building real estate investment trust in hanoi xây dựng quỹ đầu tư tín thác bất động sản tại hà nội_noi_dung

NATIONAL UNIVERSITY, HANOI
SCHOOL OF BUSINESS

HO LE QUY

BUILDING REAL ESTATE
INVESTMENT TRUST IN HANOI

Major : Business Administration
Code : 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisor: Dr Pham Quy Long

Hanoi – 2010


TABLE OF CONTENT
ACKNOWLEDGEMENT........................................................................................ i
ABSTRACT ............................................................................................................. ii
TÓM TẮT ............................................................................................................... iv
LIST OF TABLES ................................................................................................... x
LIST OF FIGURES AND GRAPHS ...................................................................... x
BEGINNING ......................................................................................................... 12
a. Introduction.................................................................................................... 12
b. Proposal .......................................................................................................... 13
CHAPTER 1. OVERVIEW OF REAL ESTATE INVESTMENT TRUST .... 18
1.1 Real estate investment Trust (REIT). ......................................................... 18
Concept. .................................................................................................... 18
1.1.1 ................................................................................................................. 18

1.1.2 REIT classification ................................................................................ 21
1.1.3 Some operation rule of REIT ................................................................ 33
1.1.4 Some Macroeconomic Factors affect to REIT ..................................... 34
1.2. Differences between REIT and other real estate investment companies .. 34
1.2.1 REIT certificates have the same nature with bond .............................. 34
1.2.2 Dividend payment .................................................................................. 35
1.2.3. Tax ......................................................................................................... 35
1.2.4 Management .......................................................................................... 36
1.2.5 Main business activities ......................................................................... 36
1.3. Benefits of REIT .......................................................................................... 37
1.3.1 Benefits of REIT to investors: ............................................................... 37
1.3.2 Benefits of REIT to economy ................................................................ 39
1.4. EXPERIENCE LESSONS FROM BUILD AND DEVELOPMENT
PROCESS OF REIT IN COUNTRIES ............................................................. 42
1.4.1 Introduction of some REIT on the world ............................................. 42
1.4.2 Success of REIT in countries................................................................. 49
1.4.3. Experience lessons ................................................................................ 50
vii


Conclusion .......................................................................................................... 51
CHAPTER 2. HOUSING MARKET AND FINANCIAL SOURCE FOR REAL
ESTATE BUSINESS IN HANOI .......................................................................... 52
2.1 HOUSING MARKET IN HANOI CITY .................................................... 52
2.1.1 Overview of Vietnam’s property market ............................................. 52
2.1.2 Property market in HANOI .................................................................. 53
2.2 Financial sources for real estate business ................................................... 63
2.2.1 Overview of real estate finance ............................................................. 63
2.2.2 The Major capital sources on primary real estate market. ................. 67
2.2.3 Difficulties in financing for real estate projects ................................... 69

2.2.4 Disadvantages in real estate trading caused by lack of monetary
supply .............................................................................................................. 73
2.3 STUDY REIT (REAL ESTATE INVESTMENT TRUST) AND
NECESSITY OF ESTABLISHING REIT IN HANOI .................................... 75
2.3.1 Existence of REITs in Vietnam ............................................................. 75
2.3.2 Differences between REIT and other Investment Fund in Vietnam. .. 75
2.3.3 Necessity of establishing a model of REIT in Hanoi ............................ 76
Conclusion: ............................................................................................................ 76
CHAPTER 3. SOLUTIONS FOR ESTABLISHING REAL ESTATE
INVESTMENT TRUSTS IN HANOI ................................................................... 78
3.1 PROPOSAL OF REITS MODEL IN HANOI ............................................ 78
3.1.1. Types of REITs should be established ................................................. 78
3.1.2 Framework of organization................................................................... 79
3.2 FOUNDATION BASIS AND OPERATIONAL PRINCIPLE ................... 82
3.2.1 Foundation basis of REIT Company .................................................... 83
3.2.2 .Operational principles of REIT ........................................................... 84
3.2.3 Operation of REIT (General) ................................................................... 85
3.2.4 The REIT ratings methodology ............................................................ 85
3.3 SUPPORTING SOLUTIONS ...................................................................... 87
3.3.1 Real estate market consolidation .......................................................... 87
viii


