A Brief History of REITs
By Tam Ging Wien
In the 1800s, trust structures (known as the Massachusetts Trust) were used by the wealthy in the US to avoid double taxation. As trusts were not corporates, they did not attract corporate taxes as long as the income derived was distributed to their beneficiaries.
However, in the 1930s the US Supreme Court ruled that trusts which were used as passive investment vehicles were not tax exempt and were required to pay corporate taxes. Opponents of this tax rule lobbied legislation for nearly 30 years to have this double taxation removed.
Finally, after extensive lobbying, the foundation for the introduction of REITs was laid on the 14th of September 1960 when then President of the United States Dwight Eisenhower signed into law the Real Estate Investment Trust Act (REIT Act) as an amendment contained in the Cigar Excise Tax Extension of 1960. One of the main provisions unique to the REIT Act was to classify REITs as pass-through entities to qualify them for tax exemption with the condition that it pays out at least 90% of its taxable income to shareholders in the form of dividends.
This was done due to the high demand of real estate funds from the investment community.
As a result of this amendment, all investors were given equal opportunity to access and invest in large-scale, diversified property portfolios in much the same way as other liquid securities.
In September of the same year, the National Association of Real Estate Investment Funds was founded to promote REITs as the preferred real estate investment vehicle. The following year it changed its name to the National Association of Real Estate Investment Trusts (NAREIT).
The first REITs in the 1960s were non-listed REITs such as Bradley Real Estate Investors, Continental Mortgage Investors, First Mortgage Investors, First Union Real Estate, Pennsylvania REIT and Washington REIT.
In 1965, Continental Mortgage Investors – which was a mortgage REIT – became the first REIT to be listed on the New York Stock Exchange (NYSE).
In 1971, Australia introduced Listed Property Trusts (LPTs), which was later renamed REITs in March 2008 to be consistent with international terminology.
Japan was the first market in Asia to introduce REITs in December 2001; it has since grown to be the largest REIT market in Asia. REITs listed in Japan are known as J-REITs.
This was followed closely by Singapore. Singaporean based developer Capitaland attempted to launch Singapore’s first REIT – SingMall Property Trust – in November 2001. The IPO was offered at S$1.00 per share and had a forecasted dividend yield of 5.75% and 6.05% for 2002 and 2003 respectively. The IPO was not well received and was subsequently scrapped due to lack of investor awareness and poor interest.
To make the REIT more attractive to investors, Capitaland had to restructure and rebrand SingMall Property Trust as CapitaLand Mall Trust. With this effort, Capitaland finally listed the first S-REIT on the SGX in July 2002 with an attractive yield of 7.1%. CapitaMall Trust began with three malls namely Junction 8, Tampines Mall and Funan the IT Mall. In the same year, Ascendas REIT followed.
By June 2005, seventeen J-REITs have been listed on the Tokyo Stock Exchange and five S-REITs listed on the Singapore Exchange with a market capitalization of around US$ 19.9 billion and US$ 5.2 billion respectively.
Following on the success of Japan and Singapore, Taiwan saw the launch of its first REIT in March 2005.
In Hong Kong, Link REIT’s IPO was mooted in 2004 by the Hong Kong government through the assembling various assets from the Hong Kong Housing Authority, including 151 shopping malls – mainly within public housing estates – and 79,000 parking spaces. After listing, Link REIT would no longer require approval from government to increase rents for new leases of its properties.
Tenants who feared that rental prices would skyrocket after Link REIT’s listing fought back with legal action. The most prominent was Lo Siu-lan, who challenged the legality of the proposed property divestment, charging the Hong Kong Housing Authority of having “breached its duty under the Housing Ordinance to provide housing to people in need”.
After these initial legal difficulties, the Court of First Instance and the Court of Appeal finally rejected the judicial review. After more than a year of delay, Hong Kong finally launched the Link REIT in November 2005, the first HK-REIT and the largest REIT IPO in the world at HK$22.2bil (US$2.86bil).
Link REIT is currently the largest REIT in Asia in terms of market capitalisation at HK$182.67bil (US$23.28bil).
While having LPTs since 1989, Malaysia liberalised its REIT framework in early 2005. Axis REIT was the first M-REIT listed under the new REIT guidelines in August 2005.
Thailand also established REITs in 2005, while in the Philippines, the Real Investment Trust Act (Reita) became law only in 2009.
Europe was a little slow to follow on the rising Asian REITs trend. The United Kingdom (UK) laid the foundation for REITs in the Finance Act 2006 which came into effect in January 2007. Soon thereafter, nine UK property-companies converted to REIT status, namely British Land, Hammerson, Land Securities, Liberty International, Slough Estates and Brixton (now collectively known as "SEGRO"), Great Portland Estates, Primary Health Properties and Workspace Group.
Germany followed suit by enacting G-REIT laws in June 2007, retrospective to January 2007.
India will welcome its first REIT listing in 2019 with Embassy Office Parks REIT, a joint venture of US private equity firm Blackstone Group and India-based real estate developer Embassy Group.
Other countries, such as China, are also considering and deliberating on the legislative frameworks for setting up REITs.
The rapid growth of REITs worldwide its testament to its growing popularity and benefits it brings to the investment community.