In this chapter, literature related to Real Estate Investment Trusts will be discussed. In add-on, the features and public presentation of REITs between Malaysia and Singapore will be compared and considered.
Real Estate Investment Trusts is an indirect investing to belongings markets. It is a corporation or concern trusts that pooling the capital of many investors to get or supply funding for all signifiers of income-producing existent estate. The cardinal characteristics of REITs is non required to pay for corporate income revenue enhancement if at least 90 per centum of its nonexempt income been distributed to portion holders each twelvemonth ( Tao & A ; Guo, 2008 ) . REITs allow little investors to put indirectly in a genuinely diversified belongings portfolio, purchasing low cost and easy tradable units, alternatively of holding to buy full belongingss.
NAREIT ( 2010 ) defines REITs as:
“ A existent estate investing trust, or REIT, is a company that owns, and in most instances, operates income-producing existent estate. Some REITs finance existent estate. To be a REIT, a company must administer at rental 90 per centum of its nonexempt income to stockholders yearly in the signifier of dividends. ”
Types of REITs
In the planetary REITs market, there are normally three types of REITs which are Equity REITs, Mortgage REITs, and Hybrid REITs.
Equity REITs largely ain and operate income-producing existent estate. Most of their incomes are derived from the rent of their belongingss. Furthermore, the grasp value of the belongingss may increase the value of REIT since the belongingss are belonging by REIT ( NAREIT, 2009 ) .
Mortgage REITs are mortgage backed securities. They largely lend money straight to existent estate proprietors. The income is generated by involvement earned on the mortgage loans ( NAREIT, 2009 )
Hybrid REITs is the combination of both investing schemes which able to bring forth income from rental and capital additions, and involvement income ( NAREIT, 2009 )
Even though there are three types of REITs in the United States of America ( USA ) REIT market, the tenancy rate had a immense difference. Sing to calculate, Equity REITs has the biggest of the pie which occupy 91 % of the REIT market ; following by Mortgage REIT at 7 % and Hybrid REITs at 1 % ( NAREIT, 2009 ) .
Presently, Malaysia REITs and Singapore REITs are based on Equity REITs. Therefore, Equity REIT is the merely 1 to discourse in this thesis. All the mentions to REITs in the undermentioned subdivisions will be mentioning to Equity REITs.
Types of belongingss invest by REITs
There are assortment types of belongingss able to have and pull off by REITs such as office edifices, shopping Centres, warehouses and etc. United States of America ( USA ) as a innovator of REITs industry kept researching new chances for income growing and provided broad scope of belongings type for investors as below:
However, the REITs market in Malaysia and Singapore are more focal points on retail and office Centres.
Structure of REITs
From the definition of REITs, it is easy to happen out some cardinal participants in REITs such as unit holders, belongings director and belongings assets. Figure 1 is shown the connexion and maps of all the participants.
The investors, usually termed as unit holders, invest their monies into REIT. The monies so became the capital for REIT to buy belongingss. With the income generate by the lease, REIT distributed the net income back to the unit holders depended on their investing sum. By the engagement of legal guardian, they made sure the investing from unit holders are managed efficaciously. The plus director of the REIT is the 1 who decides what sort of belongingss should be purchased and included in the portfolio that able to increase the value of REIT. All the belongingss which are under the ownership of the REIT will be managed by the belongings directors. They determined the figure of rentals, the sort of renters, rental infinite, and rental monetary value ( Poh & A ; Sean, 2005 ) .
Benefit of REITs
REITs had a long history in USA and Australia and now been welcoming in a batch of states particularly Asia. States such as Singapore, Malaysia and Hong Kong are holding a REITs-like construction and turning good in these states. With the alone features and characteristics of each REIT, included REITs in the investing portfolio will convey tonss of benefits to investors.
REITs is able to have multi-property with diversified renter in the same times, it helped to cut down the hazard of trusting on a individual belongings and renter. This is different with the direct investing in belongings market. Choosing the REITs based on the type of belongingss or part helps to diversify farther for investors ( MAS, 2010 ) .
