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 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 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 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 98 Organizational Rules in some countries 98 APPENDIX 101 APPENDIX 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 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 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 3.3.3 Building up and promulgation law on REIT Analyses above emerge a demand of a sufficient legal framework for REIT Actually, some new pilot models (such as local development investment funds), after years running but there has not been a legal framework carrying on activities, have to borrow legal regulations for similar organizations, enterprises to operate They always cope with difficulty in orienting operation as well as organizing system or applying labor and wage policy because of lacking legal regulations for forming of investment funds, except of securities investment funds with present regulations, but cannot apply for REIT For securities investment funds and fund management companies established following Vietnam Securities Law, it is impossible to invest more than 10% total assets value of closed-end fund and capital of open-end fund in real estate At present, all the funds diversified portfolio in listed and unlisted stocks and concentrated in stock trading only In the long term, for existing and development of REIT in Vietnam and attracting investors, Vietnam government should promulgate law on REIT, other law related securities market, tax also should be corrected in accordance with specific properties of REIT Concurrently, it is necessary to have law to protect investors participating in REIT It is important that these laws need to guarantee the transparence of information and tax preference also Although this research project brings out proposal of building up and promulgation law on REIT, in the short term, we can promulgate own Decree for REIT Below are some proposals about basic content:  Object, adjustment scale: This Decree regulate on organization and activity of Real estate investment trust (Private REIT and Public REIT) established by Fund Management Company  Establishment conditions and procedure: 89  Issue and offer of fund certificate to public performed by fund management company and it need to be registered with the State Securities Commission of Vietnam  Requirements for issuing fund certificate in the first time - Public REIT must be established with at least one hundred investors, not including professional real estate investor buying fund certificate; Private REIT includes maximum of thirty members contributing capital and they must be legal entities - Fund certificate price registered for offering is at least 300 (three hundred) billion Vietnam dong - Having issuing plan and plan for investing income earned from fund certificate offering - Having professional knowledge procedure of fund management, internal control procedure and suitable risk management procedure  Regulations on investment: Some fundamental features are basis for REIT‟s activities as follows: Table 3.1: Some activity features of private and public REIT Norm Public REIT Private REIT Main business activities Invest, own and rent real Build and develop real estate for estate sale Individuals and small and Companies and big financial medium size companies organizations List Necessary Unnecessary Operational duration Defined in the charter of Defined in the charter of the the Fund At least for Fund At least for years Investor years Buy assets for sale and Buy assets for sale rent Cooperate with existing 90 Cooperate with existing real properties owner to real properties owner to improve and upgrade improve and upgrade those real properties for those real properties for rent These existing rent These existing partners can exchange of assets- partners can exchange of assets to get shares assets- assets to get shares or cash or for rent or cash Invest in building real estate for rent or sale Other business activities Invest in building real estate for rent Participate in real estate Participate at any period of real project with requirement estate project to split profits, that REIT can own at products and hold control right of least 30% total of shares all gained to hold control right in real estates to sell or rent operation Invest maximum of 15% Invest maximum of 15% total of fund operation total of fund operation capital in stock of other capital in stock of other real estate trading real estate trading companies companies No land speculation No land speculation Perform real estate Perform real estate management management services services Provide other services for Provide other services for renter Renter 91 Investment preference - Urban upgrading - Office buildings projects - Trade centers - Infrastructures - Infrastructures - Housing and apartment - Housing and apartment projects projects - Hospitals, schools Some requirements for REIT:  No lending  Having Fund Representative Board elected by General investors meeting  Guarantee the transparence of report and information declaration  Having assets assessment and estimation policy in commercial transaction  It is necessary to regulate the maximum of shares that a shareholder can own to prevent from authority misuse  REIT members must be independent on benefit to ensure independence to REIT‟s operation  Comply with income tax policy following regulations ( tax exemption and reduction must be in conformity with State economic development viewpoint, Vietnam law and general international rule) Parties participating in audit and monitoring REIT:  State authorities: be responsible for licensing and monitoring  Individual or legal entity investors who invest their capital to REIT  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 92  Sponsor: normally, fund management companies are concurrently sponsors or supporters for forming REIT  Supervisory bank: be responsible for supervising and protecting property, benefit of investors  Auditor, valuator or assessor REIT extremely needs a legal framework to be admitted Therefore, concerned authorities from local to ministry, branch and government need to research in order to have the REIT own policy soon, multiply the REIT company model as well as make premise conditions for forming REIT following mechanism of a public or private Fund managed by Fund Management Company for purpose of bringing into play the advantage of a actual REIT Concurrently, it is