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Part I
International REITs
Thematic review of emerging issues
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1
Critical contextual issues in international REITs
David Parker, Stephen Lee, Alex Moss, Ali Zaidi and Brad Case
1.1 Introduction
This book aims to identify key areas for research in the REIT discipline for the next five to ten years by surveying the current state of the REIT discipline around the world and identifying emerging and cutting-edge research areas through a thematic review of current contextual issues and a regional analysis based on case studies.
This book comprises two parts, the first part being a thematic review of emerging and cutting-edge global research into current contextual issues in REITs internationally and the second part being a regional analysis of REITs around the world, each written by authoritative academic authors from the world’s leading Universities and REIT industry experts.
Following an extensive review of academic journals relevant to the field of REIT research, the following themes were identified as resonating with researchers around the world:
- the impact on the REIT market and on REIT industry practice of the rapid rate of evolution of the REIT sector following the wave of legislative changes in the US in the 1980s, leading to the modern REIT era of the 1990s, followed by the global financial crisis of the 2000s leading to what has become known as the post-modern REIT era and which is considered in detail in Chapter 2;
- the growing role of specialized property market sectors as a source of assets for REITs. Where, previously, REITs focused on commercial, retail and industrial property as core assets for both diversified REITs and sector-specific REITs, this is now widening to include specialized property market sectors such as self-storage or timberland and thus potentially creating a new risk-return profile in the REIT sector, which is considered in Chapter 3;
- the role of sustainability in both the property market sector and the REIT sector has grown considerably over the last decade, with major performance implications for those physical property assets that comprise the primary investment for REITs and for REITs themselves, as considered in Chapter 4;
- the future role of Islam features prominently in both global and national politics as well as in the REIT sector, given the massive depth of investable funds available in the Islamic world and the specific investment requirements of the Islamic world, as considered in detail in Chapter 5;
- as REITs become massive global businesses, a key risk that emerges is the human risk arising from the actions or inactions of human beings as REIT managers and operatives, making the world of behavioural finance and cognitive risk increasingly relevant to REIT management, as considered in Chapter 6; and
- the perennial questions: are REITs real estate? and what place do REITs have in a mixed-asset portfolio? continue to challenge both academics and REIT experts around the world with recent research reviewed in Chapter 7.
With Part I of this book providing a thematic review of emerging and cutting-edge global research into current contextual issues in REITs internationally, Part II comprises an analysis of REITs around the world grouped by region with the consideration of a developed, developing and emerging REIT sector in each:
| Chapter | Region | Developed REIT Sector | Developing REIT Sector | Emerging REIT Sector |
| 8 | North America | US | Canada | Mexico |
| 9 | Latin America | Brazil | Argentina | Uruguay |
| 10 | Europe | UK | Spain | Poland |
| 11 | South East Asia | Singapore | Malaysia | Thailand |
| 12 | North Asia | Japan | Hong Kong | China |
| 13 | Oceania | Australia | South Africa | India |
concluding with Chapter 14 which considers Directions for the Future of International REITs.
Before considering those global cutting-edge research themes identified in the following chapters, this chapter seeks to identify critical contextual issues in international REITs including the defining characteristics of REITs and their structure, the role of REITs relative to property companies and unlisted property funds, the evolution of REITs through a US lens, the global REIT markets and aspects of REIT return, risk and correlation.
1.1.1 Defining characteristics of a REIT
There is no single international REIT model, as there are significant differences in real estate markets across different countries with each country adopting a variation of a range of defining REIT characteristics.
A general definition of a REIT is provided by the OECD:
A widely held company, trust or contractual or fiduciary arrangement that derives its income primarily from long-term investment in immovable property, distributes most of that income annually and does not pay income tax on the income related to immovable property that is so distributed.
Regional industry bodies have defined REITs as follows:
European Public Real Estate Association (EPRA, Europe):
REITs are defined as publicly listed property investment companies that own, operate, develop and manage real estate assets for obtaining returns from rental income and capital appreciation. REITs obtain a special “tax-transparent” status in return for meeting certain obligations, most importantly high distribution requirements.
(www.epra.com/regulation-and-reporting/taxation/)
National Association of Real Estate Investment Trusts (NAREIT, USA):
A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modelled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.
(www.reit.com/investing/reit-basics/what-reit)
Asia Pacific Real Estate Association (APREA, Asia):
A REIT is a collective investment vehicle that invests in a diversified pool of professionally managed, investment grade real estate. In its simplest form, a REIT provides ownership of a portfolio of properties in units that are held by investors as a way of securitising property. Most of the income from the properties, typically 90–95%, will be paid directly to investors as a dividend on a regular basis. Conditional on the high dividend pay-out, most countries waive corporate income tax on the trusts.
(www.aprea.asia/file/The%20Impact%20of%20REITs%20on%20Asian%20Economies.pdf)
By comparing the definitions, a REIT has some core characteristics (tax exemption, focus on real estate and pay-out requirement) for which there are only minor differences between countries. One of the main differences between countries is related to specific real estate activities that may be undertaken by the REIT. Unlike developed markets, which are characterized by a higher proportion of property owners focused on managing and leasing properties, emerging markets are often focused on property development, which may be considered to be a key point of inconsistency. Property owners are more likely to see a stable income arising from leases and then being able to distribute a significant proportion of their profits on a regular basis, through dividends, as being a relatively lower-risk activity. On the other hand, developers are typically dependent of the project’s stage and economic cycle, where early stages are characterized by a less-stable income stream and relatively high leverage, being a relatively higher risk activity.
1.1.2 Structure of a REIT
From the definitions given previously, five key structural aspects may be identified:
- corporate structure – widely held company, trust, or other legal form;
- investment focus – investing in immovable property;
- time horizon – for the long-term;
- profits distribution – distributes most of the profits annually; and
- tax treatment – does not pay income tax on the income related to immovable property that is so distributed,
which may often be accompanied by some level of limitation on debt or gearing.
From thes...