A batch of literature reappraisal been discoursing about the variegation of REITs. Will including REITs into Mixed-Asset Portfolio offer benefits to investors? The value is varied on different clip of period, agreed by Mull & A ; Soenen ( 1997 ) . Sing to the monthly informations from Kuhle ( 1978 ) , he observed that in the period 1980 to 1985, REITs did non increase the benefits for investors. The public presentation is act as common stocks. However, based on the research from Mueller, Pauley & A ; Morrill ( 1994 ) , including REITs in a mixed-asset model from 1976-1980 and 1990-1993 clip periods were a valuable added investing, but non for the 1980-1990 sub-period. Ibbotson Associates, on behalf of NAREIT ( NAREIT, 2008 ) , showed that over the last 30 old ages, including REITs in mixed-asset portfolio was offered significant benefits.
Most of the states which apply REITs in their state, have the same regulations that REITs are required to pay out at rental 90 per centum of nonexempt income to their stockholders in the signifier of dividends. In US, some REITs even pay out more than 100 per centum to investors. Created a stable and consistent income will able to pull more investors ( NAREIT, 2010 ) .
Ibbotson Associates, on behalf of NAREIT ( NAREIT, 2008 ) , claimed that equity REIT is bring forthing a high degree of dependable income through all market conditions over the last 20 old ages. More than 50 per centum of REIT entire returns have come from dividend income over the long term.
REITs investing offers the advantage of liquidness – the easiness of change overing assets into hard currency. Equally long as there is merchandising twenty-four hours, investors can buy or sell a REIT which listed on the stock exchange, and it is easier than direct investing in belongings market ( MAS, 2010 ) .
The public presentation of REITs used to compare direct investing belongings. REITs offer strong long-run returns in USA. During the period from 1978 to 2008, equity REIT had a better public presentation which exceeded the wide equity market and other signifiers of existent estate investing ( NAREIT, 2010 ) .
Figure illustrated that the growing of planetary REITs market different in periods. In 1990-1992, due to the crisp diminution in US existent estate market, returns of REITs had autumn more than -20 % . With the occasions of REIT market roar in USA and in planetary which in the peak period 1993-1996 and 2002-2006, REITs is basking a strong market growing and the returns are over 100 % and 200 % , severally. Asiatic Financial crisis, tech flop and planetary estate market diminution in 1997-2001 had force the return dropped near to 0 % . The recognition crisis & A ; planetary existent estate market diminution had been giving a large knock to the REITs returns in 2007-2008. A autumn with more than -40 % became the enormously lost in return over the last 20 old ages period.
As mentioned before, REITs public presentation is changing in different type of periods.
The feature of REIT is pooling the capital of investors in REIT and get some belongingss that non low-cost by personal capital such as office tower, shopping Centres, warehouse and etc. By puting in REITs, investors get to put in at that place big assets in bite-size balls ( MAS, 2010 ) .
REITs able to supply transparence and it become an of import issue to pull investors. As mentioned before, REITs needed non to pay for corporate revenue enhancement if 90 % of the income been paid as a dividends. Taxs are paid merely at the single stockholder degree alternatively. The 2nd is runing transparence. Since REITs are listed in equity market, they had to register and modulate by the Securities Exchange committee and adhere to high criterions of corporate administration, fiscal coverage and information revelation. The 3rd is market transparence. The belongings which invested or owned by REITs, can easy place and value independently because they will be listed in the fiscal study or announced. They are existent and touchable assets that can see, drive by or even walk in by investors and analysts ( NAREIT, 2010 ) .
Hazard of REITs
The benefits from REITs are immense and it seems to be a sure-win investing for investors which able to increase the value of the investing portfolios and diversify the hazards. However, REITs however entail certain hazards.
Each REITs are holding their ain alone features and characteristics, so the hazards associated is vary and different. A batch of issues have to be taken as considerations such as geographical location of the investings, outputs, quality and lease length of the implicit in belongingss.
The hazards that may see are listed as below:
As mentioned before, REITs are traded on the stock exchange. The monetary value of REITs are capable to alter depends on the demand and supply of the investors. The investors may happen that the investing sum is differing than the original when selling their units in a REIT. It may increase or diminish. The monetary value by and large reflects investors ‘ assurance in the economic system, the belongings market and its returns, the REIT direction, involvement rates, and many other factors. The investors have to accept the volatility monetary value of REITs ( MAS, 2010 ) .
