Income is always split between two components consumptions and savings. Its always the savings which becomes more or less equivalent to our future funding. For investment purposes there are many options available in the economy such as bonds, stocks, investments in commodities, real estate, mutual funds, foreign exchange and foreign asset ventures. There are also numerous outlay options available via different banks along with the possibility to invest in precious stones and in real estate as well. Where an investor will endow money, depends upon the risk he is willing to take exposure in against the rewards heshe expects.
Often high risks yields higher return whereas low risks provide an investor with lower returns. As new investment options and areas become prominent we come across a lot of specialization in investment banks, mutual fund management companies and now real estate investment trusts. Such banks, companies and trusts employ experts who invest in different portfolios and with their hands on experience and knowledge their work is heavily relied upon.
Investing in real estate has remained an area of interest for long time. Initially investors used to buy the property directly and hold it as an actual property, resulting in funds being stuck up in illiquid assets (National Association of Real Estate Investment Trust, 2009). Now potential and current investors can get the benefit of putting in cash in real estate indirectly (Mansoor Aslam Seraj Saleem, Chartered Accountants). This is achieved by not purchasing the actual property, rather, create a pool of funds from number of entities thus having larger access to a diversified market yet meeting the set targets of the pool. In this way unsystematic risk (i.e. undue risk for which there is no return) is reduced while ensuring that the profit percentage does not fall.
The above concept brings towards the organization that manages and creates this pool i.e. REIT Real Estate Investment Trusts, which are a similar form of mutual funds. The entity dealing with REIT is called RMC i.e. REIT Management Company. It has units which are listed on stock exchange, normally acquired by the general public and the people who manage it are experts in real estate, risk analysis and those who are up to date with the current environment. The entire fund is then invested in any area of real estate while the profits generated are distributed in the form of divided amongst the unit holders.
REIT as suggested before is a trust where funds are pooled. Therefore REITs have the capacity to achieve many aims, not just limited to a few objectives. Such goals are prepared and set from before so that funds are steered towards the right direction. In this way there is profit distribution, at the same time RMC is able to grow and sustain by itself. There are also a lot of benefits driven by REITs which apparently becomes a reason for financier to direct their funds. Some of the many aims and advantages of REIT are listed as below:
These aims and objectives will be found across the globe due to the application of similar principles. However regulators of each country enforce different controls leading to different purpose of REIT. Such differences and similarities can be found in diverse parts of the world as UK is not the only one where REIT operates.
REITs were first created in USA in 1960, by Congress. It is the oldest existing REIT system in the world and still a leader in this kind of investments for the total market capitalization and highest number of listed REITs (National Association of Real Estate Investment Trust, 2009). From 1961, when the first REIT got listed there has been consistent growth and today accounts for one third of worlds total market capitalization of REITs. It is a fact that US REITs are largely unlisted companies unlike other countries (Kenedix Realty Investment Corporation). US REITs are categorized into equity REIT where investment is carried out directly, mortgaged REIT in which financing is done in parts and last is hybrid REIT which is the combination of the two (Hong Kong Research and Library Service Division). The growth of REIT happened after 1990 savings and loan crises as many banks and institutions got bankrupt.
Since then, REIT specialized in different segments of real estate comprising of office properties, commercial real estate, logistics facilities and hotels. US REIT system is based on US tax laws which requires distribution of 90 of taxable profits to unit holders, a minimum of 100 shareholders and 75 of income to be generated by real estate sector providing an opportunity of 25 percent of the funds to be invested in other areas of industry.
The disadvantage of the US REIT system is similar to that of UK. With respect to corporations position 90 dividend yield persists leaving only 10 to be reinvested back into the business. It proves to be disadvantage for individuals as well. In USA, 2003, legislation lowered tax to 15 but this limit did not apply on the income from REITs. This lead to n individuals income being taxed at higher rates than their other dividend income.