3.3.2 Consolidating securities market and making condition for
development of professional knowledge on securitization............................ 88
3.3.3 Building up and promulgation law on REIT........................................ 89
CONCLUSION ...................................................................................................... 94
REFERENCES ...................................................................................................... 96
APPENDIX 1 ......................................................................................................... 98
Organizational Rules in some countries ............................................................... 98

APPENDIX 2 ....................................................................................................... 101
APPENDIX 3 ....................................................................................................... 102

ix


LIST OF TABLES

Table 1.1

Dividend versus risk free rate

Table 2.1

Statistics of apartment for sale on the market

Table 2.2

Statistics of for lease apartment market (6/2009)

Table 2.3

International standard hotels in Hanoi

Table 2.4

Situation of real estate loan balance in Hanoi

Table 3.1

Some activity features of private and public REIT

LIST OF FIGURES AND GRAPHS
x


Figure 1.1 Model of REIT organized as a fund
Figure 1.2 Model of traditional REIT
Figure 1.3 UPREIT Model
Figure 1.4 DOWNREIT Model
Figure 1.5 Pacific REITs by sub-sector
Figure 1.6 Total numbers of REITs by country
Figure 2.1 Figure 2.1 Supply forecast, 2009 – 2012
Figure 2.2 Future rooms supplies in Hanoi
Figure 2.3 Stock and New Supply, 2009 - 2012
Figure 2.4 Capital Structure
Figure 2.5 Capital demand
Figure 3.1 REIT model like a company in Vietnam
Figure 3.2 Suggested REIT model in Vietnam

xi


BEGINNING

a. Introduction
With the transition of the economy from centralized planning economy to the
economy under market mechanism, understanding and awareness of land
management, housing development and real estate market in Vietnam has changed a
lot. Real estate market has achieved the remarkable development steps in recent

years thanks to the socioeconomic development of Vietnam and policies of housing
development and use of land by the government.
According to statistics by General Statistical Office, the average population of
Hanoi City in 2010 is 6.5 million. Hanoi City is one of the largest and most
dynamic economic centers in Vietnam with annual GDP making up for 12% of
national GDP and GDP growth rate of more than 11% per year [22]. Hanoi City has
been attracting a large number of domestic and foreign investors, businesses and
immigrants in recent years. Therefore, the real estate market in Hanoi City is one of
the most vibrant markets in Vietnam. In fact, the state has many efforts but the real
estate market is just only at the initiation stage with potential risks and unstableness
due to the inadequacy between the orientation of land use strategy, master planning
and legal framework and tools supporting the market.
Basically, the real estate market in Vietnam still focuses primarily on land use rights
transfer business. In addition to the actual needs on real estates for residents and
trade business, there are so many needs about investment in land of speculators.
Those who invest in land normally transfer land use rights in the suburban regions
to procure imparity shares when the land price increases as the speculators do.
According to the Department of Natural Resources and Environment of Hanoi City,
from 2000 to late 2009, there were 2,300 real estate investment projects with a total
area of used land up to 11,500 hectares. However, most of these projects have not
been completely implemented by investors.
In other words, there is no complete real estate product such as infrastructure;
housing and other real estate was conducted to generate profits in the primary

12


market. Just in fact, over the last time, for the real estate market, activities are
mainly the transfer of land use rights for business on the secondary market.

This situation makes potential risks arise and be serious for immature market,
because this situation could lead to too high and impractical real estate price, which
is out beyond the ability of payment of those with actual housing needs and
enterprises trading real estate. It will be more risk if many individual or legal entity
investors rush into real estate investment but have no suitable and careful business
strategy, while sources of land are limited. Moreover, in recent years, people tend to
change the way of putting aside unused money and savings from gold or cash to real
estate investment with expectation of earning more profits than saving. Just this
reason made the market "hot" in 1995, 2000, 2002 and 2007
Since 2004, the government issued some policies and regulations to help real estate
market to develop strongly and limit risks that may occur. Since there are Decree
No. 181/ND-CP dated October 29th 2004 of the Government with regulations
related prohibition against the dividend into plots for background sale, the real
estate market in Hanoi City as well as many other locals has been signal of
slowdown, the land prices reduces, particularly prices of agricultural land, and the
case of illegal transfer reduces visibly, Decree No 69/2009 ND –CP, and Decree No
71/2010 ND-CP. In addition, many real estate investors have gradually changed
their business strategy to invest in the secondary market with a long-term goal
because they believe that the real estate market continues to be vibrant and full of
promises of good prospects in the coming period.

