building real estate investment trust in hanoi xây dựng quỹ đầu tư tín thác bất động sản tại hà nội_noi_dung

In fact, many individual or legal entity investors want to invest in the real estate market but do not have enough funds to buy wholly a single product and on the other hand, they also a

NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisor: Dr Pham Quy Long

Hanoi – 2010

TABLE OF CONTENT

ACKNOWLEDGEMENT i

ABSTRACT ii

TÓM TẮT iv

LIST OF TABLES x

LIST OF FIGURES AND GRAPHS x

BEGINNING 12

a Introduction 12

b Proposal 13

CHAPTER 1 OVERVIEW OF REAL ESTATE INVESTMENT TRUST 18

1.1 Real estate investment Trust (REIT) 18

Concept 18

1.1.1 18

1.1.2 REIT classification 21

1.1.3 Some operation rule of REIT 33

1.1.4 Some Macroeconomic Factors affect to REIT 34

1.2 Differences between REIT and other real estate investment companies 34

1.2.1 REIT certificates have the same nature with bond 34

1.2.2 Dividend payment 35

1.2.3 Tax 35

1.2.4 Management 36

1.2.5 Main business activities 36

1.3 Benefits of REIT 37

1.3.1 Benefits of REIT to investors: 37

1.3.2 Benefits of REIT to economy 39

1.4 EXPERIENCE LESSONS FROM BUILD AND DEVELOPMENT PROCESS OF REIT IN COUNTRIES 42

1.4.1 Introduction of some REIT on the world 42

1.4.2 Success of REIT in countries 49

1.4.3 Experience lessons 50

Conclusion 51

CHAPTER 2 HOUSING MARKET AND FINANCIAL SOURCE FOR REAL ESTATE BUSINESS IN HANOI 52

2.1 HOUSING MARKET IN HANOI CITY 52

2.1.1 Overview of Vietnam’s property market 52

2.1.2 Property market in HANOI 53

2.2 Financial sources for real estate business 63

2.2.1 Overview of real estate finance 63

2.2.2 The Major capital sources on primary real estate market 67

2.2.3 Difficulties in financing for real estate projects 69

2.2.4 Disadvantages in real estate trading caused by lack of monetary supply 73

2.3 STUDY REIT (REAL ESTATE INVESTMENT TRUST) AND NECESSITY OF ESTABLISHING REIT IN HANOI 75

2.3.1 Existence of REITs in Vietnam 75

2.3.2 Differences between REIT and other Investment Fund in Vietnam 75

2.3.3 Necessity of establishing a model of REIT in Hanoi 76

Conclusion: 76

CHAPTER 3 SOLUTIONS FOR ESTABLISHING REAL ESTATE INVESTMENT TRUSTS IN HANOI 78

3.1 PROPOSAL OF REITS MODEL IN HANOI 78

3.1.1 Types of REITs should be established 78

3.1.2 Framework of organization 79

3.2 FOUNDATION BASIS AND OPERATIONAL PRINCIPLE 82

3.2.1 Foundation basis of REIT Company 83

3.2.2 Operational principles of REIT 84

3.2.3 Operation of REIT (General) 85

3.2.4 The REIT ratings methodology 85

3.3 SUPPORTING SOLUTIONS 87

3.3.1 Real estate market consolidation 87

3.3.2 Consolidating securities market and making condition for

development of professional knowledge on securitization 88

3.3.3 Building up and promulgation law on REIT 89

CONCLUSION 94

REFERENCES 96

APPENDIX 1 98

Organizational Rules in some countries 98

APPENDIX 2 101

APPENDIX 3 102

LIST OF TABLES

Table 1.1 Dividend versus risk free rate

Table 2.1 Statistics of apartment for sale on the market

Table 2.2 Statistics of for lease apartment market (6/2009)

Table 2.3 International standard hotels in Hanoi

Table 2.4 Situation of real estate loan balance in Hanoi

Table 3.1 Some activity features of private and public REIT

LIST OF FIGURES AND GRAPHS

Figure 1.1 Model of REIT organized as a fund

Figure 1.2 Model of traditional REIT

Figure 1.3 UPREIT Model

Figure 1.4 DOWNREIT Model

Figure 1.5 Pacific REITs by sub-sector

Figure 1.6 Total numbers of REITs by country

Figure 2.1 Figure 2.1 Supply forecast, 2009 – 2012

Figure 2.2 Future rooms supplies in Hanoi

Figure 2.3 Stock and New Supply, 2009 - 2012

Figure 2.4 Capital Structure

Figure 2.5 Capital demand

Figure 3.1 REIT model like a company in Vietnam

Figure 3.2 Suggested REIT model in Vietnam

BEGINNING

a Introduction

With the transition of the economy from centralized planning economy to the economy under market mechanism, understanding and awareness of land management, housing development and real estate market in Vietnam has changed a lot Real estate market has achieved the remarkable development steps in recent years thanks to the socioeconomic development of Vietnam and policies of housing development and use of land by the government

