Ceo Presentation Reit


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REIT presentation featuring REIT introduction, structure, characteristics, legal framework, regulations, risk & return, trends in Mainland China.

Ceo Presentation Reit

  1. 1. For ‘the 2 nd International CEO Roundtable of Chinese and Foreign Multinational Corporations’ REIT Real Estate Investment Trust Prepared by: Ben Tse Valuation & Advisory Services, Greater China CB Richard Ellis 15 th November 2008
  2. 2. <ul><li>Content </li></ul><ul><li>REIT Development </li></ul><ul><li>REIT Legislation </li></ul><ul><li>REIT Structure </li></ul><ul><li>Characteristics of a REIT </li></ul><ul><li>Risks of a REIT </li></ul><ul><li>REIT vs. Direct Property Investment </li></ul><ul><li>Impact of Subprime Crisis </li></ul><ul><li>REIT in Mainland China </li></ul><ul><li>Managing a REIT </li></ul><ul><li>Conclusion </li></ul>
  3. 3. <ul><li>REIT Development </li></ul>
  4. 4. REIT Development SINGAPORE JAPAN TAIWAN 20 S-REITs Mkt. Cap. about US$ 8.2 billion 8 T-REITs Mkt. Cap. about US$ 1.2 billion 4 listed CR-REITs Mkt. Cap. about US$ 0.15 billion SOUTH KOREA MALAYSIA 13 REITs Mkt. Cap. about US$ 1.2 billion HONG KONG 7 listed H-REITs Mkt. Cap. about US$ 5.1 billion 42 listed J-REITs Mkt. Cap. about US$ 23.3 billion Data as of late October 2008 REITs in Asia (excluding Property Funds) Source: Bloomberg and CBRE Research
  5. 5. REIT Development <ul><li>REITs in Asia (excluding Property Funds) </li></ul><ul><li>Amongst others, South Korea had 5 REITs delisted leaving an 81.3% contraction in total market cap. </li></ul><ul><li>In Japan, although the number of listed REITs remains unchanged, the total market cap. </li></ul><ul><li>dropped significantly by 50% </li></ul><ul><li>The number of listed REITs in Singapore increased to 20; nevertheless, the total market cap. recorded a </li></ul><ul><li>dramatic 56.6% drop. Hong Kong also suffered significantly, with 42.7% drop in total market cap. </li></ul>Source: Bloomberg and CBRE Research 1.2 (-14.3%) 1.4 13 11 Malaysia 78.2 0.8 1.7 8.9 18.9 46.5 As of late Oct 2007 As of late Oct 2008 As of late Oct 2008 As of late Oct 2007 94 9 8 7 17 42 39.2 (-50.0%) 94 TOTAL 0.15 (-81.3%) 4 South Korea 1.2 (-29.4%) 8 Taiwan 5.1 (-42.7%) 7 Hong Kong 8.2 (-56.6%) 20 Singapore 42 No. of listed REITs 23.3 (-50.0%) Japan Market Capitalization (US$ billion)
  6. 6. REIT Development <ul><li>REITs in Hong Kong </li></ul><ul><li>Late 2005 saw the Hong Kong REIT market burst into life, with the listing of three REITs on the Stock Exchange of Hong Kong including The Link REIT, Prosperity REIT and GZI REIT </li></ul><ul><li>To date, there are seven listed REITs with market capitalization of about US$ 5.1 billion (HK$ 39.8), down 42.7% in total market cap., when compared to late Oct 2007 </li></ul>
  7. 7. REIT Development <ul><li>Other Asian countries planning for setting up of REITs </li></ul><ul><li>In light of the rapid development in Japan, Singapore and HK, other countries are planning for setting up of REIT like India, Pakistan, Indonesia & Vietnam </li></ul><ul><li>India is currently in the process of formulating definitive legislation for the introduction of REIT in the Indian real estate market </li></ul><ul><li>Pakistan is also ready to allow REIT. It is understood that the Securities & Exchange Commission of Pakistan will follow regulatory framework similar to that of Singapore and Hong Kong REIT </li></ul>
  8. 8. <ul><li>REIT legislation </li></ul>
  9. 9. REIT Legislation <ul><li>As mentioned earlier, Japan, Singapore, Hong Kong, Taiwan, South Korea and Malaysia already developed the REIT structure </li></ul><ul><li>The legislation structure in these six countries will be discussed </li></ul>
