Global Real Estate Investment Volumes Likely To Decline

Mumbai: Real estate management and services firm Jones Lang LaSalle expects global investment volumes to be down by over 30 per cent in 2008, after a record year in 2007 when volumes were up eight per cent year-on-year to $759 billion.

Asia may be more resilient, though volumes will not achieve 2007 levels, its latest global real estate capital report said. Jones Lang operates in over 700 cities in more than 60 countries.

Tony Horrell, International Director and Head of European Capital Markets, said reduced debt availability and investor confidence were likely to stay for much of the first half of 2008 as the impact of the debt squeeze continues to ripple through markets, and central bankers and financiers work to stabilise and stimulate the debt markets. “We do not expect a strategic and planned withdrawal of capital from real estate in 2008, or investors to significantly adjust their allocations to the asset class. Forecasts for 2008 remain positive and the long-term trends in real estate continue to be positive drivers.”

Whilst domestic investment remained at about $400 billion globally in 2007, similar to 2006 volumes, cross-border investment (purchaser, vendor or both are from outside the country where the asset is located) increased by $58 billion to $357 billion in 2007 and of that, inter-regional investment (purchaser, vendor or both are from outside the region) accounted for $242 billion.

Asia Pacific

Direct commercial real estate investment reached a record $121bn in 2007, up 27 per cent on 2006. Japan, by far the largest market in the region, accounted for 50 per cent of the total transactions.

Stuart Crow, Head of Asia Capital Markets, said, “We are seeing a definite shift in the origin of active investors. While the Australian Listed Property Trusts (LPTs) played a large part in the buying activity in 2007 within the region, equity market dynamics at home are making it difficult for many of these funds to make accretive acquisitions outside of Australia. Instead, we are witnessing the re-emergence of Japanese interests in overseas investments, particularly in the developing markets of China, India and Vietnam.”

An Ideal Investment Vehicle

A Real Estate Investment Trust or REIT is a tax designation for a corporation investing primarily in income-producing real estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute majority of their income, which may be taxable in the hands of the investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. Budget 2008-09

In other words, REITs are pass-through entities or companies that are able to distribute the majority of income cash flows to investors, without taxation, at the corporate level. Hence, the REITs' business activities are restricted to acquisition and disposal of leased properties and generation of property rental income. REIT not only provides stable dividends but also offers capital appreciation via smart disposal of properties.

For real estate developers, it offers a route of raising more money for their business. Companies like Capitaland in Singapore have mastered the art of developing the assets, transferring them to their REITs and thus making more money available for further development. This process will be further facilitated by reducing interest rates worldwide after US Sub-prime crisis.

Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other companies.

REITs can be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest in and own properties. In other words, they are responsible for the equity or value of their real estate assets. Their revenues come principally from their properties' rents.

Mortgage REITs deal in investment into and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans portfolio. Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

The key statistics to look at in REIT are its NAV (Net Asset Value), AFFO (Adjusted Funds from Operations) and CAD (Cash Available for Distribution).

Thus, this investment vehicle called REITs opens the option of investing in real estate portfolios to the common man, and this concept has been established for decades in the United States and Australia (in case of the latter, under the name LPT, or Liquid Property Trust).

Of late, Asia too is beginning to wake up to the potential. Singapore, Malaysia, Hong Kong, South Korea and Japan have seen significant success levels with this financial instrument, while India and China are still trying to find a workable formula.

REITs are attractive investment vehicles because they have the potential of generating yields comparable to stocks and bonds. They are not prone to the kind of fluctuations one typically observes in the stock market and therefore present a higher margin of safety. They also generate capital gains and represent a stable income source. Hence, REIT is an investment vehicle combining the best of both worlds, capital appreciation of equities and stability of debt.

Fundamentally, a Real Estate Investment Trust (REIT) is an entity dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centers, hotels, offices and warehouses. This means that the company buys, manages and sells real estate assets with the sole purpose of inviting investors to put their money into a professionally managed portfolio of properties. Investors are also given an unprecedented tax exemption opportunity on the corporate level.

In some cases, such an entity may even finance real estate. REITs are particularly an attractive avenue to retail investors because it offers higher returns than fixed deposit rates. They represent a diversified portfolio of assets at low quantum of investments. REITs can serve as ultimate landlord of select rented properties.

However, REITs has yet to be proven as a workable concept in India. As of now, there is long way to go pertaining to the actual formation of REITs in this country. Any proposal to establish REITs here will have to be placed before SEBI (Securities Exchange Board of India) for approval. This body will evaluate each proposal, and considering the immense potential, it stands to reason that a number of approvals will finally come through. When they do, REITs will concentrate on the following property market areas:Commercial: Offices and IT/ITES Parks. Hospitality: Hotels, Leisure and Healthcare Retail: Large Malls Industrial It should not be assumed, however, that the introduction of REITs will result in the availability of an instant wealth-building instrument for investors. The product will be an unfamiliar one for most, and a long period of trial and error will necessarily precede the first REITs-related success stories in India. The art of maximizing profits through REITs calls for intelligent portfolio diversification and management.

A lot also depends on the format that REITs take in India. To generate good financial returns for its investors, the entity will have to own a high quality investment portfolio. Ideally, it will operate in several metropolitan and secondary cities. Returns will begin to flow in when the REIT has managed to secure several large quality properties and to consistently maintain the quality of portfolio.