According to statistics by General Statistical Office, the average population of Hanoi City in 2010 is 6.5 million Hanoi City is one of the largest and most dynamic economic centers in Vietnam with annual GDP making up for 12% of national GDP and GDP growth rate of more than 11% per year [22] Hanoi City has been attracting a large number of domestic and foreign investors, businesses and immigrants in recent years Therefore, the real estate market in Hanoi City is one of the most vibrant markets in Vietnam In fact, the state has many efforts but the real estate market is just only at the initiation stage with potential risks and unstableness due to the inadequacy between the orientation of land use strategy, master planning and legal framework and tools supporting the market

Basically, the real estate market in Vietnam still focuses primarily on land use rights transfer business In addition to the actual needs on real estates for residents and trade business, there are so many needs about investment in land of speculators Those who invest in land normally transfer land use rights in the suburban regions

to procure imparity shares when the land price increases as the speculators do According to the Department of Natural Resources and Environment of Hanoi City, from 2000 to late 2009, there were 2,300 real estate investment projects with a total area of used land up to 11,500 hectares However, most of these projects have not been completely implemented by investors

In other words, there is no complete real estate product such as infrastructure; housing and other real estate was conducted to generate profits in the primary

market Just in fact, over the last time, for the real estate market, activities are mainly the transfer of land use rights for business on the secondary market

This situation makes potential risks arise and be serious for immature market, because this situation could lead to too high and impractical real estate price, which

is out beyond the ability of payment of those with actual housing needs and enterprises trading real estate It will be more risk if many individual or legal entity investors rush into real estate investment but have no suitable and careful business strategy, while sources of land are limited Moreover, in recent years, people tend to change the way of putting aside unused money and savings from gold or cash to real estate investment with expectation of earning more profits than saving Just this reason made the market "hot" in 1995, 2000, 2002 and 2007

Since 2004, the government issued some policies and regulations to help real estate market to develop strongly and limit risks that may occur Since there are Decree

No 181/ND-CP dated October 29th 2004 of the Government with regulations related prohibition against the dividend into plots for background sale, the real estate market in Hanoi City as well as many other locals has been signal of slowdown, the land prices reduces, particularly prices of agricultural land, and the case of illegal transfer reduces visibly, Decree No 69/2009 ND –CP, and Decree No 71/2010 ND-CP In addition, many real estate investors have gradually changed their business strategy to invest in the secondary market with a long-term goal because they believe that the real estate market continues to be vibrant and full of promises of good prospects in the coming period

b Proposal

Main concern of real estate investors is funding capital The enterprises trading in this field often require a large amount and long-term capital However, regarding the real power of investors in the real estate market now, the majority are unqualified on financial capacity to conduct projects by themselves to create complete products for the primary market Most of investors conduct the projects in

small scale, but can only perform the investment preparation phase, or compensation of agricultural land Funds to build technical and social infrastructures, houses for sale must base on the advanced capital sources of buyers and credit sources of commercial banks

Generally, most of the real estate projects are funded from (i) the capital source of investors - but very small, (ii) the advanced capital sources of buyers and (iii) medium-term and short-term credit sources of commercial banks

However, these financial sources always are limited while demand for capital increases constantly Moreover, capital market has not kept a key role in developing the real estate market for years; it was due to the lack of financial instruments supporting real estate business activities

We can see that the investors have not been enough financial capacity to complete the real estate projects When the government issued policies and regulations stated above, the real estate investors can resolve the difficult problem about capital to carry out the projects

In fact, many individual or legal entity investors want to invest in the real estate market but do not have enough funds to buy wholly a single product and on the other hand, they also are interested in the liquidity in real estate business and the demand of investment diversification into other assets

Therefore, the author believe that, one of positive solutions to resolve the problem

of capital markets in real estate market is to find mechanisms and tools to mobilize capital effectively that can help to connect real estate market with capital flow channels from financial markets

For that reason, the author want to mention the review of REIT model with strategy

to mobilize capital broadly in the public who have needs of real estate investment but with a fixed capital This will contribute to limit the risks related to the land speculation as well as risks related to bank credit in the area of real estate investment financing The author want that through the project "Building Real estate Investment Trust in Hanoi city", further researches shall be suggested to find new solutions of mobilizing sources of capital funding for the real estate market of Hanoi City

c) Research purposes

This project will focus on answering 02 big questions as follows:

i Why REIT can be a long-term fund mobilization model that suitable for real estate market in Hanoi?

ii The necessary conditions for implementation of the REIT in Hanoi?