  10. 10. REIT Legislation Source: CBRE Research Ratings of twAA or above by two credit rating agencies: 50%; ratings of twA or above: 35%; those with credit ratings: 25% Capped at 45% of gross asset value Over 35% of total assets permitted with disclosed credit rating (capped at 60%) No restriction Leverage Prohibited – this rule is undergoing revision to allow for urban renewal infrastructure or public amenities construction Prohibited, but H-REIT may acquire uncompleted units comprising less than 10% NAV Property developments and investments in uncompleted projects should not exceed 10% Restricted – at least 50% of total assets are income producing and unlikely be sold within one year Property developments No restriction under the RESA; subject to approval No No No restriction under the Investment Trust and Investment Company Act, but no overseas acquisition have been made as the requirements on real estate appraisal of overseas properties are ambiguous Geographical restrictions cash, government bonds, property, property-related rights, beneficiary securities or ABS issued under real estate securitization Act/Financial Asset Securitization Act (RESA/FASA) must form at least 75% of the NAV Only invest in real estate At least 70% of deposited property should be invested in real estate or real estate-related assets For listed J-REIT, at least 75% of assets must be invested in real estate % invested in real estate Internal/External Internal/External External External Management structure Trust (Real estate asset trust or investment trust) Unit Trust Collective Investment scheme (Unit Trust) or corporate Trust or corporate (listed REITs are all corporations) Structure Taiwan Hong Kong Singapore Japan
  11. 11. REIT Legislation Source: CBRE Research 50% of total asset value (revised from 35%) REITs are permitted to have exceptional borrowing up to 1000% of equity capital, upon special approval of shareholders Leverage Prohibited, but may enter into conditional forward purchase agreement with cover for construction risks Allow Property developments No restriction basically, subject to approval from SC and relevant authorities No Geographical restrictions At least 75% in real estate, SPCs, real estate-related assets or liquid assets for listed REITs. The criteria for unlisted REIT is 70% At least 70% in real estates or corporate restructuring related properties % invested in real estate External Internal/External Management structure Unit trust Corporate-Restructuring, Entrusted Management, Development-Specialized, Self-Managed Structure Malaysia South Korea
  12. 12. <ul><li>REIT Structure </li></ul>
  13. 13. REIT Structure <ul><li>What is a REIT? </li></ul><ul><li>A company that owns, and in most cases, operates income-producing real estate </li></ul><ul><li>Some of the REITs finance real estate </li></ul><ul><li>To be a REIT, a company must distribute certain portion of its taxable income to shareholders annually in the form of dividends. (e.g. in Hong Kong, not less than 90% of its audited annual net income after tax shall be distributed in the form of dividends) </li></ul><ul><li>The REIT structure was designed to provide a similar structure for investment in real estate similar to mutual funds which provide for investment in stocks </li></ul><ul><li>Source: THE REIT STORY, the National Association of Real Estate Investment Trusts </li></ul>
  14. 14. REIT Structure <ul><li>Types of REIT </li></ul><ul><li>REIT can be classified as equity, mortgage or hybrid </li></ul><ul><ul><li>EQUITY  generates income from property ownership and operation </li></ul></ul><ul><ul><li>MORTGAGE  provide a source of loan to property owners and operators directly or via collateral bonds </li></ul></ul><ul><ul><li>HYBRID  a mixture of the above two types </li></ul></ul>
  15. 15. REIT Structure <ul><li>Specific Legislative Model of Asian REIT </li></ul><ul><ul><li>Adopt specific legislation on its establishment, structure, investment and distribution of REIT </li></ul></ul>Services Services Trust Manager Asset Management Company REIT Properties REIT Holders
  16. 16. <ul><li>Characteristics of REIT </li></ul>