Investing in REITs will able to bask the dividends paid from the rental income. However, if there is an operating loss in REIT studies, the investors might non derive the dividends from REIT. Termination on occupancy understandings renews a contract at a lower rental rate or tenancy rate addition may cut down the income of REITs. Even worst instance is the implicit in belongingss are financed by debts ; there might be a funding hazard when cost of debt varies ( MAS, 2010 ) .
If REITs are concentrating on a peculiar field or belongings, it will increase the hazard if something untoward will go on to one of these belongingss or Fieldss. Over depending on limited renters for its lease income will besides exposed to greater hazard ( MAS, 2010 ) .
The liquidness of REIT is lower than other financess puting in fiscal securities such as bonds and stocks. As the character of the REIT is puting in belongingss, REIT is still confronting some similar jobs like direct investing to belongings market such as the trouble to acquire any purchasers or Sellerss for belongings, particularly if the value of belongings is high ( MAS, 2010 ) .
If a REIT will utilize debt to finance the acquisition of underlying belongingss, it might confront a purchase hazard. REIT allows leveraging under a certain per centum set by the authorities. Same as any other company which listed in stock market, if the REIT is confronting bankruptcy, the debitors will be the first to pay off by the assets of REIT instead than the unit holders. The unit holders may administer on any staying value of REIT ( MAS, 2010 ) .
Since the characters of REITs are distribute at least 90 % of the rental income as dividend to unit holders, it may hard to construct up hard currency militias to refund loans as they fall due. Therefore, looking for a new adoption understandings or other capitalization steps such as rights or bonds issues became the typical manner to refinance. They might bear a higher refinancing cost when loans are due for reclamation. However, if the REIT is non unafraid to refinancing, selling the belongingss may necessitate. These will impact the unit monetary value and income distribution of a REIT ( MAS, 2010 ) .
A REIT is an easy investing vehicle which able to increase the value of investing portfolio for investors. However, the benefits of REIT sometimes will go the hazards for investors. For an illustration, the liquidness of REITs are giving the advantages for investors to merchandise easy on the stock markets and it save the processs and fees compare to direct investing on belongings market. However, the investors may pin down on the capital in stock market if the demand of the REITs is less or in economic crisis. Leverage on the belongingss will able to make greater net incomes for investors, but the other custodies may exposed to greater hazards. Therefore, REITs had to be regulated by some regulations and ordinances which may different in states.
Requirement of set uping REITs
Harmonizing to Geltner and Miller ( 2001, p636 ) , some major limitations on REITs were summarised.
Five-o-fewer regulation ( 5-50 regulations ) . A REIT can non be a closely held corporation in the sense that five or fewer persons may non have more than 50 % of the REIT ‘s stock.
75 % or more of the REIT ‘s entire assets must be existent estate, mortgages, hard currency, or federal authorities securities, and 75 % or more of the REIT ‘s annual gross income must be derived straight or indirectly from existent belongings ownership ( including mortgage, partnerships and other REITs ) .
90 % or more of the REIT ‘s one-year nonexempt must be distributed to stockholders as dividends each twelvemonth ( in order to keep their tax-free position ) .
REITs must deduce their income from chiefly inactive beginnings such as rents and mortgage involvement, as distinguishable from short-run trading or sale of belongings assets. They can non utilize their revenue enhancement position to screen non-real estate income from corporate revenue enhancement. A REIT is capable to a revenue enhancement of 100 % on net income from “ forbidden minutess ” , such as the sale or other temperament of belongings held chiefly for sale in the ordinary class of its trade or concern. However, if the REIT sells belongings it has held for at least four old ages and the sum adjusted footing of the belongings sold does non transcend 10 % of the aggregative footing of all assets of the REIT as of the beginning of the twelvemonth, no forbidden dealing is deemed to hold occurred.
REITs and direct existent estate
While invest in REITs, the first inquiry for the investors: Are REITs stock or existent estate? Sing to Peyton, Park & A ; Lotito ( 2007 ) , he agree with few existent estate research workers that REITs are so existent estate but may non evidently on the similarities. Both of them are generated by income returns and calculated as the alteration in the value of the implicit in assets. However, the derivation of value differs.