d) Scope of research

Because the form of Real estate Investment Trust is new to Vietnam, but in fact it has been applied in many countries on the world such as USA, United Kingdom, Japan, Singapore the research project is only focused to:

 Areas of research: Hanoi City

 Real estate business activities (including actual situation of real estate market, needs of product development and funding capital sources ) at the main primary real estate market segment in Hanoi City This research does not include researching the secondary real estate market, the laws and regulations, policies related to real estate business activities

 State and Joint-stock banks, foreign and state investment funds, private and foreign real estate companies running in Hanoi City

 Some typical REIT models in Asia, American and European

 Angle of real estate developers but not go into the details of going into professional knowledge technical on securitization

This research is studied in order to identify the REIT model to answer the issues brought out The recommendations on REIT establishment in this study are strategically ideas The proposal of building REIT in Hanoi City is seen as one of solutions of mobilizing sources of capital funding for the real estate business activities

Therefore, the scope of research of this research will include bringing out the solutions of models, operation principles of REIT in Hanoi and assistance measures These recommendations should have further research on many aspects to apply in practice

e) Research method

This is a qualitative research on the theories, which have previous solid foundation These theories were searched and exploited based on the data collected systematically Based on the establishment of specific research goals, the author uses many different methods Among them, the main method used is the analysis method to clarify the needs of real estate products and define the model of new capital mobilization tools to meet the needs of real estate investment capital On the other hand, the analysis makes clear the benefits of new investment channel so that investors can use when they want to invest in real estate business In addition, this research uses the comparison method to compare among REITs in the countries on the world to draw the practical lessons when applying to Vietnam Other support methods such as experience survey, depth interview are used to clarify more clearly the issues on research practice In this research, the author use most of secondary data resources – namely the data got in the past

These data will be used mainly in chapter 1 and chapter 2 of this research, including the theoretic documents from of the foreign author and domestic data from specialized documents, newspapers, website

f) Structure of research

This research is structured into 03 chapters (not including the Introduction and conclusion) as follows:

Chapter 1 "Overview of Real Estate Investment Trusts (REITs)" will outline

the location of REIT in real estate financing market, brings the basic concept of REIT to readers and summarizes the operation principles of REIT and the benefits brought by REIT; concurrently bring out the difference between REIT with the normal real estate business companies

Chapter 2 "Operation of real estate market and funding sources for real estate business in Hanoi City." In this chapter, the author mentioned the situation of real

estate market in Hanoi City and needs of market development in the future Also, the author will analyze the main funding sources for the real estate market, the difficulties on funding sources and the disadvantages due to lack of tools of appropriate capital mobilization tools Since then, the author will survey and research REIT model and define the need of piloting to form REIT in Hanoi City

Chapter 3 "Solutions for establishing real estate investment trusts in Hanoi City." Through the analysis results in Chapter 01 and 02, the author will bring out

the proposal model, legal basis for operation and needed support measures to build

REIT in the current conditions

CHAPTER 1

OVERVIEW OF REAL ESTATE INVESTMENT TRUST

1.1 Real estate investment Trust (REIT)

1.1.1 Concept

“REIT (Real Estate Investment Trust) is a type of investment company

specializing in purchasing, development, management and sale of real estate based on the professional management of real estate portfolios This is a form

of business investment in the real estate market through kinds of possessive assets or debt security assets that organizations and individuals can participate

by purchasing or selling shares.” [1]

According to Barron's Real Estate Dictionary: “Real Estate Investment Trust:

an investment trust that owns and manages a pool of commercial properties and mortgages and other real estate assets; shares can be bought and sold in the stock market”

“Individuals can invest in REITs either by purchasing their shares directly on

an open exchange or by investing in a mutual fund that specializes in public real estate An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs) Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels

Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or country Investing in REITs is a liquid, dividend-paying means of participating in the real estate market.” Investopedia.com

Business operation of REITs often generates income from the rental property

and capital gain when selling the property An advantage of investment in

REITs is the ability to transfer invested assets into cash quite easy compared

to owners of real estate in private form Another reason may account for

investment in REIT is that REIT‟s stocks or REITs certificates are mainly on

transacted on focused transaction floors Here, REIT's stocks purchase and

sale is much easier compared to purchase and sale respective property directly

on the property market One more advantage when investing in a REIT is that

investors can re-invest dividend to increase profits on investment

REIT operates as an intermediary organization and distributes most income

for investors To be eligible for the preferable tax treatment REIT must be

satisfied multiple standards, limitations and conditions including the standard

of shareholders, assets and income

Currently, REITs are typically organized in the following 3 forms:

I A business or an entity called Trust, from which investors buy

shares because of their believing in professional, experience and

prestige of the REIT managers, and trustee for the REIT to invest in

this property to make profit

II REIT help mobilize long-term capital market for poverty market

development through conditional tax incentives

III REIT is any enterprise which exists to meet the requirements and

regulation has been mentioned above

In summary, the research on REIT, the related terms are as follows:

Comment [V1]: Dịch bằng google à???