  17. 17. Characteristics of a REIT <ul><li>REIT Investment </li></ul><ul><li>Focus on Property Investment but without becoming a landlord </li></ul><ul><li>Tax Concession </li></ul><ul><li>Minimum Payout Ratio </li></ul><ul><li>Better Investor Protection </li></ul><ul><ul><li>Better Disclosure Requirement </li></ul></ul><ul><ul><li>Restricted to Property Related Activities </li></ul></ul><ul><ul><li>Restriction on Development Activities </li></ul></ul><ul><ul><li>Limit on Gearing </li></ul></ul>
  18. 18. Characteristics of a REIT <ul><li>REIT Investment </li></ul><ul><li>Relatively stable income with no minimum investment requirements </li></ul><ul><li>High Liquidity </li></ul><ul><li>Management Expertise </li></ul><ul><li>Access to large and high quality projects / properties </li></ul><ul><li>Diversification </li></ul><ul><li>Economy of Scale </li></ul><ul><li>Low Transaction Cost </li></ul>
  19. 19. Characteristics of a REIT <ul><li>Advantages </li></ul><ul><li>High liquidity </li></ul><ul><li>Transparency </li></ul><ul><li>Tax benefit </li></ul><ul><li>High dividend yield </li></ul><ul><li>Inflation hedge </li></ul><ul><li>Portfolio diversification </li></ul><ul><li>Lower risk </li></ul>
  20. 20. Characteristics of a REIT <ul><li>High Liquidity </li></ul><ul><li>Liquidity is a key concern to the investment. Generally, value of high liquidity investment vehicles are worth more than less liquid ones </li></ul><ul><li>Direct investment in property requires a large lump-sum payment and involves a high transaction cost </li></ul><ul><li>Direct investment faces the difficulties of matching a buyer and a seller </li></ul><ul><li>REITs are publicly traded on stock exchange with high liquidity </li></ul>
  21. 21. Characteristics of a REIT <ul><li>Transparency </li></ul><ul><li>Corporate governance and internal control are important issues in today’s business operation </li></ul><ul><li>REIT, just like stocks, requires regular reporting, independent audit and appraisal </li></ul><ul><li>These improve the quality of investment and investor’s confidence </li></ul>
  22. 22. Characteristics of a REIT <ul><li>Tax Benefit </li></ul><ul><li>For a REIT to become qualified (in Hong Kong), a real estate company must agree to pay in dividends at a minimum of 90% of its taxable profit </li></ul><ul><li>By having REIT status, a company avoids corporate income tax </li></ul><ul><li>A regular corporation makes profit and pays taxes on the entire profits, and then decides how to allocate its after-tax profits between dividends and reinvestment </li></ul><ul><li>However, a REIT simply distributes all or almost all of its profits (excluding tax) </li></ul>
  23. 23. Characteristics of a REIT <ul><li>High Dividend Yield </li></ul><ul><li>Although risks are apparent, REIT receives special tax considerations and typically offer investors fairly high yields (see next slide for more details) as well as highly liquid method of investing in Real Estate </li></ul><ul><li>As mentioned previously, it must distribute most of its profits as dividends </li></ul><ul><li>The high dividend yield provides a relatively stable income stream to the investors </li></ul><ul><li>Therefore, it is relatively safe to invest in REIT in a volatile market </li></ul>
  24. 24. Characteristics of a REIT <ul><li>Dividend Yield of Hong Kong REITs </li></ul><ul><li>(As of late Oct 2008) </li></ul>4.62 0049 Wheelock Properties 5.06 Average 16.20 Average 5.24 0014 Hysan 5.33 0004 Wharf Holdings Source: Bloomberg 24.90 01881 Regal REIT 20.68 00435 Sunlight REIT 20.87 02778 Champion REIT 15.90 00405 GZI REIT 16.45 00808 Prosperity REIT 5.55 00823 The Link REIT 9.06 00625 RREEF CCT REIT Dividend Yield Stock Code Name of REIT
  25. 25. Characteristics of a REIT <ul><li>Inflation Hedge </li></ul><ul><li>REIT invests in property market </li></ul><ul><li>Traditionally, investments in tangible hard assets are good for hedging against inflation </li></ul>
  26. 26. Characteristics of a REIT <ul><li>Portfolio Diversification </li></ul><ul><li>REIT has a low correlation with stock and bond investments </li></ul><ul><li>According to modern portfolio theory, adding REIT to a portfolio with stock and bond would improve return and reduce risks </li></ul>
