Reits - Vinod Kothari

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Text of Reits - Vinod Kothari

  • VINOD KOTHARI1012 Krishna224 AJC Bose RoadCalcutta 700 017. IndiaPhone 91-33-22813742/ 22811276/ 22817715/ Fax: 22811276e-mail: vinod@vinodkothari.com

    Introduction to Real Estate Investment Trusts

  • Real estate securities

    Reasons for adding real estate in investment portfolio: Real estate is globally the biggest asset Presumption is that real estate has low correlation with the rest of financial

    securities Investing in real estate has several problems

    Availability Ticket size Management problems

    Hence, intermediated investment through real estate securities came up

    Real estate securities include: REITs REOCs Mortgage-backed securities ETFs/ real estate mutual funds Synthetic investment by investing in real estate indices

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    Presentation on REITs by Vinod Kothari

  • Meaning of REITs A collective investment device of commercial real estate Equity-type funding REITs versus CMBS:

    CMBS is securitised debt lending against real estate

    REITS are security equity funding of real estate

    REITs

    Owns, and in most cases operates, income-producing property (Equity REITs) Office

    Apartment

    Retail (shopping centers)

    Hotels

    Warehouses (storage)

    Some REITs also finance real estate (Mortgage REITs) Essentially a tax-tool where equity funding of real estate is

    allowed on tax transparent basis: Minimum 90% dividend

    REITs are typically listed and quoted

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    Presentation on REITs by Vinod Kothari

  • REITs as property investment vehicle

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    Real Estate Investment

    Direct Investment Indirect Investment

    Listed

    Property Stocks

    REITs

    Non-listed

    Close-End Funds

    Partnerships

    Open-End Funds

    Mutual Funds

    Commingled Funds Syndication, JVs, TIC

    Special Funds Hedge Funds

    REITs

    Fund-of-Funds

    REITs have some 34% share in listed property investments. Presentation on REITs by Vinod Kothari

  • Commercial real estate as asset class

    0 10 20 30 40 50

    Corporate bonds

    Equities

    Residental property

    Exhibit 1: More bricks than bondsDeveloped economies' stocks of assets end 2002 ($trillion)

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    Source: The Economist

    Presentation on REITs by Vinod Kothari

  • Typical REIT structure

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    Presentation on REITs by Vinod Kothari

  • REITs and Mutual funds/ collective investment schemes

    While mutual funds may be open-ended, REITs are closed-end funds. As such, REITs are typically listed and their market values may or may not be their NAVs.

    Owing to nature of their assets, computation of NAVs by REITs is different from that by securities mutual funds

    REITs are income-oriented Investors relying on regular income have incentive

    to invest in REITs Statutorily, REITs distribute substantial part of their

    taxable profits

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    Presentation on REITs by Vinod Kothari

  • Major Player/Capital Sources: Equity:

    REITs are major sources of equity for real estate, mainly commercial real estate today

    JP Morgan Asset management estimates total investment grade, income producing CRE in the USA to be USD 6.4 trillion

    3.5 trillion debt

    2.9 trillion equity

    5.9 trillion private

    0.5 trillion public

    of the USD 2.9 trillion equity, approx USD 500 billion is owned by REITs

    Global estimate of investment grade CRE is $26.6 trillion (2011):

    Europe $9.4 trillion,

    US/Canada $7.5 trillion

    Asia-Pacific $7.2 trillion

    Latin America $1.8 trillion)

    GCC: $677 billion [Prudential Real Estate Investors data]

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    Presentation on REITs by Vinod Kothari

  • Suppliers of CRE debt

    2013 data indicates banks holding 35% CRE debt, followed by CMBS/CDOs holding 23%, GSEs /MBS about 16% [http://housingamerica.org/RIHA/RIHA_NewsArticle.aspx?85740]

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    Source: http://www.reit.com/Portals/0/PDF/CommercialRealEstateGeneralPurpose(10-7-09).pdf

    Presentation on REITs by Vinod Kothari

  • 10

    Major Player/Capital Sources: Debt

    Banks

    CMBS

    Life Co.