b. Proposal
Main concern of real estate investors is funding capital. The enterprises trading in
this field often require a large amount and long-term capital. However, regarding
the real power of investors in the real estate market now, the majority are
unqualified on financial capacity to conduct projects by themselves to create
complete products for the primary market. Most of investors conduct the projects in
13

small scale, but can only perform the investment preparation phase, or
compensation of agricultural land. Funds to build technical and social
infrastructures, houses for sale must base on the advanced capital sources of buyers
and credit sources of commercial banks.

Generally, most of the real estate projects are funded from (i) the capital source of
investors - but very small, (ii) the advanced capital sources of buyers and (iii)
medium-term and short-term credit sources of commercial banks.

However, these financial sources always are limited while demand for capital
increases constantly. Moreover, capital market has not kept a key role in developing
the real estate market for years; it was due to the lack of financial instruments
supporting real estate business activities.

We can see that the investors have not been enough financial capacity to complete
the real estate projects. When the government issued policies and regulations stated
above, the real estate investors can resolve the difficult problem about capital to
carry out the projects.

In fact, many individual or legal entity investors want to invest in the real estate
market but do not have enough funds to buy wholly a single product and on the
other hand, they also are interested in the liquidity in real estate business and the
demand of investment diversification into other assets

Therefore, the author believe that, one of positive solutions to resolve the problem
of capital markets in real estate market is to find mechanisms and tools to mobilize
capital effectively that can help to connect real estate market with capital flow
channels from financial markets.

14

For that reason, the author want to mention the review of REIT model with strategy
to mobilize capital broadly in the public who have needs of real estate investment
but with a fixed capital. This will contribute to limit the risks related to the land
speculation as well as risks related to bank credit in the area of real estate
investment financing. The author want that through the project "Building Real
estate Investment Trust in Hanoi city", further researches shall be suggested to find
new solutions of mobilizing sources of capital funding for the real estate market of
Hanoi City.

c) Research purposes
This

project

will

focus

on

answering

02

big

questions

as

follows:

i Why REIT can be a long-term fund mobilization model that suitable for real

estate market in Hanoi?
ii. The necessary conditions for implementation of the REIT in Hanoi?
d) Scope of research
Because the form of Real estate Investment Trust is new to Vietnam, but in fact it
has been applied in many countries on the world such as USA, United Kingdom,
Japan, Singapore ... the research project is only focused to:
 Areas of research: Hanoi City
 Real estate business activities (including actual situation of real estate
market, needs of product development and funding capital sources ...) at the
main primary real estate market segment in Hanoi City. This research does
not include researching the secondary real estate market, the laws and
regulations, policies related to real estate business activities.
 State and Joint-stock banks, foreign and state investment funds, private and
foreign real estate companies running in Hanoi City
 Some typical REIT models in Asia, American and European
 Angle of real estate developers but not go into the details of going into
professional knowledge technical on securitization.

15


This research is studied in order to identify the REIT model to answer the issues
brought out. The recommendations on REIT establishment in this study are
strategically ideas. The proposal of building REIT in Hanoi City is seen as one of