The Australian system of REITs which are known as Listed Property Trusts (LPT), established in 1970 and the third system in the world established after US and Dutch. Supposedly LPT was the 2nd largest in terms of market capitalization, number of investors and formed largest proportion of securities market. The establishment of Lend Lease and Westfield Trust speed up the market growth of REITs which was limited before that.
Australian REIT (A-REIT) is regulated by the countrys tax law, corporation law, and the Managed Investment Act. These are closed end mutual funds including both listed as well as unlisted. It uses an external management structure like Japan, Malaysia, and Hong Kong etc. Recently another structure was introduced known as stapled securities approach in which unit of the trust are listed together with the managers as an integrated unit and the income from the passive property is taxed on the corporation level rather than individual. Though no ratio is specified for the proportion of the type of property held by REIT and no requirement unlike other countries are set for dividend distribution. Yet a normal trend of profits being distributed is evidenced. No restrictions are placed on overseas investment which is why Australian REITs are increasingly migrating their funds overseas mainly observed in US properties while some investments in European and Japanese properties. (ASX Limited, 2010)
The Singaporean REIT (S - REIT) established in 1999 and one of the best systems in Asia with mainly foreign investment in China. The current development in S-REIT is the establishment of REITs specializing in hotels, retail properties and healthcare facilities. According to the Singapore law REITs are required to be listed trusts under tax law. A minimum of 35 of total assets are to be invested in real estate, a minimum 70 of total assets to be invested in real estate related assets and 90 of total taxable income to be distributed to investors.
The Hong Kong REIT system (H REIT) is listed closed ended funds. They have highest corporate governance requirement in the region. Transactions require approval of investors whereas all publicity agendas need to be approved by regulatory authority. Another observable fact is that somehow investments in China tend to make depositors more enthusiastic about the new investments.
The REIT being the most stable, liquid and high yield investment option, invests in the real estate as an indirect investment. It aims at removing the difficulties of direct investment in property such as large capital investment requirement, high risk, and inabilities of portfolio adjustment, diversification and high taxation. UK REIT is a newly established system which was adopted after witnessing how well the system worked for economies such as USA, Australia, Belgium, France, Korea, Hong Kong and Singapore.
The UK REIT sector started on 1st January 2007, mainly for the small private investors to take the benefit of the investments in real estate property market (Propertyshowrooms.com International Property Investment Network (IPIN) and Property hot topics - Real Estate Investment Trusts (REITs)). It gives tax advantage to companies working as REIT vehicles otherwise its just like an ordinary investment company registered on London Stock Exchange (REITS AND CROSS-BORDER PROPERTY INVESTMENT, Opening up the Internal Market for Real Estate and promoting market safety and security). It has been legislated that if REIT distribute 90 of the taxable income then that income is not subject to tax and thats an advantage to engaging in REIT further more an incentive to many investment companies to register as one (similar to benefits of another country REIT). Another incentive provided to the companies to get them into REIT system is with minimal conversion cost.
When REIT initially kicked off the rate of return was not high nor was the returns guaranteed. It was just an investment option that was available for financiers to invest in property market with far greater liquidity which was not there for direct investment in property market. The real estate market when dealt in directly lead to inabilities to liquidate quickly as the nature of that form of transaction is large lump of capital and a lot of documentation (as stated above). Some resorted to the option to convert into an REIT and such companies managed to get minimal conversion cost stated that they have managed to recover their cost within three years i.e. from 2007 to date.
The worst and the most disadvantageous issue was that REIT system was launched in UK when the markets were about to start their cyclical downturn and the investors lost their confidence in all forms of finance. But REITs survival proved itself in terms of liquidity and stability which is why many equity funds managers got interested in REIT units. This is how REITs in UK picked up pace as many funds holder invested their money in REIT before or during the downturn of the economy. Initially this new type of investment was not that popular and REIT managing companies had to look to overseas market and private investors. Overseas institutional shareholders tried screening the investment in the UK REIT on the basis that how much legislation has been put in place in this new area of investment. On that notion the strict legislation followed by good corporate governance requirements prompted the increase of foreign institutional investment from 22 to 39, which was quite a material inflow of capital.