Lee and Stevenson ( 2005 ) , mentioning Clayton and Mackinnon ( 2001 ) positions on the sensitiveness of REIT returns to private existent estate showed a important addition in the 1990s. It indicated that REITs are more incorporate with private existent estate than fiscal assets. These findings indicate that the public existent estate market provides information about existent estate public presentation that is later impounded into the direct market and that the public market leads the private market. Furthermore, Lee and Stevenson ( 2005 ) concluded the returns of REITs and direct market have a topographic point in optimum portfolios in the short-run. However, it will go a replacement for the other in the long-term and so merely 1 may hold a topographic point in optimum portfolios.
Fei, Ding and Deng ( 2008 ) found small dissymmetry in the conditional correlativities of REITs stock and direct existent estate returns which different to the old groundss of bing important dissymmetry in correlativities among fiscal assets by Cappiello et Al. ( 2006 ) . They concluded that the higher ( lower ) correlativity between equity REIT and direct existent estate is, the higher ( lower ) the future returns of equity REIT.
REITs and stock market
In the research of Fei, Ding and Deng ( 2008 ) , they discussed about the nature and behavior of the correlativities between REITs and other fiscal assets. A wide organic structure of literature show that macroeconomic variables that have been found to explicate stock and bond returns and hazards have important power in explicating REIT return and hazards ( Ling and Naranjo, 1997 ; Peterson and Hseih, 1997 ; Karolyi and Sanfers, 1998 ; Calyton and MacKinnon, 2003 ) . However, the empirical consequences about the way and extent of the relationship between REITs and stock have been besides assorted and sometimes contradictory depending on the clip periods or the methodological analysis used in the surveies ( Chen and Peiser, 1999 ; Hartzell, et al. , 1999 ; Clayton and MacKinnon, 2001 ) . Fei, Ding and Deng ( 2008 ) found strong relationship between correlativities and REITs returns. When the correlativity between REITs and S & A ; P are the lowest, the future public presentation of REITs is the best.
Global REITs history and public presentation
In USA, REITs created by Congress in 1960. The purpose is to do investing in large-scale, income-producing existent estate accessible to all investors in the same manner they typically invest otherwise – through the purchase and sale of liquid securities ( NAREIT, 2010 ) . Nowadays, REIT industry has become an of import section of the US economic system and investing market. Harmonizing to NAREIT ( 2010 ) , US REIT has seen their equity market capitalisation surge from $ 90 billion to approximately $ 200 billion in merely the past 10 old ages.
Based on the information from DWS ( 2010 ) , is giving a closer expression of the geographic part wealth of Earth existent estate. USA is the biggest participant which occupies 43 % of the REITs market. Hong Kong became the 2nd with 16 % which higher than Japan on 10 % . United Kingdom occupy 6 % while Canada occupy 4 % which same as Singapore.
From the research study from EPRA ( 2010 ) , it showed the return of planetary existent estate is -1.8 % in June 2010. However, it had the highest YTD return at 12.2 % comparison to planetary equities and planetary bonds. European existent estate is the highest return at 1.6 % on June 2010 ; North America existent estate is the highest YTD return at 23.1 % . Asia existent estate is the highest rolled 5 old ages return and mean one-year return at 19.8 % and 3.7 % , severally.
Asiatic REITs market history and public presentation
REITs market in Asia is turning and spread outing quickly with important public presentation, although it starts rather late comparison with REITs of USA and Europe states. Japan became the first state in Asia established REITs, following by Singapore, South Korea and Taiwan. Hong Kong, Malaysia and Thailand besides established REITs in late 2005.
Involve Asiatic existent estate as portion of planetary portfolios is indispensable by most of institutional investors. Asiatic REITs have their ain alone ordinances and construction, which different than USA REITs ; make a lower hazard but same return for the planetary investors is sounds attractive. Besides, the geographic differences are likely to do a little correlativity between assets ( Yu, 2009 ) .
The Trust Company ( 2010 ) has researched a study purpose on Asia-Pacific REITs. The consequence shows that Singapore has become the most of import REITs for institutional investors in Asia-Pacific. Singapore is the first rank at 62 % in the overall REIT potency evaluation in Asia state evaluation 2010. Malaysia is 45 % in the overall REIT potency evaluation and rank at figure 7th.It is calculated by three chief steps which are belongings market growing, REIT chances and regulative support.