solutions of mobilizing sources of capital funding for the real estate business
activities.
Therefore, the scope of research of this research will include bringing out the
solutions of models, operation principles of REIT in Hanoi and assistance measures.
These recommendations should have further research on many aspects to apply in
practice.
e) Research method
This is a qualitative research on the theories, which have previous solid foundation.
These theories were searched and exploited based on the data collected
systematically. Based on the establishment of specific research goals, the author
uses many different methods. Among them, the main method used is the analysis
method to clarify the needs of real estate products and define the model of new
capital mobilization tools to meet the needs of real estate investment capital. On the
other hand, the analysis makes clear the benefits of new investment channel so that
investors can use when they want to invest in real estate business. In addition, this
research uses the comparison method to compare among REITs in the countries on
the world to draw the practical lessons when applying to Vietnam. Other support
methods such as experience survey, depth interview are used to clarify more clearly
the issues on research practice. In this research, the author use most of secondary
data resources – namely the data got in the past.
These data will be used mainly in chapter 1 and chapter 2 of this research, including
the theoretic documents from of the foreign author and domestic data from
specialized documents, newspapers, website...

16


f) Structure of research
This research is structured into 03 chapters (not including the Introduction and
conclusion) as follows:

Chapter 1. "Overview of Real Estate Investment Trusts (REITs)" will outline
the location of REIT in real estate financing market, brings the basic concept of
REIT to readers and summarizes the operation principles of REIT and the benefits
brought by REIT; concurrently bring out the difference between REIT with the
normal real estate business companies.

Chapter 2. "Operation of real estate market and funding sources for real estate
business in Hanoi City." In this chapter, the author mentioned the situation of real
estate market in Hanoi City and needs of market development in the future. Also,
the author will analyze the main funding sources for the real estate market, the
difficulties on funding sources and the disadvantages due to lack of tools of
appropriate capital mobilization tools. Since then, the author will survey and
research REIT model and define the need of piloting to form REIT in Hanoi City.

Chapter 3. "Solutions for establishing real estate investment trusts in Hanoi
City." Through the analysis results in Chapter 01 and 02, the author will bring out
the proposal model, legal basis for operation and needed support measures to build
REIT in the current conditions.

17


CHAPTER 1.
OVERVIEW OF REAL ESTATE INVESTMENT TRUST

1.1 Real estate investment Trust (REIT).
1.1.1 Concept.
“REIT (Real Estate Investment Trust) is a type of investment company
specializing in purchasing, development, management and sale of real estate
based on the professional management of real estate portfolios. This is a form

of business investment in the real estate market through kinds of possessive
assets or debt security assets that organizations and individuals can participate
by purchasing or selling shares.” [1]
According to Barron's Real Estate Dictionary: “Real Estate Investment Trust:
an investment trust that owns and manages a pool of commercial properties
and mortgages and other real estate assets; shares can be bought and sold in
the stock market”
“Individuals can invest in REITs either by purchasing their shares directly on
an open exchange or by investing in a mutual fund that specializes in public
real estate. An additional benefit to investing in REITs is the fact that many
are accompanied by dividend reinvestment plans (DRIPs). Among other
things, REITs invest in shopping malls, office buildings, apartments,
warehouses and hotels.
Some REITs will invest specifically in one area of real estate - shopping
malls, for example - or in one specific region, state or country. Investing in
REITs is a liquid, dividend-paying means of participating in the real estate
market.” Investopedia.com

18


Business operation of REITs often generates income from the rental property
and capital gain when selling the property. An advantage of investment in
REITs is the ability to transfer invested assets into cash quite easy compared
to owners of real estate in private form. Another reason may account for
investment in REIT is that REIT‟s stocks or REITs certificates are mainly on
transacted on focused transaction floors. Here, REIT's stocks purchase and

Comment [V1]: Dịch bằng google à???

sale is much easier compared to purchase and sale respective property directly
on the property market. One more advantage when investing in a REIT is that
investors can re-invest dividend to increase profits on investment.

REIT operates as an intermediary organization and distributes most income
for investors. To be eligible for the preferable tax treatment REIT must be
satisfied multiple standards, limitations and conditions including the standard
of shareholders, assets and income...

Currently, REITs are typically organized in the following 3 forms:

I.

Comment [V2]: Không rõ Quý định viết về hình
thức tổ chức hay chức năng đặc điểm, vì nội dung ở
dưới lẫn lộn giữa hai vấn đê này, xem lại nhé

A business or an entity called Trust, from which investors buy
shares because of their believing in professional, experience and
prestige of the REIT managers, and trustee for the REIT to invest in
this property to make profit.