Like other countries such as USA and Australia they had major financing carried out by private individuals unlike the case in UK. It is assumed that the private investors are solely interested in high yields but that is not the right ideology of operating REIT because the investors weigh the tax burdens and capital growth in addition to income yields. Mostly REIT tries to deliver high yield along with capital growth in right weight ages.
The main difference between the REIT of UK and other overseas markets is that the UK REIT is not income focused rather UK property sector has always been focused on Net Asset Value (NAV). In overseas markets when a new market of REIT is established, focus is primarily on capital growth leading to NAV growth. This structure did change in UK market until investors confidence did not rise with regards to REIT providing sustainable income growth.
Due to fall in rental values UK REIT is now trying to be more focused on the important areas of property income which is to manage, develop, refurbished, buy and sell. The future of REIT system is looking bright as they intend to do better and hope for rentals to kick back the value of properties. Hence in comparison with the rest of the market UK REIT proved to be self sustaining market which worked for the benefit for not just the industry but the public at large as well.
Lets take a look at Hammerson Inc as a REIT for our case study which has a diverse portfolio of 16 shopping centers and 16 retail parks. The main objective is to manage a portfolio of high quality investment properties which are substantially enhanced through development and providing stable returns to the occupiers, investors and partners. (Hammerson, 2009 Full Year Results). As being a part of UK REIT it is exempted from tax on corporate profits but have to pay Property Income Distributions (PID) which is taxable in the hands of investors. This is because individuals get dividend income while the company deducts tax from payments it makes to the depositor. These payments are treated as net off payments from tax. Its Interim dividend is just one element which is PIDs but the final dividend has normal dividend element together with PID.
The business management approach shown by Hammerson is initially the management of assets, creating the portfolio in such a way that it remains attractive to the investors. They are improving their leasing teams to speed up their leasing process in order to be up with the industry practice by giving the tenants occupancy quickly. The portfolio is tending to be managed in a way that the assets are evaluated against financial benchmark and if any asset seems to be not proving good returns Hammerson changes the assets to other better option. This approach leads to better yields to their investors.
At present the employment position in UK has improved and the investors confidence is growing, which is a good position over the last 18 months. In UK because the demand is increasing mainly because of consumption rise in the property demand for opening shops and eateries to satisfy the demand raise creating new options for Hammerson to invest in property (Hammerson, 2010). Hence entities that are growth oriented will definitely find it lucrative to look forward to with this option as it results in increase in wealth in the form of income or valuation.
The current outlook of UK REITs depicts the potential to progress further. For example residential and commercial sector, under the scheme of REIT, can be converted to Alternative Investment Market (AIM) however the existing situation requires that companies listed as AIM can not be converted into REITs, unless recognized in a stock exchange. This creates problem for small sized companies as it proves to be expensive and also limits the potential for small companies to grow by joining in together.
Government is also actively seeking to enhance this market by promoting renting of premises under Homes and Communities Private Rented Sector Initiative. But it would be better for the above mentioned issue to be resolved as it could turn around the infrastructure of the industry. On the other hand, low yields add further barrier for the small company to operate as REIT that is why it is necessary to address the need to change gearing structure especially for residential property. This can be seen from the fact that in comparison to commercial property, residential REIT income is more heavily relied upon from sales which makes it harder to gratify the interest cover test of 1.25. Since profits are generated from capital gains i.e. sale of residential properties, it does not constitute as income for calculation of interest cover test.
In reflection to the contemporary issue, there are certain solutions which could help bridge this gap. For starters treating capital gains in the computation of interest cover, in this way the income portion will substantially increase. Another option is to lower the limit of interest cover for residential REITs. Lastly, apply restriction on the use of loan rather than using income as the basis of imposing restrictions.
One more aspect to take into account for REITs is the social sector. This is because a financier main concern is the ability to be paid over a long term lease or to have least possible periods without being paid. That is why factors such as reputation of the counter party comes into account along with many more that needs to be addressed before a fully regulated yet progressive market can be established in UK.
