Real Estate Investment Trusts

REITs are corporations that own and manage a portfolio of real estate properties. Some requirements to qualify as a REIT and gain pass-through entity status: Be structured as corporation, business trust, or similar association Offer fully transferable shares Pay dividends of at least 90%of the REIT's taxable income Derive at least 75 percent of gross income from rents or mortgage interest

Closed-end, it can only issue shares to the public once and can only issue additional shares, which dilutes the stock, if current shareholders approve it. Open-ended REITs can issue new shares and redeem shares at any time.

REIT & Property Valuation

NAV = Portfolios Assets Liabilities Where there is no objective method of calculating the value of an asset, the fund manager's own valuation methods subject to a fund's directors or trustees is usually used. Land Valuation 1. Direct sales comparison: the most reliable method of land valuation, however reliable sales data is not always available. 2. Abstraction: the analysis of the improved property sales data. Land Value = Sale cost depreciated replacement cost of the improvements 3. Anticipated Use or Development: value land in transition from agricultural to other uses; Land Value = projected sales prices total development costs 4. Capitalization of Ground Rent: valuation based on future income potential 5. Land Residual Procedure: Land Value = Income Multiple x (Property Net Income Income attributable to improvements) Valuing Real Estate Property 1. Income capitalization approach

a.

b. Similar to Equity Valuation c. NOI = Revenue Operating Cost Property Tax d. Cap Rate = Expected Rate of Return NOI Growth 2. Sales comparison approach a. Comparables b. Adjustment for: i. Age ii. Market Condition iii. Location iv. Physical Feature v. Terms/Condition of sale 3. Cost approach a. Principle of substitution: no buyer will pay more for a property than land value + improvement value depreciation b. Often most accurate value when the property is new.

REITs in Indonesia
PT Lippo Karawaci is the first company in Indonesia that publicly issued a REIT, First REIT in SGX. First REIT has NAV of S$1,018.3mn and manages 10 Siloam Hospitals real estate in Indonesia, 3 healthcare real estate in Singapore and 1 in South Korea.

How REITs Operate

REITs earn money from rented space or sales of property. The preferred method for measuring REIT earnings is called funds from operations (FFO): Net Income gains (plus losses) from property sales + D&A

Why Invest in REITs

publicly traded: liquidity portfolio balancing and diversification. ongoing dividend income +long-term capital gains pass-through taxation (maintained by paying out 90%of net income) REITs rental incomes adjust with the cost of living->less vulnerable to inflation