II.

REIT help mobilize long-term capital market for poverty market
development through conditional tax incentives

III.

REIT is any enterprise which exists to meet the requirements and

regulation has been mentioned above.

In summary, the research on REIT, the related terms are as follows:

19

Comment [V3]: Đây có vẻ là chức năng/đặc điểm
chứ khơng phải là hình thức tổ chức của REIT


 Real estate properties: are properties that has fix physical location and
not movable, including land, houses, construction works associated
with land, including assets associated with the houses, buildings and
other properties associated with land. Real estate market is place or
means for purchasing and transactions of real estate and related
properties. [2]
 Real estate business activities: includes real estate business and
property business services [2]
 Real estate business: is the investment to create, buy, receive, transfer,
lease, financing lease real estate for sale, transfer, for rent, lease, and
financing lease for the purpose of the profit.[2]
 Real estate business services: is the business support the property
market and real estate, including brokerage services, property priced
valuation, property transaction floor, property consultancy, real estate
auction, real estate advertising, property management.[2]
 Real Estate Investment Trust – REIT: “A corporation or trust that uses
the pooled capital of many investors to purchase and manage income
property (equity REIT) and or mortgage loans (mortgage REIT). REITs
are traded on major exchanges just like stocks. They are also granted
special tax considerations. REITs offer several benefits over actually

owning properties. First, they are highly liquid, unlike traditional real
estate. Second, REITs enable sharing in non-residential properties as
well, such as hotels, malls, and other commercial or industrial
properties. Third, there's no minimum investment with REITs. REITs
do not necessarily increase and decrease in value along with the
broader market. However, they pay yields in the form of dividends no
matter how the shares perform. REITs can be valued based upon

20


fundamental measures, similar to the valuation of stocks, but different
numbers tend to be important for REITs than for stocks.”[3]

1.1.2 REIT classification
1.1.2.1. Classification by investment subject
There are three types of REIT: equity REIT, mortgage REIT and hybrid REIT
 Equity REIT - Equity trust
“Equity REITs invest in and own properties (thus responsible for the equity or
value of their real estate assets). Their revenues come principally from their
properties' rents. “[4] REITs issue stocks making common fund (blind-pool) in
order to invest in large number of unfixed areas and form real estates in
unlimited period. Since then, REITs earn their income from real estate rental
and distribute them as dividend for shareholders. A REIT in the true sense of
the word in theory will be investment in real estate or loan security property
(hereafter called security property) stated in detail in the prospectus of REIT
when issuing stocks. These investments shall not change all the time. Owing
to that, investors could carry out assessing quality of the real properties in that
portfolio before deciding to invest in REIT. Conversely, a common trust fund
can mobilize starting capital in advance and then find security real estate or

property for investment. Some REITs are organized as specialized investment
funds or trusts. Unlike common trust fund, trust reselling and renting will
invest in land below building projects and then rent back them out to seller.
These specific REITs get bigger income from properties rental or increase
value of reinvestment those buildings. In fact, REIT can rent professional
property management companies to manage the properties to make income
from rental and provide related services for renters.
 Mortgage REIT - Mortgage trust

21


“Mortgage REITs deal in investment and ownership of property mortgages.
These REITs loan money for mortgages to owners of real estate, or purchase
existing mortgages or mortgage-backed securities. Their revenues are
generated primarily by the interest that they earn on the mortgage loans” [4]
These REITs are highly sensitive to credit quality of renters. Some mortgage
REITs restrict their investment items in construction and short-term security
properties; some others only invest in long-term or eternal security property,
and some mortgage REITs invest in both two kinds of these security
properties. Another kind of mortgage fund - dedicated mortgage fund - is
organized to provide companies specialized in development of real estate
projects with security loans to a defined project. In brief, mortgage REIT lend
money to real estate's owners or exploiter, for example, REIT lend to buy
back exploitation right of a hotel in a fixed number of years.
In several years recently, many mortgage REITs started issue bond securitized
with real estate mortgage loans (Collateralized Mortgage Obligations CMOs) with a lower interest rates than those of a loan with security property
or mortgage-backed pass-through certificates required of issuing by REIT to
guarantee for correlative CMOs.
 Hybrid REIT - Hybrid trust

“Hybrid REITs combine the investment strategies of equity REITs and
mortgage REITs by investing in both properties and mortgages”.

