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Property
Realty funds provide future property growth
Update: 7-11-2005
Traditionally, equities are the mainstay of investing, government
bonds are the safe alternative, options provide leverage for
speculators, and mutual funds are considered as one of the easiest
vehicles for investors. One type of investment that doesn’t quite
fall into these categories and is often overlooked is the real
estate investment trust (REIT).
Previously overlooked real estate investment trusts are rising in
popularity
Vietnam has recently witnessed the emergence of the REIT market and
it is likely that the popularity of this vehicle of investment shall
continue to increase. This article will identify the potential
benefits that REITs offer investors and to understand some of the
wider issues associated with the REIT in Vietnam as well as other
countries. In principle, a REIT accumulates a pool of money through
an initial public offering (IPO), which is then used to buy, develop,
manage and sell assets in real estate. The IPO is identical to any
other security offering but instead of purchasing stock in a single
company, the owner of one REIT unit has the option to purchase a
portion of a managed real estate investment portfolio. Income is
generated through normal commercial property activities including
renting and selling, and income is passed directly to the REIT
holder on a regular basis. This contrasts equities where investors
are buying the right to participate in the profitability of the
company through ownership. The attractiveness of real estate
investment trusts can be attributed to the ease that investors can
participate in commercial real estate investment activities, and
unlike more traditional forms of direct property investment, the
investor does not need an understanding of specialist property
issues including management and marketing.
Although fund management companies such as already exist in Vietnam,
funds are allocated to a variety of business sectors, with real
estate being just one channel of investment.
Although REITs benefit from a reputation of providing generous
returns, some doubt still exists as to the benefit of holding REITs
from a risk diversification perspective, in as much as that some
analysts believe that REIT performance is inversely related to
interest rates, whilst other analysts report that REIT performance
characteristics are similar to holding an investment portfolio
comprising of 40 per cent equity and 60 per cent government bonds.
In the United States, during the period between 1984 and 2003, REITs
provided equity-like returns, averaging around 12.25 per cent per
year. From a performance perspective, REITS have provided generous
returns in many Asian countries including Japan and in the US for
example, the S&P REIT index has outperformed the S&P 500 on a total
return basis since late 1997. Furthermore, from a taxation
perspective, property trusts offer investors other advantages when
compared with stand alone one off direct investments, especially
within an expanding portfolio.
Unlike other developed countries such as Australia where the REIT
market represents 9.2 per cent of the total stock market (capitalised)
the REIT market in Vietnam is still within the infancy stages of
development and in order to develop it is essential that an
effective administrative framework is established. Further to
analysis of the ways in which REITs are administrated in other
countries including Japan and Malaysia, some of the essential
standards/guidelines that need to be established are: maximum
borrowing to capital ratios; internationally recognised reporting
procedures (example, International Valuation Standards 2005),
commissioning of independent professional management companies, as
well as the compliance with international accounting standards.
Overall, REITs offer investors unique and easily accessible exposure
to real estate investments as well as significant diversification
benefits, attractive risk/ reward trade-off together with low
correlations to other traditional asset classes. If properly managed,
together with the establishment of an efficient administrative
framework, REITs shall provide a formidable alternative to
traditional forms of investment and provide the necessary funds to
fuel further commercial property development activities in Vietnam
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