From the latter half of the twentieth century, real estate investment trusts or REITs have grown to become a substantial sector in the world’s stock markets, being now well established in the USA and Australia, growing in Asia and emerging in Europe. Starting as an amalgam of a few individual properties, REITs have now become not only substantial, structured real estate portfolios but also large business enterprises. As such, management of the modern REIT requires a combination of professional skills from the real estate sector, portfolio management skills from the finance and capital markets sectors and management skills akin to those required for the successful operation of other global enterprises. Accordingly, this book views REITs primarily as major international enterprises for which the core business is investment in and development of real estate.
I seek to explain the real estate investment decision making process by which a real estate investment trust, or REIT, converts $1 of unit-holder capital into $1 of investment real estate. Focusing equally on the people and the process, the contributions of the key participants in the real estate investment decision making process are described and analysed with a particular emphasis on both the overlap between their roles and their interaction.
The process of real estate investment decision making is a fusion of the ‘how’ and the ‘why’. The how is based on the results of new, original academic research, including structured interviews with the managers of a wide range of different types of REITs, as well as the research and publications of others as referenced, together with the author’s 25 years experience in REIT management. The why is drawn from the real estate theory, capital market theory and finance theory that underpins real estate investment management.
The original role of a REIT, which remains the core role of many REITs today, was to unitise and securitise otherwise illiquid investment real estate. As individual buildings increased in value and became denominated in billions of dollars rather than just in millions, the ability of and wisdom for investors to own such a building in its entirety came into focus. By acquiring a billion dollar building and offering a billion one dollar units tradeable on a stock exchange, the REIT provides an intermediation role allowing a building for which there may otherwise be a limited market of possible purchasers to be owned indirectly by investors who would o therwise be unable to own such real estate. The same intermediation principle is applicable to buildings in different real estate sectors, different states and different countries. In each case, the REIT offers the opportunity for bricks and mortar investment real estate to be broken down into small paper units tradeable on a stock exchange. Further, the same intermediation principle is applicable to either individual buildings or to a very large number of buildings. As the number of buildings owned by a REIT grows or as the REIT expands into different sectors, states or countries, the REIT may group the buildings, sectors, states or countries through the creation of funds and portfolios based on such characteristics or upon other characteristics such as income, capital growth and so forth. The evolution of REITS varies between countries with, for example, US REITs based in specifi c enabling legislation, Australian REITs based in trust law and other countries adopting varying combinations of both. While the details of governing documents may vary between countries, a common feature of REITs worldwide is that they enjoy some form of beneficial tax treatment in their local jurisdiction requiring very close adherence to local laws, regulations and rules in order to qualify for and maintain the tax benefit.
In the US, REITs were shaped through successive legislation including the Real Estate Investment Trust Act (1960), the Tax Reform Act (1986) and the REIT Modernisation Act (1999). US REITs have to fulfill a variety of criteria including a specified proportion of assets invested in real estate, mortgage loans, shares in other REITs, cash or government securities and deriving a specified proportion of gross income from rents, mortgage interest or gains from the sale of real estate (Block, 2002; Chan et al., 2003). From a taxation viewpoint, US REITs pay no corporate taxes provided that they distribute at least 90% of taxable income to unit-holders who then pay tax at their individual tax rate (Block, 2002; Chan et al., 2003). Comparatively, in Australia, REITs were initially shaped by the equitable principles of trust law generally and latterly by corporations and taxation legislation specifically. Australian REITs have comparatively few criteria to fulfil, with the nature of investment determined by those investments authorised under a financial services licence (Booth, 2006). From a taxation viewpoint, Australian REITs pay no corporate taxes provided that they distribute all relevant income to unitholders who then pay tax at their individual tax rate (Booth, 2006). With REITs now existing not only in the US and Australia but also g rowing across Asia and emerging in Europe, the range of differing laws, regulations and rules for the REIT sector in the respective countries is vast and beyond the scope of this book to address. Readers seeking further detail of REIT laws, regulations and rules in those countries with an active REIT sector are referred to the comprehensive overview provided by Rachel Booth in Real Estate Investment Trusts: A Global Analysis (2006). In addition to the common feature of some form of benefi cial tax treatment, REITs across the world are also gradually converging on more transparent governance while gradually diverging on the nature of REIT models developed.