In the study, it showed the sum-up of single states in Asia. Singapore and Malaysia are holding a steady growing on belongings market in 2007 and 2008 but confronting a large impact in 2009 due to the planetary fiscal crisis. The market is back to path in 2010 and the growing is increasing. Singapore had rank no.1 in REIT chance and regulative support in Asia-Pacific 2010 with 60 % and 70 % , severally. However, Malaysia maintained the same as 2009 in REIT chance and regulative support with 44 % and 46 % , severally.
Singapore and Malaysia
Singapore as a neighbour state of Malaysia, in the same geographical location, additions the first rank of REITs in Asia-Pacific by The Trust Company ( 2010 ) ; Malaysia had a batch to larn from Singapore. Based on the three chief steps from The Trust Company, it will happen out the difference between Malaysia and Singapore REITs.
Singapore REITs history and regulative
Singapore REITs had become one of the most celebrated REITs in the universe in less than 10 old ages clip. However, it is non smooth-sailing for the development of REIT market in Singapore. In 1986, REITs thought was suspended by the Property Market Consultative Committee. It is an informal commission set up under the Economic Review Committee when Singapore belongings market was in stagnations following its first post-independent economic recessions in 1985. Their duty is to bring forth thoughts on how to revitalize and reconstitute the existent estate market. After a long period of lobbying by involvement groups like the Real Estate Developers ‘ Association of Singapore ( REDAS ) , REIT been accepted. The Monetary Authority of Singapore ( MAS ) , the de-facto cardinal bank of Singapore, issued the guidelines of existent estate financess and trusts in May 1999 ( Ho, 2007 ) .
Different of inducements had introduced by Singapore authorities to increase the attractive of Singapore REITs. As the tabular array shown, the changing and back uping on the regulative and runing environment from Singapore authorities has undergone significant liberalization over the old ages. The introducing of SREITs has revolutionised Singapore ‘s existent estate market. Singapore authorities had further deepened and broaden Singapore ‘s capital market in 2005 and increase the gearing cap of the SREIT in 2006. To make a more safety and flexibleness for investors, MAS is maintaining alteration of the SREIT ordinances in order to maintain SREIT as the preferable pick for a REIT listing in Asia. Investors are get downing interesting on SREIT after it acquiring popularity and recognize the potency in offering a comparatively higher risk-adjusted return in comparing to existent estate common stocks ( Ho, 2007 ) . Continuing stated by Ho ( 2007 ) , the assets in the SREIT market have grown more than five times from $ 1.8 billion in 2003 to $ 10.5 billion in 2005. In the study from Ernst & A ; Young ( 2010 ) , there are 20 S-REITs listed in Singapore Exchange with market capitalization of $ 23 one million millions in 2009 which double in four old ages.
A closer review of the regulative environment for the SREIT is necessary. Table summarizes the SREIT regulative and operating environment.
Malaysia REITs history and regulative
Malaya is the first state in Asia to present belongings trusts which listed on the Kuala Lumpur Stock Exchange ( KLSE ) in 1989. Although Malaysia is the first Asiatic state to develop Listed Property Trusts, the development had been slow ( Ting, 2002 and Newell, et Al. 2002 cited in Lee, Ali and Lee, 2005 ) . Lee, Ali and Lee ( 2005 ) agreed with Ting ( 1999 ) and Shun ( 2003 ) that the factors which constrained the development of Listed Property Trusts in Malaysia are:
Poor perceptual experience and deficiency of demand for merchandise amongst investors including institutional investors.
Properties available for acquisition are supplying low output.
Too few institutional investors in Malaya
Strong public presentation by viing investing options
Local investing mind favours bad investing.
Lee, Ali and Lee ( 2005 ) further research the grounds for neutrality in LPT amongst investors which are:
Thin trading volume of LPTs
LPTs required being subordinates of fiscal establishments, it deter LPTs from geting premier, high giving up belongingss. Lack of attraction on the bing existent estate assets of LPTs cause low dealing volume and resulted in the lowered liquidness degree of LPTs market.
Small market size of LPTs in Malaysia
Small market capitalization and rigorous geartrain bound are the grounds prevent LPTs from geting more moneymaking premier belongingss.
Low capital grasp, historical returns, dividend output and returns fluctuation
The returns of LPTs are unattractive and even lower than other investing options. Lee, Ali & A ; Lee ( 2005 ) agree with Newell, et Al. ( 2002 ) that all LPTs except Amanah Harta Tanah PNB underperformance the Bursa Malaysia Composite Index ( CI ) and the Kuala Lumpur Stock Exchange Property Index within March 1991 – March 2000. LPTs tend to extremely volatile investing, high hazard, lower mean one-year returns and low dividend.
