Realty funds provide future property growth

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