since 1993. It has used various collective investment schemes as well as corporate bonds to finance its mortgage lending activities. Collective Investment Schemes, of which REITs are a part, are regulated by the Securities and Exchange Commission of Ghana.

Nigeria

In 2007, the Securities and Exchange Commission issued the first set of guidelines for the registration and issuance of requirements for the operation of REITs in Nigeria as detailed in the Investment and Securities Act. The first REIT, the N50 billion Union Homes Hybrid Real Estate Investment Trust, was launched in September 2008. In November 2015 there were three listed REITS on the Nigerian Stock Exchange: Skye Shelter Fund, Union Home and UPDC. A Haldane McCall REIT did not list after failing to reach the minimum 50% subscription in a January 2015 initial public offer amid poor market prospects.

South Africa

By October 2015 there were 33 South African REITS and three non-South African REITs listed on the Johannesburg Stock Exchange, according to the SA REIT Association, which said market capitalization was more than R455 billion.

Saudi Arabia

Commonly referred to as Real Estate Investment Fund, the regulations were launched in July 2006 by the Saudi Capital Market Authority, The regulation did not allow the funds to be traded in the stock market and forced all funds to be structured by a licensed Investment companies by CMA with a presence of a real estate developer and some other key persons.

United Arab Emirates

The REIT legislation was introduced by Dubai International Financial Centre to promote the
development of REIT's in the UAE by passing The Investment Trust Law No.5 that went into effect
on August 6, 2006. This restricts all 'true' REIT structures to be domiciled within the DIFC. The first REIT license to be issued will be backed by Dubai Islamic Bank with a REIT named 'Emirates REIT' headed up by the dot com entrepreneur, Sylvain Vieujot.
The issue is that DIFC domiciled REITs cannot acquire non-Freezone assets within the Emirate of Dubai. The only federally approved Freezone within the UAE is the DIFC itself so therefore any properties outside this zone are purchasable by local Gulf passport holders only. However, through a collaboration with local authorities, Emirates REIT has been able to establish a platform enabling it to purchase properties anywhere in Dubai given a minimum of 51% of local ownership of its shares. This allows the company to diversify its portfolio with an efficient revenue generating mix of properties in the prime locations of Dubai. Emirates REIT is the first REIT established within the United Arab Emirates. It is also the first REIT listed on NASDAQ Dubai and one of the five Shari'a compliant REIT in the world with a focus on Income-producing assets.
Emirates REIT has a portfolio of over US$575.3 million consisting of a total of seven properties primarily focused on commercial and office space as of December 2014. It has had substantial growth over the last four years.

Asia and Pacific

Australia

The REIT concept was launched in Australia in 1971. General Property Trust was the first Australian real estate investment trust on the Australian stock exchanges. REITs which are listed on an exchange were known as Listed Property Trusts until March 2008, distinguishing them from private REITs which are known in Australia as Unlisted Property Trusts. They have since been renamed Australian Real Estate Investment Trusts in line with international practice.
REITs have shown numerous benefits over direct investment including lower tax rates and increased liquidity. There are now more than 70 A-REITs listed on the ASX, with market capitalization in excess of A$100bn.
Australia is also receiving growing recognition as having the world's largest REITs market outside the United States. More than 12 percent of global listed property trusts can be found on the ASX.

Hong Kong

REITs have been in existence in Hong Kong since 2005, when The Link REIT was launched by the Hong Kong Housing Authority on behalf of the Hong Kong Government. Since 2005, there have been seven REIT listings as at July 2007, most of which, including Sunlight REIT have not enjoyed success because of low yield. Except for The Link and Regal Real Estate Investment Trust, share prices of all but one are significantly below the initial public offering price. Hong Kong issuers' use of financial engineering to improve initial yields has also been cited as having reduced investors' interest
As of July 2012 there are nine REITs listed with a total market capitalisation of approximately €15 billion which amounts to almost 2% of the total global REIT market capitalisation. Two out of the nine listed REITs are also included in the EPRA index, an index published by the European Public Real Estate Association. The current top five REITs in Hong Kong are The Link REIT with a total market capitalisation of €8 billion, Hui Xian REIT with a total market capitalisation of €2.3 billion, Champion REIT with a total market capitalisation of €1.8 billion, Fortune REIT with a total market capitalisation of €1 billion and with a total market capitalisation of €700 million.