  27. 27. Characteristics of a REIT <ul><li>Lower Risk </li></ul><ul><li>The risks in the investment of REIT are relatively lower than that in investment of property stocks </li></ul><ul><li>More details on risk of REIT will be discussed in the next section </li></ul>
  28. 28. <ul><li>Risks of a REIT </li></ul>
  29. 29. Risks of a REIT <ul><li>Volatility of REIT </li></ul><ul><li>Volatility is a measure of risk </li></ul><ul><li>Unpredictable, unstable and explosive are some of the words, which can best describes the share market in the last 12 months </li></ul><ul><li>For REITs, investors need to remember that they are still buying shares, not bricks and mortar </li></ul><ul><li>Therefore, the share price will be influenced by what is happening in the commercial property market </li></ul>
  30. 30. Risks of a REIT Volatility of HK REITs vs. HK property stocks 49.08 0049 Wheelock Properties 52.05 Average 38.46 Average 47.03 0014 Hysan 60.04 0004 Wharf Holdings Source: Bloomberg 49.14 Hang Seng Index 38.20 1881 Regal REIT 35.06 0435 Sunlight REIT 45.10 2778 Champion REIT 33.77 0405 GZI REIT 40.16 808 Prosperity 33.84 0823 The link REIT 43.09 0625 RREEF CCT REIT Annualized Volatility Stock Code Name of REIT
  31. 31. Risks of a REIT <ul><li>Volatility of REIT </li></ul><ul><li>The volatility of REIT, which is a measurement of the daily change of stock price, is smaller than those of property stocks </li></ul><ul><li>The volatility of REITs is also smaller than that of the Hang Seng Index, which is a representative index for the overall movement of the stock market </li></ul><ul><li>Therefore, the risks in investment of REIT are relatively lower </li></ul>
  32. 32. Risks of a REIT <ul><li>Beta Coefficient of REIT </li></ul><ul><li>Looking at the stock market, we could use Beta to measure the sensitivity of REIT to the stock market </li></ul><ul><li>It is a measure of the volatility, or the systematic risk of a security on a portfolio in comparison to the market as a whole </li></ul><ul><li>Beta is calculated by using regression analysis and it can be described as the correlation of the move of a security to the swings in the market </li></ul>
  33. 33. Risks of a REIT <ul><li>Beta coefficient of REIT (cont’d) </li></ul><ul><li>A Beta of 1 indicates that the security's price will move with the market </li></ul><ul><li>A Beta of less than 1 means that the security will move less than the market </li></ul><ul><li>A Beta of larger than 1 indicates that the security's price will move more than the market </li></ul>
  34. 34. Risks of a REIT <ul><li>Beta coefficient of Hong Kong REITs </li></ul><ul><li>(As of late Oct 2008 over 2 years) </li></ul>0.84 0049 Wheelock Properties 0.85 Average 0.72 Average 0.81 0014 Hysan 0.91 0004 Wharf Holdings Source: Bloomberg 0.76 1881 Regal REIT 0.80 435 Sunlight REIT 0.70 2778 Champion REIT 0.72 405 GZI REIT 0.69 808 Prosperity 0.61 823 The link REIT 0.74 625 RREEF CCT REIT Beta Stock Code Name of REIT
  35. 35. Risks of a REIT <ul><li>Beta Coefficient of REIT (cont’d) </li></ul><ul><li>From the table provided, the average Hong Kong REIT Beta is around 0.72 </li></ul><ul><li>The average Beta for property developers and the market are 0.85 and 1 respectively </li></ul><ul><li>This indicates that REIT is less sensitive to the market change </li></ul>
  36. 36. Risks of a REIT <ul><li>Risk associated with REIT </li></ul><ul><li>Performance of the Property Market </li></ul><ul><ul><li>Fall in the prices/ valuations of properties will drag down unit prices </li></ul></ul><ul><ul><li>Low occupancy and rental will affect distributable incomes </li></ul></ul><ul><li>Insufficient diversification </li></ul><ul><ul><li>Location </li></ul></ul><ul><ul><li>Number of properties </li></ul></ul><ul><ul><li>Variety of property type </li></ul></ul><ul><li>Tenancy durations and quality of tenants </li></ul><ul><ul><li>shorter tenancy terms -> higher number of tenant changes / voids -> unstable rental income </li></ul></ul><ul><li>Rental Guarantee and IPO Valuation </li></ul><ul><ul><li>Special financial engineering </li></ul></ul><ul><ul><li>duration and validity of rental guarantees provided by the property vendors </li></ul></ul><ul><ul><li>effects on the IPO valuation </li></ul></ul>