Comment [V2]: Không rõ Quý định viết về hình

thức tổ chức hay chức năng đặc điểm, vì nội dung ở dưới lẫn lộn giữa hai vấn đê này, xem lại nhé

Comment [V3]: Đây có vẻ là chức năng/đặc điểm

chứ không phải là hình thức tổ chức của REIT

 Real estate properties: are properties that has fix physical location and

not movable, including land, houses, construction works associated with land, including assets associated with the houses, buildings and other properties associated with land Real estate market is place or means for purchasing and transactions of real estate and related properties [2]

 Real estate business activities: includes real estate business and

property business services [2]

 Real estate business: is the investment to create, buy, receive, transfer,

lease, financing lease real estate for sale, transfer, for rent, lease, and financing lease for the purpose of the profit.[2]

 Real estate business services: is the business support the property

market and real estate, including brokerage services, property priced valuation, property transaction floor, property consultancy, real estate auction, real estate advertising, property management.[2]

 Real Estate Investment Trust – REIT: “A corporation or trust that uses

the pooled capital of many investors to purchase and manage income property (equity REIT) and or mortgage loans (mortgage REIT) REITs are traded on major exchanges just like stocks They are also granted special tax considerations REITs offer several benefits over actually owning properties First, they are highly liquid, unlike traditional real estate Second, REITs enable sharing in non-residential properties as well, such as hotels, malls, and other commercial or industrial properties Third, there's no minimum investment with REITs REITs

do not necessarily increase and decrease in value along with the broader market However, they pay yields in the form of dividends no matter how the shares perform REITs can be valued based upon

fundamental measures, similar to the valuation of stocks, but different numbers tend to be important for REITs than for stocks.”[3]

1.1.2 REIT classification

1.1.2.1 Classification by investment subject

There are three types of REIT: equity REIT, mortgage REIT and hybrid REIT

 Equity REIT - Equity trust

“Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets) Their revenues come principally from their properties' rents “[4] REITs issue stocks making common fund (blind-pool) in order to invest in large number of unfixed areas and form real estates in unlimited period Since then, REITs earn their income from real estate rental and distribute them as dividend for shareholders A REIT in the true sense of the word in theory will be investment in real estate or loan security property (hereafter called security property) stated in detail in the prospectus of REIT when issuing stocks These investments shall not change all the time Owing

to that, investors could carry out assessing quality of the real properties in that portfolio before deciding to invest in REIT Conversely, a common trust fund can mobilize starting capital in advance and then find security real estate or property for investment Some REITs are organized as specialized investment funds or trusts Unlike common trust fund, trust reselling and renting will invest in land below building projects and then rent back them out to seller These specific REITs get bigger income from properties rental or increase value of reinvestment those buildings In fact, REIT can rent professional property management companies to manage the properties to make income from rental and provide related services for renters

 Mortgage REIT - Mortgage trust

“Mortgage REITs deal in investment and ownership of property mortgages These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities Their revenues are generated primarily by the interest that they earn on the mortgage loans” [4]These REITs are highly sensitive to credit quality of renters Some mortgage REITs restrict their investment items in construction and short-term security properties; some others only invest in long-term or eternal security property, and some mortgage REITs invest in both two kinds of these security properties Another kind of mortgage fund - dedicated mortgage fund - is organized to provide companies specialized in development of real estate projects with security loans to a defined project In brief, mortgage REIT lend money to real estate's owners or exploiter, for example, REIT lend to buy back exploitation right of a hotel in a fixed number of years

In several years recently, many mortgage REITs started issue bond securitized with real estate mortgage loans (Collateralized Mortgage Obligations - CMOs) with a lower interest rates than those of a loan with security property

or mortgage-backed pass-through certificates required of issuing by REIT to guarantee for correlative CMOs

 Hybrid REIT - Hybrid trust

“Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages”. [4]

These REITs can be distinguished by different characteristics, such as of closed-end REIT or open-end REIT With closed-end REIT, the number of shares in the Initial Public Offering is limited to protect shareholders from the drop of dividend of common stock and value of stock in the future Fact shows their methods of gaining profit are easier to predict and the price fluctuation of stock reduces On the contrary, with open-end REIT, new

shares shall be issued and sold when REIT discover new investment opportunities Although new shares will make reduction of income of present shareholders, managers and shareholders still believe that basically, total value of a share is higher because of additional investment items