The three years of REIT system in UK proved many aims of the indirect investment in real estate property. It has attracted foreign capital, and the REIT regulatory system proved itself beyond expectation in the economic downturns as well by giving unit holders enough liquidity to manage their investments in a better way. (Land Securities, 2010)
Often high risks yields higher return whereas low risks provide an investor with lower returns. As new investment options and areas become prominent we come across a lot of specialization in investment banks, mutual fund management companies and now real estate investment trusts. Such banks, companies and trusts employ experts who invest in different portfolios and with their hands on experience and knowledge their work is heavily relied upon.
Investing in real estate has remained an area of interest for long time. Initially investors used to buy the property directly and hold it as an actual property, resulting in funds being stuck up in illiquid assets (National Association of Real Estate Investment Trust, 2009). Now potential and current investors can get the benefit of putting in cash in real estate indirectly (Mansoor Aslam Seraj Saleem, Chartered Accountants). This is achieved by not purchasing the actual property, rather, create a pool of funds from number of entities thus having larger access to a diversified market yet meeting the set targets of the pool. In this way unsystematic risk (i.e. undue risk for which there is no return) is reduced while ensuring that the profit percentage does not fall.
The above concept brings towards the organization that manages and creates this pool i.e. REIT Real Estate Investment Trusts, which are a similar form of mutual funds. The entity dealing with REIT is called RMC i.e. REIT Management Company. It has units which are listed on stock exchange, normally acquired by the general public and the people who manage it are experts in real estate, risk analysis and those who are up to date with the current environment. The entire fund is then invested in any area of real estate while the profits generated are distributed in the form of divided amongst the unit holders.
REIT as suggested before is a trust where funds are pooled. Therefore REITs have the capacity to achieve many aims, not just limited to a few objectives. Such goals are prepared and set from before so that funds are steered towards the right direction. In this way there is profit distribution, at the same time RMC is able to grow and sustain by itself. There are also a lot of benefits driven by REITs which apparently becomes a reason for financier to direct their funds. Some of the many aims and advantages of REIT are listed as below:
- REIT provides the small investors to take the advantage of the property market. In contrast to indirect investment, direct method of financing requires a high initial lump sum capital to acquire a real estate property. Even with few thousand of savings, an investor can invest in property market through REITs. This is possible through unitization, i.e. availability of units of REITs which has opened a new channel for small institutional and non institutional sponsors to devote their funds. (Propertyshowrooms.com International Property Investment Network (IPIN))
- Tax relief REIT is prevented from double taxation. An individual is taxed for receiving dividend income. However, in UK, if units of REIT are held under Individual Saving Accounts, Personal Equity Plans and Self-invested Personal Pension Plans dividend income on REIT will not be subject to tax. Similarly it is a rule for UK-REIT that the profits are not taxable as corporate profits if 90 of the taxable income is distributed as divided to the unit holders. To get this relief most of the REITs distribute 90 of their taxable income hence this tax reliefs make it a highly attractive investment. (Kennon, J., Propertyshowrooms.com International Property Investment Network (IPIN), McAllister, Adarkwah Antwi 2001)
- Liquidity A major issue with direct investment in real estate property and other long term investments is that of liquidity. Due to large sizes of investment, transaction costs, long and delayed legal processes and absence of central market place (secondary market), this venture were considered illiquid. These problems in real estate investment make it difficult to even use analytical tools effectively. However this problem is resolved by indirect investment in real estate property, through REIT, making it easier to switch by availability of units of REIT at stock exchange. (Kennon, J., McAllister, Adarkwah Antwi 2001)
- Inability to adjust investment portfolio In direct investment of real estate the above mentioned problems make it difficult for depositors to adjust their investment portfolio to some primary indicators. Moreover there are no leading indicators available to show which way the investment in real estate will move. Whatever information present is lagging indicators, creating a difficulty for financiers to make bail out before making huge losses. REIT resolves this by unitization of the investment and diversification of portfolios which is possible mainly due to large funds pooled in through institutional and non institutional investors. (Kennon, J., McAllister, Adarkwah Antwi 2001)