  37. 37. <ul><li>REIT </li></ul><ul><li>vs. </li></ul><ul><li>Direct Property Investment </li></ul>
  38. 38. REIT vs. Direct Property Investment <ul><li>After discussing the unique characteristic and risk of REIT, </li></ul><ul><li>the difference between REIT and direct property </li></ul><ul><li>investment will be highlighted </li></ul><ul><li>Factors for consideration </li></ul><ul><li>Return on Investment </li></ul><ul><li>Leverage/ Cost of Borrowing </li></ul><ul><li>Valuation Volatility </li></ul><ul><li>Taxation </li></ul>
  39. 39. REIT vs. Direct Property Investment   REIT     Properties                 Revenue     Property Income - Interest Payment (depends on leverage) - Landlord's Expenses   - Management Expenses     Net Income  Yield     Operating income         - Tax           Net Income         x Payout Ratio           Dividend  Dividend Yield        
  40. 40. REIT vs. Direct Property Investment <ul><li>Liquidity of Property Assets </li></ul><ul><ul><li>Investment Fund Available </li></ul></ul><ul><ul><li>The potential buyers – Buying sentiment expectations </li></ul></ul><ul><ul><li>Strata-title properties available in market </li></ul></ul><ul><li>Maturity of Property Market </li></ul><ul><ul><li>Frequency of transactions </li></ul></ul><ul><ul><li>Legal Framework on Conveyancing, Leasing and Asset Management </li></ul></ul><ul><ul><li>General Perception of buy / sell sides </li></ul></ul>
  41. 41. <ul><li>Impact of Subprime Crisis </li></ul>
  42. 42. Impact of Subprime Crisis <ul><li>Although REIT is relatively stable and less sensitive to the market change, the performance of REIT still suffered considerably under the turmoil of subprime crisis, followed by global credit crunch </li></ul><ul><li>Under the impact of subprime crisis, the entire Asian REIT market, REIT IPO, REIT acquisition, market sentiment all turn sluggish and lose their impetus </li></ul>
  43. 43. Impact of Subprime Crisis <ul><li>Sluggish REIT Market </li></ul><ul><li>The leading Asian REITs market experienced consolidation, following the broad correction in the global equity markets in the first half of 2008 as the subprime crisis spilled over to other financial market segments and the macro economic environment turned dimmer overall </li></ul><ul><li>The total market capitalisation of Asian REITs recorded a 9.4% contraction within the first six months in 2008, following a 4.5% decline in the second half of 2007 </li></ul><ul><li>The three major growth drivers for Asian REITs – new listings, acquisitions and robust property fundamentals – are all losing their impetus to varying degrees. </li></ul>
  44. 44. Impact of Subprime Crisis <ul><li>Sluggish REIT Market (cont’d) </li></ul><ul><li>Given the continuing credit squeeze, IPO fund raising and financing for on-going acquisitions have become more difficult since late 2007 </li></ul><ul><li>Property fundamentals, although still basically resilient for most Asian REITs, they have shown signs of softening as office demand may be impacted by a growing conservation in corporate expansion plans and rental growth is decelerating after the huge run up experienced by most markets in recent years </li></ul>
  45. 45. Impact of Subprime Crisis <ul><li>Major Acquisition by Asian REITs (1 st Half 2008) </li></ul><ul><li>The first half of 2008 continued to witness REIT acquisition activities, despite the prevailing pessimism, especially on the part of financially sound REIT </li></ul><ul><li>One of the notable transactions of the period was Champion REIT’s acquisition of Langham Place retail and office portions from its major shareholder Great Eagle at a total consideration of HK$12.5 billion (US$1.6 billion) </li></ul><ul><li>However, the global credit squeeze is making it difficult for REIT to raise further funds to buy new assets. Japan saw a number of REITs cancel their planned acquisitions due to capital raising difficulties. Such situation is most pronounced among REITs with high gearings </li></ul>