    Federally Guar. Pools

    Other

    Presentation on REITs by Vinod Kothari

  • REITs by country

    The number of REITs globally, end-June 2008 stood at 451 (E&Y 2008 REIT Annual). Down from 484 end 2006

    Decline mostly accountable by US debacle number down from 253 in 2006 to 148 in 2008

    In terms of market cap, the most significant REIT countries, in order of significance, are

    USA

    Australia

    France

    UK

    Japan

    Canada

    Singapore

    And so on

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    Presentation on REITs by Vinod Kothari

  • REITs global dataREITS data in different countries

    Country Market Total rate of Total rate of Weighted

    capitalization return one return three average

    US$ millions year (%) years (%) dividend

    yield (%)

    United States 271,850 27.9 -14.2 5.6

    Australia 70,747 10.4 -25.0 9.7

    France 64,526 45.5 -9.6 0.2

    United Kingdom 37,176 14.5 -26.3 4.6

    Japan 29,432 6.7 -19.4 6.9

    Singapore 23,134 85.6 -4.2 8.9

    Canada 20,610 56.2 -3.3 8.1

    Netherlands 11,234 40.9 -6.0 *

    Hong Kong 9,518 64.5 9.9 8.1

    Belgium 6,761 17.2 -2.4 1.4

    South Africa 3,400 17.5 12.4 8.5

    New Zealand 2,540 12.7 -4.9 8.4

    Turkey 1,889 151.3 -1.8 *

    Malaysia 1,542 38.6 10.2 3.7

    Germany 713 45.5 N/A *

    South Korea 132 28.4 12.1 8.4

    * Insufficient data for Germany, the Netherlands and Turkey

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    Presentation on REITs by Vinod Kothari

  • REITs market cap over years

    34 countries have REITs as of 2013

    Number has increased over time as many countries have enacted REIT legislation

    South Africa and Ireland recently passed legislations

    About two dozen more countries are planning to have REITs

    India has come with a draft REIT regulation from SEBI

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    Presentation on REITs by Vinod Kothari

  • REITs market cap in the USA

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    Authors graph based on data on reit.com

    0

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    0.00

    50,000.00

    1,00,000.00

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    3,50,000.00

    4,00,000.00

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    5,00,000.00

    Market Cap

    No of REITs

    Presentation on REITs by Vinod Kothari

  • Market capitalisation per REIT

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    Presentation on REITs by Vinod Kothari

  • US REITs capital issues

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    From reit.com

    Presentation on REITs by Vinod Kothari

  • REITs by region

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    Source: EYs Global REIT report Oct 2006

    Presentation on REITs by Vinod Kothari

  • REITs by country

    Total number of REITs by country

    Global Region Country 2008 2006

    North America

    United States 148 253

    Canada 33 33

    EMEIA (EMEIA is a global region made up of

    Europe, Middle East, India and Africa.

    Note Indian REITs have not been

    analyzed in this report.)

    Netherlands 8 9

    Belgium 14 13

    Germany 2 NA

    France 48 30

    Turkey 13 NA

    United Kingdom 19 NA

    South Africa 6 7

    Pacific

    Australia 64 58

    New Zealand 8 6

    Asia

    Japan 42 38

    Hong Kong 7 4

    South Korea 6 11

    Malyasia 13 11

    Singapore 20 11

    Total 451 484

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    Presentation on REITs by Vinod Kothari

  • Market cap by country

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    Source: E&Y 2008 REITs annual

    Presentation on REITs by Vinod Kothari

  • REITs in certain countries

    USA: REITs have been there since 1960 when tax rules were amended to permit REITs Apart from listed REITs, there are many unlisted

    REITs (about 1100)

    UK REITs were a recent introduction. Provisions were contained in Finance Act 2006 permitting property companies to transform into REITs

    Australia- they are known as listed property trusts and have been in existence for several years

    China: has taken an in-principle decision but REITs yet to be a reality in China

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    Presentation on REITs by Vinod Kothari

  • Geographical distribution of REITs

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    Presentation on REITs by Vinod Kothari

  • REITs returns

    Till 2008, REITs performed very badly due to global property meltdown

    In 2009, REITs have been recovering Though in most cases they are still below 2007 values

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    S&P REIT quarterly report Q3 2009

    Presentation on REITs by Vinod Kothari

  • Performance of REITs

    0

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    600

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    1200

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    1800

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    31-0

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    DJ Global Select REIT index

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    Presentation on REITs by Vinod Kothari

  • Comparative REITs performance

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    Presentation on REITs by Vinod Kothari

  • Indicators of leverage

    Most REITs make use of leverage If REITs are tax transparent, use of leverage is akin

    to use of debt in a tax-free world Significance debt/assets ratios in some countries

    (2008): Canada 0.69 USA: 0.64 South Korea 0.56

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