[4]

These REITs can be distinguished by different characteristics, such as of
closed-end REIT or open-end REIT. With closed-end REIT, the number of
shares in the Initial Public Offering is limited to protect shareholders from the
drop of dividend of common stock and value of stock in the future. Fact
shows their methods of gaining profit are easier to predict and the price
fluctuation of stock reduces. On the contrary, with open-end REIT, new
22


shares shall be issued and sold when REIT discover new investment
opportunities. Although new shares will make reduction of income of present
shareholders, managers and shareholders still believe that basically, total
value of a share is higher because of additional investment items.
Hybrid REITs can be distinguished based on REIT's operation level and
period. Unit trusts with defined operation period are established as investment
tools with capacity of liquidity by themselves; properties of the fund must be
liquidated and then income must be distributed to shareholders at a defined
time. In these cases, properties must be taken back in many different periods,
normally from 4 to 15 years, then these properties will be sold and income
will be distributed to shareholders when the fund is liquidated. Theoretically,
advantage of a unit trust with defined period is price of REIT's share in
accordance with present value of the property because investors can estimate
quite exactly the balance of correlative property. REITs without defined
period have eternal operation period and characteristic of capacity of
reinvestment in any trading or financial activities for new or present

properties. To maintain their condition, these REITs must distribute most of
cash flow gained from renting real estate or interests paid for shareholders.

Hybrid REITs also can be distinguished based on "lever effect". When a lever
REIT buys back property, REIT will find a loan to sponsor for that property.
Normally, the amount of sponsoring money can reach 90% value of the
purchased property. Conversely, non-lever REIT will not make the most of
loan sponsoring items to invest in obtained property. Then, REIT will buy
property by cash or invest its fund in security property.

23


1.1.2.2. Classification by organization

REIT organized as a company (legal entity REIT)

This REIT is formed following Enterprise Law as a company with Board of
manager or Trustees elected by shareholders. REIT‟s stock can be traded on
big securities exchange floors, at both primary and secondary market.
Basing on management purpose, this type of REIT can be classified into two
subgroups as follows:
- Subgroup 1: Self-managed REIT
This type of REIT is applied in America, Western Europe nations and Japan.
This REIT often self-manages REIT‟s property to gain profit. Related legal
regulations in these nations are very strict to criterion for Board of Manager
and operational staffs of these REIT. They must have suitable professional
knowledge, experience and prestige in financial and real estate areas; they
must not have personal or investment relations that can bring unfair business
decisions

- Subgroup 2: REIT managed by a hired Assets management company
This type of REIT is rather common in many countries. REIT entrusts or
mandates a professional real estate management company (hereafter-called
management company) to carry out investment activities. Board of manager/
trustees is restricted in scope of activity following contract with Management
Company and supervisory bank and also in making decision of investment
strategy, business plan, dividend policy…
In this case, the income gained from selling REIT‟s shares must be divided
into two parts. One is for investment item in selected supervisory bank; the
very small part remaining is used for paying management costs.

24


Like banks, real estate management companies are formed with a close
procedure sequence ensuring special criteria and conditions. Activities of
these management companies are controlled and supervised by both trustees
and representative of shareholders and authority supervisory agency
(normally a bank selected and appointed by government) with support from
related agencies and organizations such as audit companies, property
assessment organizations.
Additionally, in some cases, REIT organized as a company can be the very
property management company
 REIT organized as a fund
This type of REIT is a form of cooperation or association of investors who
want to mandate their sum of investment contribution money in real estate
business. This type can be described with following diagram:

25

Figure 1.1: Model of REIT organized as a fund: [1]
State
authority

Sponsors

Fund
management
company

Supervisory
organization

REIT

Assessment
organization

State
authority
Properties
management
company

Real estate

REIT
subsidiaries

Real estate

Audit
company

Consultant
organization

Source:
The management company on behalf of REIT will conduct all REIT‟s
commercial transactions. The relation between investors and management
company bases on the control of fund management trust contract