  46. 46. Impact of Subprime Crisis <ul><li>Forecast of REIT performance in 2008 year end </li></ul><ul><li>Against the backdrop of extremely low vacancy in prime locations and sustained high rental income, prices of many REITs in Asia have dipped below their respective net asset value (NAV), resulting in higher yield level </li></ul><ul><li>In Hong Kong, the yield increased from 6.03% to 6.67% in the first six months of 2008, against the 2.95% of the overall stock market </li></ul><ul><li>Under the current market conditions, investors are likely to remain cautious with respect to any investment decisions and pace of acquisitions by REITs could further slow should the tight credit environment show no improvement in the year’s remaining months </li></ul>
  47. 47. Impact of Subprime Crisis <ul><li>Hong Kong REIT market </li></ul><ul><li>Amid jitters in the equity and credit markets worldwide, the IPO market in Hong Kong experienced rapid cooling in the first half of 2008 and no new REIT was launched during the period under review </li></ul><ul><li>Total number of HK-REIT remained at seven, with a total market capitalisation of US$ 5.1 billion (HK$39.8 billion) </li></ul><ul><li>The dull market condition for Hong Kong REIT has forced property owners to re-consider their plans to list their real estate investment trusts </li></ul><ul><li>In January, Far East Consortium International Limited announced its plan to spin-off its mid-market hotels into the HK Hotel REIT. However, given the volatility of the capital market and unattractive pricing, Far East finally decided to postpone the spinoff programme in March even though the ordinary resolution to undertake the spin-off was passed in EGM. </li></ul>
  48. 48. Impact of Subprime Crisis <ul><li>Hong Kong REIT market </li></ul><ul><li>Following the SFC’s clarification in October 2007 that overseas acquisitions do not need approval, REIT started to amend their investment scopes </li></ul><ul><li>Investment activities of Prosperity REIT and Regal REIT will no longer be restricted to Hong Kong or Greater China region </li></ul><ul><li>Similarly, GZI REIT was permitted to shed its former restriction of being only permitted to invest in Guangdong Province and will henceforth be permitted to target properties in mainland China, Hong Kong and Macau as well </li></ul>
  49. 49. Impact of Subprime Crisis <ul><li>Hong Kong REIT market </li></ul><ul><li>REIT acquisitions in Hong Kong have not been active since the inauguration of the listing of REIT in the SAR in 2005 </li></ul><ul><li>Given the current slowdown in real estate investment activities, REITs are likely to temporarily cease purchasing new assets and rather concentrate their efforts on existing portfolios to sustain revenue growth </li></ul><ul><li>Launching new REIT can remain challenging, if the general securities market remains in bearish mood </li></ul>
  50. 50. Impact of Subprime Crisis <ul><li>Hong Kong REITs Performance (as of late Oct 2008) </li></ul>Source: Bloomberg and CBRE Research - 61.6% 1.98 5.150 22-Jun-07 00625 RREEF CCT REIT - 73.1% 0.72 2.680 30-Mar-07 01881 Regal REIT - 55.0% 1.17 2.600 21-Dec-06 00435 Sunlight REIT - 64.1% 1.83 5.100 24-May-06 02778 Champion REIT - 51.2% 1.50 3.075 21-Dec-05 00405 GZI REIT - 62.0% 0.82 2.160 16-Dec-05 00808 Prosperity REIT + 30.1% 13.40 10.300 25-Nov-05 00823 The Link REIT % change since Date Listed Closing price as of late Oct 08 (HK$) Offer price (HK$) Date Listed Stock Code Name of REIT
