Useful Aspects of US Real Estate Investment Trusts for China/ASPECTS UTILES DU REITS DES ETATS-UNIS POUR LA CHINE

By Jinzhao, Wang | Canadian Social Science, March 1, 2007 | Go to article overview

Useful Aspects of US Real Estate Investment Trusts for China/ASPECTS UTILES DU REITS DES ETATS-UNIS POUR LA CHINE


Jinzhao, Wang, Canadian Social Science


Abstract:

Real estate has long been a popular form of investment in many countries. With recent years seeing an increased level of global interest in indirect investment in this asset class through real estate investment trusts (REITs), opportunities in China markets are now grabbing much attention. China is being tipped as the area likely to offer the best returns over the coming years. This article traces the development and growth of REITs in US, where there are lessons to be learnt, so that subsequent efforts to introduce REITS' status, requirements, types and advantages. Further more, benefits, key evaluating elements, risks and obstacles were discussed respectively in order to promote practice and application of REITs in China and avoid risks in applying process to create a reasonable framework and structure.

Key Words: REIT, Development, Benefit, Evaluation, Risk, Obstacle

Résumé: L'immobilier est depuis lontemps une forme d'investissement populaire dans beaucoup de pays. Dans les dernières années avec le constat d'un niveau élevé de l'intérêt global des investissements directs dans cette industrie à travers le REITs(Real Estate Investment Trusts), les opportunités sur le marché chinois tirent maintenant beaucoup plus d'attention. La Chine est considérée comme la région susceptible de rapporter le plus dans les prochaines années. L'article présent décrit le développement du REITs aux Etats-Unis qui nous donne des leçons et indique des efforts à faire pour introduire le REITs en ce qui concerne son statut, ses conditons, ses types et ses avantages. De plus, les bénéfices, éléments clés d'évaluation, risques et obstacle seront étudiés respectivement dans le but de promouvoir la pratique et l'application du REITs en Chine et d'éviter les risques dans le processus d'application afin de créer un cadre raisonnable.

Mots-Clés: REIT, développement, bénéfice, évaluation, risque, obstacle

1. THE DEVELOPMENT OF REAL ESTATE INVESTMENT TRUST IN US

1.1 Background

The origins of the real estate investment trust, or REIT date back to the 1880s. At that time, investors could avoid double taxation because trusts were not taxed at the corporate level if income was distributed to beneficiaries. This tax advantage, however, was reversed in the 1930s, and all passive investments were taxed first at the corporate level and later taxed as a part of individual incomes. Unlike stock and bond investment companies, REITs were unable to secure legislation to overturn the 1930 decision until 30 years later. Following WWII, the demand for real estate funds skyrocketed and President Eisenhower signed the 1960 real estate investment trust tax provision which reestablished the special tax considerations qualifying REITs as pass through entities (thus eliminating the double taxation). This law has remained relatively intact with minor improvements since its inception.

1.2 Development

Real Estate Investment Trusts (REIT) have been available since 1960, but it has only been in the last decade that they have become a major powerhouse on the exchange. While there were already roughly 50 REITs companies by the mid-1970s, their market capitalization was very small(less than USD 500m). The breakthrough did not come until the 1990s. Many investors only became aware of REITs in the 1990s. REITs helped to recapitalise property businesses following the global downturn that began in the late 80's. Today, the 143 equity Reits alone have a market cap of nearly USD 370 bn(the market development is illustrated in the Annex). Since 2001, REITs have outperformed most other major market benchmarks including the Dow Jones Industrials, S&P 500 and the NASDAQ Composite. REIT investment increased throughout the 1980s with the elimination of certain real estate tax shelters. Investments in real estate provided investors with income and appreciation. The Tax Reform Act of 1986 allowed REITs to manage their properties directly, and in 1993 REIT investment barriers to pension funds were eliminated. …

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