Lack of portfolio direction expertness and hapless public presentation of domestic belongings market
Lee, Ali & A ; Lee ( 2005 ) argued that the vacancy rate of belongingss which under direction of LPTs are public presentation better so sub-sector norm in Kuala Lumpur. In add-on, they found out the office sub-sector in Malaysia ( Kuala Lumpur ) really performed better than abroad belongings markets which possess active REITs. All REIT corporations believe that a diversified portfolio of belongingss from different sectors will predictably execute better.
Since LPTs are non accepted by institutional investors, it renamed become MREITs in January 2005. A new Guidelines on Real Estate Investment Trusts been issued by the Securities Commission to administer the operation and disposal of MREITs in Malaysia. The alterations of the ordinance are doing the industry participants become aroused and sing shooting their ample investing belongingss into MREITs ( Hamzah, Rozali & A ; Tahir, 2010 ) . They outlined the major betterments which different than the old guidelines, which are:
Liberalization of the adoption bound for a REIT
Relaxation of regulations on acquisition of leasehold belongingss
Flexibility in the acquisition of existent estate that is encumbered by fiscal charges
Eligibility demands for direction companies that manage MREITs have been streamlined
Introduction of a declarative attack in the constitution of MREITs, and
Enhancement in the sum of exposure and coverage required which is consistent with international criterions.
The alterations of regulative had attracted tonss of different MREITs listed in the stock market. In the study from Ernst & A ; Young ( 2010 ) , there are 12 MREITs listed in Malaysia stock exchange with of $ 1,542million in December 2009. It is non included the latest Real estate investment trust listed in Malaysia stock market in 2010, Sunway REITs which is the largest listed REIT in Malaysia market ( Yap, 2010 ) . Table outlines the summarised of the regulative and operating environment for MREITs.
The Guidelines of Islamic Real Estate Investment Trusts ( Islamic REITs ) been issued by the Securities Commission on 22 November 2005 to help farther development of new Islamic capital market merchandises. Malaya was the first state developed Islamic REITs in the planetary Islamic fiscal sector. The guidelines had set as a planetary benchmark for the development of Islamic REITs ( Hamzah, Rozali & A ; Tahir, 2010 ) .
Tinging & A ; Noor ( 2007 ) had outlined the two major different between conventional REIT and Islamic REIT which are Syariah Committee/Syariah Avdisor and Syariah conformity standards. The Syariah Committee/Syariah Advisor act as an adviser on all Syariah related affairs which under the Guidelines for Islamic REIT. Their duty are included guaranting the Islamic REIT complies with the investing guidelines, supplying mentions and audiences to the director on permitted investings as provided in the Guidelines. Besides, proctors and ensures the fund under Syariah rules are portion of their duty. For the Syariah conformity standards, activities which contrary to Syariah rules had listed out:
Financial services based in riba ‘ ( involvement )
Industry or sale of non-halal merchandises or related merchandises
Entertainment activities that are non-permissible harmonizing to Syariah
Industry of sale of tobacco-based merchandises or related merchandises
Stock broking or portion trading in Syariah non-approved securities
Hotels and resorts
Other activities deemed non-permissible harmonizing to Syariah.
The fund director has to do certain the rental income from the activities mentioned supra does non transcend 20 % of the entire turnover of the Islamic REITs.
The tabular array below had point out the different between conventional REIT and Islamic REIT.
The three celebrated Islamic REITs are Al-‘Aqar KPJ REIT ( Alaqar ) , Al-Hadharah Boustead REIT and Axis-REIT. Al-‘Aqar KPJ REIT is focus on the private infirmary, Al-Hadharadh Boustead REIT is focus on oil thenar estates and palm oil Millss and Axis-REIT, turning Islamic in December 2008, concentrate on office and retail which are non violate with the Islamic REIT ordinance ( Aziz, 2009 ) .
Different ordinance of REITs between Singapore and Malaysia
Mentioning to the tabular array, it had showed the different on the chief ordinance between both states. Investors may take whether which markets are suited for them sing on the ordinance and inducement that provided from the REITs.