Tuesday, 30 May 2017

Limitations of Real Estate Investment Trusts

Written by Posted On Tuesday, 26 July 2016 12:05

Real Estate Investment Trusts (REITs) are businesses that purchase, offer, create and oversee property resources for various customers. They choose to qualify under certain assessment procurements to wind up proprietors of property and contracts, and to pay profits without earlier finding of corporate charges. REITs businesses fill in as a security and offer their items on all the principle stock trades in stocks. Cash is placed straightforwardly into the business through property or home loan.

Limitations

Listing in the Stock Exchange

The property business faces its own challenges e.g. expenses related to the listing in the stock exchange are substantial. Closed-end investment companies behave like stock. They issue an initial public offering after which shares are traded in the stock exchange where their value is purely determined by market demand. The trusts must be listed in the recognized stock exchange. Lands Securities is listed in the Financial Times Stock Exchange. Restrictions are also in place as to how many shareholders a trust can have as well as the types of shares they can offer. Prohibitions on the type of loans REITs can take is another condition that limits the operations of REITs. They for example cannot take out loans in which the interest charged reflects the profitability or success of the company.These restrictions have to a great extent contributed to its inability to cope with the current economic situation. The requirement to distribute 90% of its profits means it cannot save enough for difficult economic times. This has led to sourcing of funds from elsewhere including the disposal of assets and sale of equity.

Securities Issues

Land Securities was doing very well prior to the credit crunch with increasing profits, dividends and share prices. The tax exemptions seemed to have informed the huge risks taken by the company which was dismissive of the huge debt it had accumulated despite an impending slow down and rising interest rates. The effect of consumer confidence on commercial property performance has meant that serious economic problems inevitably filter into the property market. The opening up of the economic zones has meant that economic problems can easily be transferred from one country or region to another.

The Mid Western American mortgages are a case to point at in this respect. Lands Securities has been affected by many problems as result of exposure of banks to sub-prime mortgages. These problems include falls in retail experienced by most retailers with retail voids rising sharply. The experience with Lands Securities shows voids between tenants and administrators rising significantly.

The demand of office in London where Land Securities is a major player has also fallen. The Prime Central London index was down by 2% in the final quarter of 2007 and down by 1.5% in the first quarter of the following year. (Office space demand fell sharply in the fourth quarter of 2008 to 7.4 billion from 17.5 billion in the same quarter of 2007. The void rate experienced by Lands Securities during the credit crunch was 6.8 %.

expensive to Convert

The issue of converting is also a very expensive and complicated helpdesk guide process especially for open ended businesses. Lands Securities for example incurred a lot of costs in complying with the requirements for conversion which included the complete valuation of the whole portfolio. It estimated the total cost of meeting the requirements at 300 million.

Property being held for Long

Yet another requirement prevents the movement of assets outside the ring fence which means a property has to be held for three years to be exempt from tax. This presents a challenge especially when dealing with recession where maneuvers to generate quick profits have to be made. It seems these restrictions without the anticipation of problems it would present during difficult times of economic recession. Methods of resolving the crisis have to include the permission to issue shares instead of a dividend to count towards the 90 % requirement. This percentage should also be reviewed down to reduce liability in terms of cash flow.

 

 

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