Hybrid REITs can be distinguished based on REIT's operation level and period Unit trusts with defined operation period are established as investment tools with capacity of liquidity by themselves; properties of the fund must be liquidated and then income must be distributed to shareholders at a defined time In these cases, properties must be taken back in many different periods, normally from 4 to 15 years, then these properties will be sold and income will be distributed to shareholders when the fund is liquidated Theoretically, advantage of a unit trust with defined period is price of REIT's share in accordance with present value of the property because investors can estimate quite exactly the balance of correlative property REITs without defined period have eternal operation period and characteristic of capacity of reinvestment in any trading or financial activities for new or present properties To maintain their condition, these REITs must distribute most of cash flow gained from renting real estate or interests paid for shareholders

Hybrid REITs also can be distinguished based on "lever effect" When a lever REIT buys back property, REIT will find a loan to sponsor for that property Normally, the amount of sponsoring money can reach 90% value of the purchased property Conversely, non-lever REIT will not make the most of loan sponsoring items to invest in obtained property Then, REIT will buy property by cash or invest its fund in security property

1.1.2.2 Classification by organization

REIT organized as a company (legal entity REIT)

This REIT is formed following Enterprise Law as a company with Board of manager or Trustees elected by shareholders REIT‟s stock can be traded on big securities exchange floors, at both primary and secondary market

Basing on management purpose, this type of REIT can be classified into two subgroups as follows:

- Subgroup 1: Self-managed REIT

This type of REIT is applied in America, Western Europe nations and Japan This REIT often self-manages REIT‟s property to gain profit Related legal regulations in these nations are very strict to criterion for Board of Manager and operational staffs of these REIT They must have suitable professional knowledge, experience and prestige in financial and real estate areas; they must not have personal or investment relations that can bring unfair business decisions

- Subgroup 2: REIT managed by a hired Assets management company

This type of REIT is rather common in many countries REIT entrusts or mandates a professional real estate management company (hereafter-called management company) to carry out investment activities Board of manager/ trustees is restricted in scope of activity following contract with Management Company and supervisory bank and also in making decision of investment strategy, business plan, dividend policy…

In this case, the income gained from selling REIT‟s shares must be divided into two parts One is for investment item in selected supervisory bank; the very small part remaining is used for paying management costs

Like banks, real estate management companies are formed with a close procedure sequence ensuring special criteria and conditions Activities of these management companies are controlled and supervised by both trustees and representative of shareholders and authority supervisory agency (normally a bank selected and appointed by government) with support from related agencies and organizations such as audit companies, property assessment organizations

Additionally, in some cases, REIT organized as a company can be the very property management company

 REIT organized as a fund

This type of REIT is a form of cooperation or association of investors who want to mandate their sum of investment contribution money in real estate business This type can be described with following diagram:

Figure 1.1: Model of REIT organized as a fund: [1]

Source:

The management company on behalf of REIT will conduct all REIT‟s commercial transactions The relation between investors and management company bases on the control of fund management trust contract

This type of REIT is quite similar to the mutual fund governing business activities on securities in America and some other countries on the world At present, securities investment funds operating following Vietnam Securities Law are similar to this type

This type of REIT must be participated by following parties and sponsors:

Properties

management

company

State authority

Fund management company Sponsors

State

authority

Supervisory organization

REIT

Consultant organization

Audit company

Assessment organization

REIT subsidiaries

Real estate Real estate

 State authorities : be responsible for licensing and monitoring

 Individual or legal entity investors: who invest their capital to REIT

 Management companies: Management Company: Joint Stock Company

or Limited company has sufficient conditions to perform fund management services These companies on behalf of REIT will conduct all commercial transactions of REIT such as preparing portfolio, carrying out investment plans… A fund management company can establish and manage many different funds at the same time

 Sponsor: normally, fund management companies are concurrently sponsors or supporters for forming REIT

 Fund: sum of money contributed by investors and trusted to Management Company to conduct investment to make profit This sum

is income arising from selling REIT‟s shares for investors

 Trustees and guardian: can be one person, a group or an organization (bank or trustee company) meeting requirements They are representative who are responsible for looking after, supervising and protecting property, benefit of investors

 Auditors, valuators or assessors

 Special organization (Special Purpose Vehicles - SPV): like a subsidiary company that is rather common in Vietnam REIT invests to establish this SPV or REIT together with other investors invests separately in special property The property condition of these SPV will not be shown in the REIT's balance sheet, so SPV is called "off–balance–sheet companies"

 Consultant organization in real estate and properties management market

1.1.2.3 Classification by operation structure

Traditional REIT

Traditional REIT usually holds directly its properties, while UPREIT and DOWNREIT (will be mentioned below) hold REIT's properties through partners Operation of traditional REIT is described as follows:

Figure 1.2: Model of traditional REI [1]