  51. 51. Impact of Subprime Crisis <ul><li>The Hong Kong Hang Seng Index (HSI) plummeted from 31,492 </li></ul><ul><li>in early-Nov 2007 to 13,968 in late-Oct 2008, down by 55.6% </li></ul><ul><li>over the year. Starting from Sept 2008, the HSI experienced a </li></ul><ul><li>severe drop, triggered by global financial tsunami </li></ul>Hong Kong Hang Seng Index 香港恒生指数 Source:
  52. 52. Impact of Subprime Crisis Stock Price Performance From early-Nov 2007 to late-Oct 2008 Link REIT 领汇房地产投资信托基金 Prosperity REIT 泓富产业信托 GZI REIT 越秀房地产投资信托基金 Champion REIT 冠君产业信托 - 23.8% - 48.8% - 52.7% - 60.2% Source:
  53. 53. Impact of Subprime Crisis Stock Price Performance From early-Nov 2007 to late-Oct 2008 <ul><li>On average, more than 50% decline was recorded in HK REITs during the period </li></ul><ul><li>Amongst others, Link REIT relatively outperformed the other REITs, with only 23.8% decline during the period </li></ul>Sunlight REIT 阳光房地产投资信托基金 Regal REIT 富豪产业信托 RREEF CCT REIT 睿富中國商業房地產投資信托基金 - 53.6% - 70.4% - 44.8% Source:
  54. 54. <ul><li>REIT in Mainland China </li></ul>
  55. 55. REIT in Mainland China <ul><li>To date, there is no setting up of REIT in Mainland China </li></ul><ul><li>Due to the slowdown of China economic growth, the macro-economic control is relaxed and measures are taken as follows:- </li></ul><ul><ul><li>Enable regional government to rescue the economy </li></ul></ul><ul><ul><li>Reduce the deed tax in relation to property transaction </li></ul></ul><ul><ul><li>Strengthen alarming system of property market </li></ul></ul><ul><li>Under such circumstances, in order to facilitate financing, it is expected the structure of REIT will be set up at the end of 2008 </li></ul><ul><li>Also, in order to reduce the exposure of risk from banks, the government is planning to securitize the assets, thus encouraging various methods of financing </li></ul><ul><li>Source: HK Wenweipo [2008-10-20] </li></ul>
  56. 56. REIT in Mainland China <ul><li>Problem faced by REIT in Mainland China </li></ul><ul><li>Setting up REIT-related limited companies and companies limited by shares </li></ul><ul><li>May result in conflicts with relevant provisions in Company Law and Securities Law. Also, setting up special purpose vehicle (SPV) to REIT IPO is still not passed </li></ul><ul><li>Problems faced:- </li></ul><ul><ul><li>In accordance with Company Law, the net asset value (NAV) of foreign investment shall not exceed 50% </li></ul></ul><ul><ul><li>Conflicts in profit exist in company management and asset management </li></ul></ul><ul><ul><li>Source: [2008-10-21] </li></ul></ul>
  57. 57. REIT in Mainland China <ul><li>Problem faced by REIT in Mainland China </li></ul><ul><li>Offshore REIT management company for REIT IPO </li></ul><ul><li>As stipulated in Securities Investment Fund Law of the PRC, the financial assets for investment shall be:- </li></ul><ul><ul><li>Publicly listed stocks and bonds </li></ul></ul><ul><ul><li>Other securities approved by regulatory bodies from the State Council </li></ul></ul><ul><li>To issue REIT in terms of securities investment fund may require amendment of relevant laws passed by the National People’s Congress </li></ul><ul><ul><li>Source: [2008-10-21] </li></ul></ul>
  58. 58. REIT in Mainland China <ul><li>Problem faced by REIT in Mainland China </li></ul><ul><li>Setting up unit trust of REIT in terms of trust basis </li></ul><ul><li>Despite less regulatory restrictions, there is no precedent for REIT IPO in stock markets </li></ul><ul><li>As stipulated in Trust Law, the single issue of trust shall not exceed 200 units </li></ul><ul><li>The regulatory bodies remain doubtful about the issuance of REIT in terms of trust basis </li></ul><ul><ul><li>Source: [2008-10-21] </li></ul></ul>
  59. 59. <ul><li>Managing a REIT </li></ul>
  60. 60. Managing a REIT <ul><li>Asset Management </li></ul><ul><li>Provide management services from </li></ul><ul><li>routine property and facilities </li></ul><ul><li>operations to decision making at </li></ul><ul><li>strategic levels </li></ul><ul><li>To maximize the net return and </li></ul><ul><li>enhance the capital value of the </li></ul><ul><li>property </li></ul>Risk Management Sustainable Development Property Portfolio Management Cash Flow Analysis Leasing Acquisition & Disposal of Assets Advice on Capital Market Activities Strategic Levels