- Inability to track the market Tracking the market changes in case of holding property income individually is intricate because the property market doesnt take economic factors effect very easily. REIT on the other hand reduces the portfolio risk since a correlation between the real state market and stock market exists which help even out returns on a whole. (StreetAuthority, LLC)
- Risk There is high degree of risk in direct investment in property income i.e. selection of the investment property. There are a lot of investment benchmarks and indices being used by the experts of these REIT s, using such tools are not possible by individuals, thereby making the direct investments more risky. The risk is also reduced due to diversification as explained below. Professional team of experts is involved in managing REIT, also known as fund managers who provide the knowledge and expertise not available to individual investors or expensive to acquire by small institutional investors. (Kennon, J., StreetAuthority LLC)
- Valuation The unitization in the REIT makes it easier to efficiently value it as they respond quickly to the changes in the market and available data about the trends. Direct investment of sponsors in real estate does not provide them with such valuation. Property market tends to be slow in reacting to the economic factors and none of the structured data is available. But with respect to REITs, units are being traded on stock exchange like any other stock hence its valuation is easily done with trends that can be predicted. (Kennon, J.)
- High cash dividend Because of REIT tax relaxation they have to pay out 90 of their taxable profits resulting in high cash payout ratios. (Kennon, J.)
- Diversification The expensive nature of investment in case of direct investment in real estate makes it impossible to diversify. This is also rectified in REIT, a mode of indirect investment in real estate property. In literal sense REIT is not a trust but a company diversifying a portfolio of a pool of funds generated from shareholders (Kennon, J.). There are companies which specialize in property investment, development or trading. REIT does not specialize into any one category they tend to broaden their horizons of portfolios in such a manner that they increase their profits and reduce their risks substantially (National Association of Real Estate Investment Trust, 2009). As a proverb says not to put all your eggs in one basket, applies over the diversification of REIT. (Kennon, J.)
These aims and objectives will be found across the globe due to the application of similar principles. However regulators of each country enforce different controls leading to different purpose of REIT. Such differences and similarities can be found in diverse parts of the world as UK is not the only one where REIT operates.
REITs were first created in USA in 1960, by Congress. It is the oldest existing REIT system in the world and still a leader in this kind of investments for the total market capitalization and highest number of listed REITs (National Association of Real Estate Investment Trust, 2009). From 1961, when the first REIT got listed there has been consistent growth and today accounts for one third of worlds total market capitalization of REITs. It is a fact that US REITs are largely unlisted companies unlike other countries (Kenedix Realty Investment Corporation). US REITs are categorized into equity REIT where investment is carried out directly, mortgaged REIT in which financing is done in parts and last is hybrid REIT which is the combination of the two (Hong Kong Research and Library Service Division). The growth of REIT happened after 1990 savings and loan crises as many banks and institutions got bankrupt.
Since then, REIT specialized in different segments of real estate comprising of office properties, commercial real estate, logistics facilities and hotels. US REIT system is based on US tax laws which requires distribution of 90 of taxable profits to unit holders, a minimum of 100 shareholders and 75 of income to be generated by real estate sector providing an opportunity of 25 percent of the funds to be invested in other areas of industry.
The disadvantage of the US REIT system is similar to that of UK. With respect to corporations position 90 dividend yield persists leaving only 10 to be reinvested back into the business. It proves to be disadvantage for individuals as well. In USA, 2003, legislation lowered tax to 15 but this limit did not apply on the income from REITs. This lead to n individuals income being taxed at higher rates than their other dividend income.
The Australian system of REITs which are known as Listed Property Trusts (LPT), established in 1970 and the third system in the world established after US and Dutch. Supposedly LPT was the 2nd largest in terms of market capitalization, number of investors and formed largest proportion of securities market. The establishment of Lend Lease and Westfield Trust speed up the market growth of REITs which was limited before that.