Properties management company

Rent contract Rental

UPREIT

“This is an operating partnership in which the partners of one REIT team up with the principles of another, newer REIT For interests of both parties in the operating partnership, the partners from the older REIT contribute the properties, while the new REIT contributes the money from its public offering After a given period of time has passed, often one year, the partners are allowed to have the same liquidity as the REIT shareholders through selling their pieces of their partnership for either cash or REIT shares Also, when a partner in this partnership possesses the units until death, the federal estate tax allows the beneficiaries to sell the units for cash or REIT shares without paying income tax.” [5]

In general, when participating in UPREIT, REIT's partners move towards IPO (Initial Public Offering) and the gained income must be contributed to UPREIT (normally used to improve or upgrade present properties or restructure loans of present partners) The initial partners bring their properties in cooperation to get income certificates (called Operating Partnership Units – OP Units) in transition period After a period, normally one year, these OP certificates can be sold or exchanged with REIT's shares

OP certificates often are valued at equivalent level of REIT's shares and also

OP can be exchanged in securities market, except UPREIT is a private REIT

To UPREIT, all partners have responsibility limited corresponding with contributed capital REIT's partners are always main partner with contributed capital affected

Present cooperation organizations can get their interests from the exchange between properties and OP certificates because when selling properties for UPREIT, taxable items payment can be postponed until these OP certificates are changed to cash or shares

This REIT is also a solution that some companies want to participate to be applied regulations for REIT, use to conduct trade activities, merge present

properties to transfer properties in order to diversify portfolios without issuing shares or borrowing, or carrying out payment in big scale at a time

Operation of UPREIT is described as follows:

Figure 1.3: UPREIT Model: [6]

All real estate contributed to OP

Business cooperation contract BBC

OP Certificate

s

Initial Partner Asset Owner

Initial Partner Asset Owner

By advantages of UPREIT's structure, some “non UPREITs" are established, temporarily called DOWNREIT This will help REIT to use partner members

of DOWNREIT to buy properties Operation effect of this type s similar to UPREIT; however, on structure, DOWNREIT is a unit directly under REIT Operation of DOWNREIT is described as follows

Figure 1.4: DOWNREIT Model:[6]

All real estate contributed

Initial Partner Asset Owner

Current real estate

Own and manage

Cash contribution

Asset Owner

Initial Partner Asset Owner

Shareholders of REIT Investment

1.1.3 Some operation rule of REIT

1.1.3.1 REIT is participated by many organizations and individuals with separate responsibilities

 Management Company is responsible for selecting and deciding business plan to conduct investing capital of the fund

 Trustee and/or supervisor is responsible for looking after REIT's properties and supervising REIT activities

 Properties assessment organization: determine value of all or a part of REIT's properties and supervise REIT's activities

 Audit company: be responsible for auditing

 Properties Management Company: directly manage, maintain, and rent visible properties (buildings, hotels, car parks, shopping centers…)

1.1.3.2 Independence

All the members participate in REIT must be independent on personal benefit

in order to prevent unfair business transactions and decisions

1.1.3.3 Prevention of authority misuse

There are many regulations to prevent ability of authority misuse of individual or group of investors in a REIT This regulation stipulates some criteria that REIT must comply, such as the minimum of shares (or fund certificates) released to public, the maximum of shares that a shareholder can own…

Related regulations also bring out strict restrictions to main shareholders (strategy) in some business activities of REIT and of own these main shareholders

Properties estimation policy in business transactions and investment portfolios assessment must be stipulated rather specifically

1.1.3.4 Risk management

Risk management activities are required strictly Each REIT must let some fixed quantity of its properties in the form of investment with high liquidity such as bank margin, bond,…Portfolio is required with management to ensure the minimum of risks

1.1.3.5 Transparency

Every REIT must take strict responsibility in declaring information to public (prospectus, periodical financial report, changes in operation management…) following requirements of current law on transparency

1.1.4 Some Macroeconomic Factors affect to REIT

 Interest rates

 GDP or economic growth

 Inflation

 Real Estate Cycles

 Property market outlook

 Equity/debt market conditions

1.2 Differences between REIT and other real estate investment companies

1.2.1 REIT certificates have the same nature with bond

Certificates of REIT are actually stocks that holders can get their interest from potentiality of stock value increase thanks to positive changes in real estate renting market, changes in interest rate or increase of REIT stock demand

In the fact recently, REITs usually make high dividend productivity because most of REITs pay the majority of REIT revenue for shareholders in the form

of dividend This dividend is quite stable and in fact, its value is higher than

of government bonds and treasury bills REIT's shareholders can receive

dividends regularly without participating in REIT management that is trusted

to professional management company under supervision of government As a result, many investors see investment certificates of REIT simply as a kind of bond with high profitable rate

For example, According to Nareit, in America, to meet requirements for

company income tax exemption, each REIT must comply with the following provisions:

 Be structured as Corporation, business trust, or similar association

 Be managed by a board of directors or trustees

 Shares need to be fully transferable

 Pay other taxes as a domestic company

 Not be a financial organization or an insurance company

 Be jointly owned by more than 100 people

Have 95% income from dividends, interest rate and revenue from properties Pay dividends of at least 90 percent of REIT's taxable income

No ore than 50 percent of the shares can be held by five or fewer individuals during the last half of each taxable year

At least 75 percent of total investment assets must be in real estate

Derive at least 75 percent of gross income from rents or mortgage interest Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries

1.2.4 Management

REIT is really a kind of business management Therefore, capital management and investment of REIT must be conducted by a professional management company (also called trustee party) following some given conditions Even when established as a company, the investment capital of REIT will be trusted to a professional management company to conduct REIT's shareholders, or investors, will never be managers Because shareholders mandate the management company with almost operation management and investment rights without interference in normal conditions, government should promulgate strict regulations to protect investors

1.2.5 Main business activities

The main difference in business activities between REIT and real estate companies is that REIT often buys or builds real estate for rent to get income from rental REIT buys or develops real estates to operate and manage as a part in portfolios of REIT, but does not sell instantly after the project finished This is the key point in real estate development While real estate companies often trade these properties to gain profits, but rarely rent to get rental On the other hand, REITs are financial investors, they do not function executing and building as real estate companies REITs' activities are operated, managed by professional organizations on each area that REITs conduct

1.3 Benefits of REIT

“After more than 45 years as from the first model was formed, REIT has been established and developed in many countries on the world and become a dynamic institution with large effect on real estate market.” [7]

Below are some REIT's benefits of great interest:

1.3.1 Benefits of REIT to investors:

In general, REITs and their performance have some common characteristics with small-cap stocks and bond-like investments However, REITs have advantages over stocks and bonds in terms of dividends

The long-term performance of an individual REIT is determined by the value

of its real estate assets at any given time One of the primary incentives for REIT investment is the low correlation of its value to that of other financial assets Because of this, REITs possess low relative historical volatility and provide some degree of inflation protection In addition to the advantages of

an investment which avoids double taxation and requires no minimum investment, REITs offer investors current income that is usually stable and often provides an attractive return Another factor attractive to the investor is that a REIT's performance is monitored on a regular basis, by independent directors of the REIT, analysts, auditors, and the business and financial media

Benefits that REITs can bring to investors:

 Periodical dividend

 Income from stock value of REIT increasing in securities market

Table 1.1 Dividend versus risk free rate

* This is the average of the risk free rate, five year bond rate, 10 year bond rate and the cash rate

Source: Global Real Estate Investment Trust Report 2008 oft Ernst & Young company [23]

Source: investopedia.com

1.3.2 Benefits of REIT to economy

1.3.2.1 Opening up many investment opportunities

REIT brings many investment opportunities for individual and organization investors to join real estate market REIT provides long-term capital source from broad capital mobilization to form an investment type that can meet very large capital demand for real estate projects and at the same time support banks and primary real estate development companies in revoking their spent capital to invest in other projects

Investment certificates of REIT with low par value can bring many investment opportunities for anyone who joins real estate market Therefore this investment model can be considered as a socialization tool in real estate investment Performance period of REIT is often more than two years The main activity of REIT is purchasing formed properties to rent Thus, REIT

can help real estate companies and banks that provided loans for these companies in revoking capital for other projects Investment activities of REIT have been maintained at these properties even to tens of years However, in case of need, investors can exit from this investment activity through securities exchange floors

With a sum of capital and given period, REIT can participate in trading properties that REIT wants to buy after these properties are finished This will help real estate development companies to reduce their burden of bank loans and more comfortable in selling products Moreover, banks can resell the loans of real estate development companies to REITs

1.3.2.2 Making safer and more professional conditions for real estate business and investment activities

Investment policies and structure of REIT are supervised following law regulations in order to guarantee for investment safety and stable income Most of REIT uses its capital to buy completed properties and then use for rent The rental will be main income source of REITs REITs must not be allowed to lend or borrow money These restrictions are gotten rid of a part or all to REIT subsidiaries

Management companies are responsible for investing safely and legally REIT‟s capital in properties to get the best result These companies together with key staffs of REIT must meet professional criteria and have business ethics following government regulations through work permit in this area In other words, law regulations for REITs at least are strict as for banks

1.3.2.3 Supporting in providing with many diversified products for real estate market, especially to properties market for rent and sale