This type of REIT is quite similar to the mutual fund governing business
activities on securities in America and some other countries on the world. At
present, securities investment funds operating following Vietnam Securities
Law are similar to this type.
This type of REIT must be participated by following parties and sponsors:

26


 State authorities : be responsible for licensing and monitoring
 Individual or legal entity investors: who invest their capital to REIT
 Management companies: Management Company: Joint Stock Company
or Limited company has sufficient conditions to perform fund
management services. These companies on behalf of REIT will conduct
all commercial transactions of REIT such as preparing portfolio,
carrying out investment plans… A fund management company can
establish and manage many different funds at the same time.

 Sponsor: normally, fund management companies are concurrently
sponsors or supporters for forming REIT
 Fund: sum of money contributed by investors and trusted to
Management Company to conduct investment to make profit. This sum
is income arising from selling REIT‟s shares for investors.
 Trustees and guardian: can be one person, a group or an organization
(bank

or

trustee

company)

meeting

requirements.

They are

representative who are responsible for looking after, supervising and
protecting property, benefit of investors.
 Auditors, valuators or assessors.
 Special organization (Special Purpose Vehicles - SPV): like a
subsidiary company that is rather common in Vietnam. REIT invests to
establish this SPV or REIT together with other investors invests
separately in special property. The property condition of these SPV will
not be shown in the REIT's balance sheet, so SPV is called "off–
balance–sheet companies"
 Consultant organization in real estate and properties management

market.

27


1.1.2.3. Classification by operation structure
Traditional REIT

Traditional REIT usually holds directly its properties, while UPREIT and
DOWNREIT (will be mentioned below) hold REIT's properties through
partners. Operation of traditional REIT is described as follows:
Figure 1.2: Model of traditional REI [1]

Shareholders of
REIT

Profit

Investment

Rental income

REIT

Properties
management
contract

Properties
management

company

Management
Own

Rent
contract

Real estate

Renter

28

Rental


UPREIT
“This is an operating partnership in which the partners of one REIT team up
with the principles of another, newer REIT. For interests of both parties in the
operating partnership, the partners from the older REIT contribute the
properties, while the new REIT contributes the money from its public
offering. After a given period of time has passed, often one year, the partners
are allowed to have the same liquidity as the REIT shareholders through
selling their pieces of their partnership for either cash or REIT shares. Also,
when a partner in this partnership possesses the units until death, the federal
estate tax allows the beneficiaries to sell the units for cash or REIT shares
without paying income tax.” [5]
In general, when participating in UPREIT, REIT's partners move towards IPO
(Initial Public Offering) and the gained income must be contributed to

UPREIT (normally used to improve or upgrade present properties or
restructure loans of present partners). The initial partners bring their
properties in cooperation to get income certificates (called Operating
Partnership Units – OP Units) in transition period. After a period, normally
one year, these OP certificates can be sold or exchanged with REIT's shares.
OP certificates often are valued at equivalent level of REIT's shares and also
OP can be exchanged in securities market, except UPREIT is a private REIT.
To UPREIT, all partners have responsibility limited corresponding with
contributed capital. REIT's partners are always main partner with contributed
capital affected.
Present cooperation organizations can get their interests from the exchange
between properties and OP certificates because when selling properties for
UPREIT, taxable items payment can be postponed until these OP certificates
are changed to cash or shares.
This REIT is also a solution that some companies want to participate to be
applied regulations for REIT, use to conduct trade activities, merge present

29


properties to transfer properties in order to diversify portfolios without issuing
shares or borrowing, or carrying out payment in big scale at a time.
Operation of UPREIT is described as follows:
Figure 1.3: UPREIT Model: [6]

All real estate
contributed to OP

Own and manage

Business cooperation contract BBC
(OP)

Properties
contribution

Initial
Partner
Asset
Owner

Initial
Partner
Asset
Owner

OP Certificates

Cash contribution

Cash or
share of
REIT

Initial
Partner
Asset
Owner

OP

Certificate
s

30

REIT