For a while now, the consensus amongst China’s financial commentators has been the imminent arrival of the Real Estate Investment Trust (REIT) and many sources indicate that the Coronavirus pandemic has sped up the arrival of the REIT. REITs look like they will be traded like stocks in much the same way as any other stock. In China, the investment vehicle for the Real Estate industry for the average person has not included the REIT, but the discussions around the arrival of the REIT looks to signal the start of trillions of dollars being injected into the Chinese economy. Since the Coronavirus outbreak and the impact on the economy, China has stepped up its programme to induce spending, and with the economy growing at its slowest pace for a while, a pilot programme to introduce REITs to the Chinese stock market seems to be ideal at the current time. Spending has been encouraged by the selling of local government bonds and key interest rates have been cut to promote an increase in liquidity.
Real Estate Investment Trusts (the Western world)
Real Estate Investment Trusts are an investment concept where people can buy and sell shares in a company that owns income producing assets. Legislation has made it possible for any individual to invest in a Real Estate Investment Trust. Some of the benefits of REITs are that they tend to provide investors with a stable income stream and are professionally managed by a company involved in running an income producing Real Estate property. REITs can create a diversified portfolio which limits risks. They are usually subject to ‘Capital Appreciation’ – that means a rise in the value of the asset which leads to rental income increases. Any individual can invest in a REIT portfolio of huge commercial properties in the same way they invest in other industries through the purchase of stocks. Individuals who own a REIT will receive part of the income through the investment of the share and individuals do not need to become financiers of any property – that means that they do not physically buy a property.
REITs provide long term investment planning and a predictable income stream. They allow for portfolio diversification into publicly traded stocks, bonds and mutual funds. In this way, investors can preserve their capital, receive a regular income and be confident that there is usually a very good potential for growth.
Three different types of REITs
|Type of REIT||Characteristics of the REIT|
|Equity REIT||Investors can earn dividends through rental income from property and can earn capital gains from the sale of property if it appreciates|
|Mortgage REIT||They lend money directly to owners of real estate or loans which have been secured by real estate. REITs generate income through the interest payments from the loans|
|Hybrid REITs||A combination of both the above, equity and mortgage REIT. Income in this case is a combination of capital gains, rents charged and also interest charged on loans|
The REITs cycle
Different types of properties (REITs)
REIT properties can come is various formats. They can be offices, retail buildings, industrial or Warehouse buildings, hospitals or other healthcare facilities, storage spaces (usually large), hospitality buildings or multi-family apartments. What qualifies as a REIT varies from country to country, however, a REIT should have a minimum of 75% of its assets in real estate, its income should be comprised of at least 75% coming from rents, mortgage interest payments, or the sale of real estate, and it must have the ability to pay a certain amount of its income as dividends to shareholders and pay tax – the amounts of which are dependent on the country in question. They must have a managing entity which is a trust or a board of named directors and must have a certain number of names shareholders (usually 100) it its year of induction as REIT.
REITs can be tradable or non-tradable. Here are some properties of each type listed below in a table.
|Traded REITs||Like stocks and shares, they can be bought and sold, and they can also be traded on the public market|
|Non-traded REITs||These are not traded on a national public stock exchange. Many of these REITs can be more stable in terms of income derivation. Liquidity is more limited than traded REITs. Investors of non-traded REITs are looking for longer term investments|
|Private REITs||These are not traded on an exchange and are not subject to strict jurisdiction. Investors in these REITs must be accredited investors|
The above tells a short story of REITs work in the west, however, China may have its own processes and laws once REITs are rolled out publicly. The presentation of REITs will free up capital to be reinvested and trials will be concentrated on projects in certain areas. The success of this rollout will be a welcomed addition to China’s economic programme and a positive step for the Real Estate sector.