The Hindu Business Line : Just the right time for REITs?

REIT or real estate investment trust isn't a new concept. It's been there for almost half a century, points out "REITs in Asia: from Concept to Completion," from Asia Law & Practice, distributed by Bharat Book Bureau (www.bharatbook.com) .

"It was not until in 1991, when Kimco Realty of the US completed its initial public offering that the current explosive growth of REITs began," chronicles the book.

In Asia, `the current REIT era' is reckoned as starting from 2002, with the launches of the Japan Retail Fund Investment Corporation (NRF), Orix Asset Management, and Japan Prime Realty Investment Corporation (JPR) on the Tokyo Stock Exchange (TSE) and "the listing of the Capital Mall Trust on the Singapore Stock Exchange."

Year 2005 was bright for real estate in many places. For instance, `REIT Composite Index ends year up 8.3 per cent,' reports www.banknet360.com about the US market. And, "Among the Asian REITs, the J-REITs have shown the most substantial growth," with market cap growing nearly 8 times to $19 billion! The same methodology for the calculation of TOPIX (Tokyo Stock Price Index) is used for the TSE REIT Index, as www.tse.or.jp informs.

But what's a REIT? It is "a mechanism that allows investors to actively participate in the real estate market." The book benefits of owning real estate are passed on to investors, through REITs. "With the added advantage of liquidity, investors can opt out or rotate portfolios in an efficient manner." To developers, "REITs provide a more effective access to capital markets."

Recently, the Associated Chambers of Commerce and Industry of India called for the creation of REITs to "improve the quality and quantity of finance for investment in commercial and residential properties and also expand access to a wide range of savings products on a stable and well-regulated basis."

There are different types of REITs, such as equity, mortgage, hybrid, and public/private. One of the features of REITs highlighted in the book is high payout ratio. "For example, REITs must distribute at least 90 per cent of taxable income in the US, Singapore and Japan, and 100 per cent of taxable income in Australia."

Since depreciation charges are not applicable to REITs in many places, "the distributable income is almost equivalent to the cash return to equity holders." Just the thing that most shareholders may want in the case of companies too!

"In a dozen or more countries REIT legislation has been enacted or is pending," informs the book. A happening area, this is. For example, "REITs make Israeli debut," reads a headline dated January 26, on The Jerusalem Post (www.jpost.com) . "REITs were introduced in Israel early this month, following the amendment to the Income Tax Ordinance."

While many countries are keen to create the new investment vehicle, they are also worried about minimising "tax leakage from the conversion process." It is important for investors to know that all REITs aren't equal. Legislation plays a major role.

Thus, what's appropriate in Australia may not suit Hong Kong, because REITs in the latter case "are primarily intended to facilitate trading in developed Hong Kong real estate than to encourage additional development or investment abroad."

The `market focus' section of the book looks at the REIT scenario in countries such as Japan, Korea, Hong Kong, Australia, Malaysia, Singapore and Thailand. The book cites Property Investment Research report for statistics - such as that in Australia, property trusts and funds account for a total value of A$155 billion; and that LPT or listed property trust sector constitutes 9 per cent of the Australian Stock Exchange, compared to "1 per cent in the US and 2 per cent in the UK".

Though Australia represents only 2 per cent of the world's principal real estate market, it has "a real estate securitisation level of 52 per cent compared to 12 per cent in the US and 17 per cent in the UK." An interesting analysis shows that over 40 per cent of LPTs' earning Down Under comes from "either non-property related operations such as property fund management fees and third party construction contracting, or from overseas assets."

A chapter on Korea informs about the recent legislation governing REITs, the Indirect Investment Asset Management Business Law, which created REF or real estate fund, where "100 per cent of beneficiary certificates can be held by a single owner". Right book to read when REITs are just around the corner.

TitleFeed@Rediffmail.com

D. Murali

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