Australian REIT (A-REIT) is regulated by the countrys tax law, corporation law, and the Managed Investment Act. These are closed end mutual funds including both listed as well as unlisted. It uses an external management structure like Japan, Malaysia, and Hong Kong etc. Recently another structure was introduced known as stapled securities approach in which unit of the trust are listed together with the managers as an integrated unit and the income from the passive property is taxed on the corporation level rather than individual. Though no ratio is specified for the proportion of the type of property held by REIT and no requirement unlike other countries are set for dividend distribution. Yet a normal trend of profits being distributed is evidenced. No restrictions are placed on overseas investment which is why Australian REITs are increasingly migrating their funds overseas mainly observed in US properties while some investments in European and Japanese properties. (ASX Limited, 2010)
The Singaporean REIT (S - REIT) established in 1999 and one of the best systems in Asia with mainly foreign investment in China. The current development in S-REIT is the establishment of REITs specializing in hotels, retail properties and healthcare facilities. According to the Singapore law REITs are required to be listed trusts under tax law. A minimum of 35 of total assets are to be invested in real estate, a minimum 70 of total assets to be invested in real estate related assets and 90 of total taxable income to be distributed to investors.
The Hong Kong REIT system (H REIT) is listed closed ended funds. They have highest corporate governance requirement in the region. Transactions require approval of investors whereas all publicity agendas need to be approved by regulatory authority. Another observable fact is that somehow investments in China tend to make depositors more enthusiastic about the new investments.
The REIT being the most stable, liquid and high yield investment option, invests in the real estate as an indirect investment. It aims at removing the difficulties of direct investment in property such as large capital investment requirement, high risk, and inabilities of portfolio adjustment, diversification and high taxation. UK REIT is a newly established system which was adopted after witnessing how well the system worked for economies such as USA, Australia, Belgium, France, Korea, Hong Kong and Singapore.
The UK REIT sector started on 1st January 2007, mainly for the small private investors to take the benefit of the investments in real estate property market (Propertyshowrooms.com International Property Investment Network (IPIN) and Property hot topics - Real Estate Investment Trusts (REITs)). It gives tax advantage to companies working as REIT vehicles otherwise its just like an ordinary investment company registered on London Stock Exchange (REITS AND CROSS-BORDER PROPERTY INVESTMENT, Opening up the Internal Market for Real Estate and promoting market safety and security). It has been legislated that if REIT distribute 90 of the taxable income then that income is not subject to tax and thats an advantage to engaging in REIT further more an incentive to many investment companies to register as one (similar to benefits of another country REIT). Another incentive provided to the companies to get them into REIT system is with minimal conversion cost.
When REIT initially kicked off the rate of return was not high nor was the returns guaranteed. It was just an investment option that was available for financiers to invest in property market with far greater liquidity which was not there for direct investment in property market. The real estate market when dealt in directly lead to inabilities to liquidate quickly as the nature of that form of transaction is large lump of capital and a lot of documentation (as stated above). Some resorted to the option to convert into an REIT and such companies managed to get minimal conversion cost stated that they have managed to recover their cost within three years i.e. from 2007 to date.
The worst and the most disadvantageous issue was that REIT system was launched in UK when the markets were about to start their cyclical downturn and the investors lost their confidence in all forms of finance. But REITs survival proved itself in terms of liquidity and stability which is why many equity funds managers got interested in REIT units. This is how REITs in UK picked up pace as many funds holder invested their money in REIT before or during the downturn of the economy. Initially this new type of investment was not that popular and REIT managing companies had to look to overseas market and private investors. Overseas institutional shareholders tried screening the investment in the UK REIT on the basis that how much legislation has been put in place in this new area of investment. On that notion the strict legislation followed by good corporate governance requirements prompted the increase of foreign institutional investment from 22 to 39, which was quite a material inflow of capital.
Like other countries such as USA and Australia they had major financing carried out by private individuals unlike the case in UK. It is assumed that the private investors are solely interested in high yields but that is not the right ideology of operating REIT because the investors weigh the tax burdens and capital growth in addition to income yields. Mostly REIT tries to deliver high yield along with capital growth in right weight ages.