As mentioned above, the main activity of REIT is holding properties for rent and the main income is from renting properties REIT can buy back many kinds of properties such as hotels, schools, hospitals, warehouses, shopping centers,… from any individuals or organizations, which lack of management experiences, be loss-making or have difficulty in handling…Then, REIT can rent a professional assets management company to gain profit with purchased properties Because REIT is a model that can mobilize long-term capital, REIT often does not need any bank loans It has not to cope with burdens of loan and other rental, therefore it can keep its stability and reasonableness when participating in competition in long-term market

Figure 1.5 Pacific REITs by sub-sector

Source: Global Real Estate Investment Trust Report 2008 oft Ernst & Young company

1.3.2.4 Helping in development of professional areas and socioeconomic development programs

 REIT makes dynamic to help many building and real estate business companies

 REIT makes dynamic to develop professionalism and experience in asset management services

 REIT support in development of some social housing program such as investing in social housing projects with long-term capital In the condition with no burdens of bank loans, REIT can keep the price of sale or rent at reasonable level that beneficiaries could accept

 Establishment of REIT and regulations on REIT and support from securities market can protect legally investors who are short of experience in participating investment and improve liquidity of portfolio

 Thanks to investment in properties for rent, REIT can bring in some advantages for many businesses, especially small and medium ones, help to increase operation effect of business without any pressure from necessary properties investment items for business activities

1.4 EXPERIENCE LESSONS FROM BUILD AND DEVELOPMENT PROCESS OF REIT IN COUNTRIES

1.4.1 Introduction of some REIT on the world

At present, about 30 countries on the world have their law regulating, adjusting on REIT The following are some typical REITs in some countries

in America, Asia, and Europe

Figure 1.6 Total numbers of REITs by country

Source: Global Real Estate Investment Trust (REIT) Report of Ernst & Young

1.4.1.1 United States

United States Congress allowed for establishment of REITs in 1960 to expand business investment joining level of small investors in real estate area Average investors can invest in large commercial real estates with buying REIT‟s shares Similar to shareholders who gain profit from owing stocks in a corporation, shareholders of REIT can get profit from owing commercial real estates REIT has advantages that it can diversify its real estate portfolio, this will be better than investment in only one real estate Operation, management

of REIT will be conducted by experts who have experiences in real estate area

Regulations for REIT are in the United States Internal Revenue Code system

A REIT can have structure as a corporation, association, trust fund… if it can pay taxes as a corporation, but not be financial institutions such as bank or insurance company To be admitted as a REIT, a company must submit Internal Revenue service Agency with a special income tax return paper (following form 1120 of Internal Revenue Code) When becoming a REIT, the company must send yearly the detailed documents on shareholder‟s profit

to its shareholders If does not send, REIT will be penalized on financial obligation

REIT must be managed by one or many trustees or managers and REIT‟s share must be transferable In United States, REITs are not stipulated on minimum capital, but it must be jointly owned by more than 100 shareholders Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year In United States, there is no limitation for foreigners, no listing requirement and it is possible to form private REIT According to regulations, REIT must invest at least 75% of its total assets in real estate assets, government bonds or cash, it must not own more than 10% stocks of other corporations or REITs At least 75% of gross income comes from rents or mortgage interest Moreover, at least 95% income from real estates, dividends and revenue from properties At end of each quarter, REIT must have no more than 20 percent of its assets consist of stocks in REIT subsidiaries The law also requires REIT to distribute yearly dividends of at least 90 percent of its taxable income The distributed dividends are exempted from income tax, the keeping revenue will be taxable as normal business income tax

REIT is allowed to provide all services for renter such as: comforts supply services, security services, hygiene services, internet and TV cable REIT also is allowed to develop own, operate, manage and develop real estates following its portfolio REIT can develop or trade real estate through its subsidiaries and permitted to invest in oversea properties After 40 years, REIT was very successful in United States with total market capitalization reaches 450 billion US dollars

1.4.1.2 Japan

REIT in Japan was formed based on investment trust Law (2000) At this time, law on tax was developed to apply for REIT In principle, REIT is taxable as Japanese businesses However, REIT can be deducted its paid dividends from taxable revenue if at least 90% REIT‟s taxable revenue is distributed in the form of dividends Two first REITs were listed on the Tokyo Stock Exchange in September 2001 Up to now, Japan REIT market has expanded more and more with 41 listings and market price of about 5.700 billion JPY

Normally, it will take one year to establish a REIT The first step is forming

an assets management company and gets license of construction business from Ministry of Land, Infrastructure and Transport Then, the assets management company registers its activities with Financial Services Agency (FSA) When approved, the assets management company can be switched to REIT REIT has to submit FSA listing documents following regulations for REIT and then submit to Legal affair bureau Any REIT formed must be registered with FSA to start its activities as a REIT and must under control of FSA and local financial agencies

REIT has minimum capital of 100 million JPY REIT issues only one kind of share, just the kind with voting right REIT in Japan often is structured as a company The first REITs formed have shown that structure of a trust is