  61. 61. Managing a REIT <ul><li>Property Portfolio Management </li></ul><ul><li>Diversification </li></ul><ul><li>Economy of Scale </li></ul><ul><li>Look for the best combination to maximize return and minimize risk </li></ul><ul><li>To formulate, implement and advise on policies and programs on portfolio level </li></ul><ul><li>To advise on financial viability of major renovation / redevelopment / disposals </li></ul>
  62. 62. Managing a REIT <ul><li>Strategy Planning & Settings </li></ul><ul><li>Strategic levels embrace posing the proper questions and seeking the answers to fulfill long-term decision making </li></ul><ul><ul><li>Increasing recognition of Portfolio Management’s importance in preserving and enhancing the value of properties. </li></ul></ul><ul><ul><li>Evolvement of Property Market </li></ul></ul><ul><li>Merge with Capital Market. </li></ul><ul><ul><li>Acquisition / Disposal Strategy </li></ul></ul><ul><li>Look global to maximize returns and diverse risks </li></ul>
  63. 63. Managing a REIT <ul><li>Cash Flow Analysis </li></ul><ul><li>To maximize the net return, whilst preserving and enhancing the </li></ul><ul><li>capital value of the property. </li></ul><ul><li>The return can be variously measured in terms of income and </li></ul><ul><li>income growth or capital appreciation or a combination of the two </li></ul>Decision Analysis Payback method Return on capital employed approach Discounted cash flow approach Net present value technique Internal rate of return approach
  64. 64. Managing a REIT <ul><li>Good Management </li></ul><ul><li>Portfolio and Asset Management expertise </li></ul><ul><li>Market knowledge – ahead and strategic </li></ul><ul><li>Transparency </li></ul><ul><li>Good understanding of the requirement of investors </li></ul><ul><li>Match with management objective. </li></ul><ul><li>Valuation Methods </li></ul><ul><ul><li>Net Asset Value (NAV) </li></ul></ul><ul><ul><li>Net Present Value (NPV) </li></ul></ul><ul><ul><li>Earnings Per Unit (EPU) </li></ul></ul><ul><ul><li>Funds From Operation (FFO) </li></ul></ul>
  65. 65. Managing a REIT <ul><li>REIT-related services in real estate industry </li></ul><ul><li>Due Diligence Purposes </li></ul><ul><ul><li>Valuation & Advisory Services </li></ul></ul><ul><ul><li>Consulting Services (including market studies) </li></ul></ul><ul><ul><li>Building Consultancy Services </li></ul></ul><ul><li>Pro-acquisition Purposes </li></ul><ul><ul><li>Asset / Property Management </li></ul></ul><ul><ul><li>Leasing / Agency </li></ul></ul>
  66. 66. <ul><li>Conclusion </li></ul>
  67. 67. Conclusion <ul><li>There is already the implementation of REIT in Japan, Singapore, Hong Kong, Taiwan, South Korea and Malaysia. It is foreseen that there would be more and more countries launching REIT in the very future but in a very cautious manner </li></ul><ul><li>Traditionally, REIT is accounted for high liquidity, tax benefit, transparency, high dividend yield, inflation hedge, lower risk and portfolio diversification. It could be the alternative to direct real estate investment </li></ul>
  68. 68. Conclusion (cont’d) <ul><li>Under the turmoil of Subprime crisis, the entire Asian REIT market, REIT IPO, REIT acquisition, market sentiment all turn sluggish and lose their impetus. The total market capitalisation of Asian REIT recorded a 50% contraction as of late Oct 2008 when compared to late Oct 2007 </li></ul><ul><li>After overcoming the regulatory impediments, the implementation of REIT in Mainland China is yet to be launched for greater financing opportunities </li></ul><ul><li>A strategic and specialized management of properties in the portfolio of REIT certainly adds value to the asset itself as well as investors </li></ul>
  69. 69. <ul><li>Q&A </li></ul>
  70. 70. <ul><li>Thank you </li></ul>