The main difference between the REIT of UK and other overseas markets is that the UK REIT is not income focused rather UK property sector has always been focused on Net Asset Value (NAV). In overseas markets when a new market of REIT is established, focus is primarily on capital growth leading to NAV growth. This structure did change in UK market until investors confidence did not rise with regards to REIT providing sustainable income growth.
Due to fall in rental values UK REIT is now trying to be more focused on the important areas of property income which is to manage, develop, refurbished, buy and sell. The future of REIT system is looking bright as they intend to do better and hope for rentals to kick back the value of properties. Hence in comparison with the rest of the market UK REIT proved to be self sustaining market which worked for the benefit for not just the industry but the public at large as well.
Lets take a look at Hammerson Inc as a REIT for our case study which has a diverse portfolio of 16 shopping centers and 16 retail parks. The main objective is to manage a portfolio of high quality investment properties which are substantially enhanced through development and providing stable returns to the occupiers, investors and partners. (Hammerson, 2009 Full Year Results). As being a part of UK REIT it is exempted from tax on corporate profits but have to pay Property Income Distributions (PID) which is taxable in the hands of investors. This is because individuals get dividend income while the company deducts tax from payments it makes to the depositor. These payments are treated as net off payments from tax. Its Interim dividend is just one element which is PIDs but the final dividend has normal dividend element together with PID.
The business management approach shown by Hammerson is initially the management of assets, creating the portfolio in such a way that it remains attractive to the investors. They are improving their leasing teams to speed up their leasing process in order to be up with the industry practice by giving the tenants occupancy quickly. The portfolio is tending to be managed in a way that the assets are evaluated against financial benchmark and if any asset seems to be not proving good returns Hammerson changes the assets to other better option. This approach leads to better yields to their investors.
At present the employment position in UK has improved and the investors confidence is growing, which is a good position over the last 18 months. In UK because the demand is increasing mainly because of consumption rise in the property demand for opening shops and eateries to satisfy the demand raise creating new options for Hammerson to invest in property (Hammerson, 2010). Hence entities that are growth oriented will definitely find it lucrative to look forward to with this option as it results in increase in wealth in the form of income or valuation.
The current outlook of UK REITs depicts the potential to progress further. For example residential and commercial sector, under the scheme of REIT, can be converted to Alternative Investment Market (AIM) however the existing situation requires that companies listed as AIM can not be converted into REITs, unless recognized in a stock exchange. This creates problem for small sized companies as it proves to be expensive and also limits the potential for small companies to grow by joining in together.
Government is also actively seeking to enhance this market by promoting renting of premises under Homes and Communities Private Rented Sector Initiative. But it would be better for the above mentioned issue to be resolved as it could turn around the infrastructure of the industry. On the other hand, low yields add further barrier for the small company to operate as REIT that is why it is necessary to address the need to change gearing structure especially for residential property. This can be seen from the fact that in comparison to commercial property, residential REIT income is more heavily relied upon from sales which makes it harder to gratify the interest cover test of 1.25. Since profits are generated from capital gains i.e. sale of residential properties, it does not constitute as income for calculation of interest cover test.
In reflection to the contemporary issue, there are certain solutions which could help bridge this gap. For starters treating capital gains in the computation of interest cover, in this way the income portion will substantially increase. Another option is to lower the limit of interest cover for residential REITs. Lastly, apply restriction on the use of loan rather than using income as the basis of imposing restrictions.
One more aspect to take into account for REITs is the social sector. This is because a financier main concern is the ability to be paid over a long term lease or to have least possible periods without being paid. That is why factors such as reputation of the counter party comes into account along with many more that needs to be addressed before a fully regulated yet progressive market can be established in UK.
The three years of REIT system in UK proved many aims of the indirect investment in real estate property. It has attracted foreign capital, and the REIT regulatory system proved itself beyond expectation in the economic downturns as well by giving unit holders enough liquidity to manage their investments in a better way. (Land Securities, 2010)
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