necessary to have a law to protect investors (similar to regulations protecting investors of Securities investment funds) 93 CONCLUSION For years, the strong socioeconomic development of Vietnam in general and Hanoi City in particular has opened up the large business opportunities and created favorable conditions for the development of economic sectors In this trend, the real estate market has appeared and developed strongly However, in the development of the real estate market, a lot of restrictions and problems has been expressed which can cause negative effects, the unfavorable impact for the development of just real estate market This is due to the occurrence of the following reasons: the private investors those have idle fund change from saving to investment and make excessive investment in real estates; lack of appropriate funding sources for the real estate projects which always require large and long-term capital As the real estate market has a key position for the economy of the country, there should be solutions to promote the real estate market for non-stop and sustainable development One of those solutions is this research with desire of certifying that Real Estate Investment Trust is a completely popular and common model in developed countries REIT model can answer two main questions as follows: 94 (1) How to mobilize a large, long capital from the potential finance resources in the society for real estate investment projects? (2) Which investment channel is appropriate for everyone who wants to invest in real estate projects for high profits and liquidity? To make the of business management model approved in Vietnam, the biggest obstacle must be overcome - that means it must have an appropriate legal framework to protect the interests of investors The city will need much more time to prepare a full system of the premise conditions for the establishment of REIT In there, the support on law is one of the essence issues In the limited scope of this project, the author cannot mention further on legal issues This research only bring out the basic problems on REIT model - can works effectively in conducting real estate projects when considering on the view of project funding The author understand that there are still many aspects, which need further researches, from a more detailed angle, in order to affirm the feasibility of building REIT, as well as research further on legal, tax policy, financial mechanism and solutions of operating, managing REIT's activities in the practical context in Hanoi City 95 REFERENCES John Erickson, Real Estate Investment Trusts: Structure, Performance, and Investment Opportunities, Oxford University Press, USA (November 7, 2002) 2,28 Vietnam Real estate business Law http://www.investorwords.com Barron's Real Estate Dictionary: investorwords.com 6, 13,16 The CBRE of Vietnam : www.cbrevietnam.com Ralph L Block, Investing in REITs: Real Estate Investment Trusts Bloomberg Press; 3rd edition (January 1, 2006) 8,9 The International Association of Real Estate Investment Trusts: www.reit.com 10, 15 Savills real estate service provider : www.savills.com.vn 11,12 Vnexpress.net 96 14 www.vietnamtoursimt.com 17, 18, The state bank of Vietnam: www.sbv.gov.vn ; annual report of SBV 19 2008, 2009 29 The state securities commission of Vietnam: www.ssc.gov.vn 20 Land law 2003 21 Vietnam national real estate association www.vnrea.vn 22 General Statistics Office of Vietnam: www.gso.gov.vn 23 Global REIT report in 2008 of Ernst and Young company 25 Frank J Fabozzi and Laurie S Goodman, Investing in Collateralized Debt Obligations 26 David J Lynn PhD, Active Private Equity Real Estate Strategy, Publisher: Wiley (August 10, 2009) 27 Securities law 2006 97 APPENDIX Organizational Rules in some countries Australia      REITs in Australia are organized as listed or unlisted fixed trusts The listed REITs are known as Listed Property Trusts (LPT) If eligible (passive property holdings), they are taxed as flow-through vehicles (i.e., the net income of the trust is taxed in the hands of the unit holders upon distribution and not at the level of the trust); otherwise, the REIT is taxable as a domestic company (e.g., if engaged in property management/redevelopment) It is common for Australian property trusts to form part of a stapled security with a stapled company/trading trust, undertaking a range of activities relating to passive property holdings (e.g., management, redevelopment, funds management) (See page 23 for further explanation of the stapled security structure) There is no minimum/maximum shareholder requirement The trust must be managed by a corporate trustee/responsible entity/fund manager Hongkong         Japan  The REIT must be listed on the stock exchange of Hong Kong It must be structured in the form of a trust It must appoint a trustee that is functionally independent of the management company of the REIT and that acts in the best interest of unit holders It must appoint a management company acceptable to the Securities and Futures Commission (SFC) It must appoint an independent property appraiser The valuation of REIT assets must be done on an annual basis If the name of the REIT indicates a particular type of real estate, it must invest at least 70% of its non-cash assets in such a type of real estate Funds seeking REIT status must apply for a license through the SFC REITs in Japan are known as Japanese Real Estate Investment Trusts (JREITs) 98        Singapore     South Korea       UK   JREITs are generally formed as corporations rather than as trusts Registration based on Investment Trust Law is required  One of the following must be met with regard to the investment certificates: The certificates must be publicly offered and the issuing amount must be at least 100 million yen (approximately US$900,000) as at the time of the incorporation  The certificates must be owned by at least 50 investors at the end of the fiscal year, or  Qualified institutional investors must hold 100% of the JREIT units at the end of the fiscal year The offer for investment of the units in the JREIT must be mainly in the domestic market The JREIT must have a fiscal period of one year or less The asset management function must be outsourced to an asset manager The custody function for assets owned by the JREIT must be outsourced to an asset manager The three largest investors must own less than 50% of the units REITs are typically structured as unit trusts The REIT manager of a listed REIT should be a corporation with a physical office in Singapore and have minimum shareholders‟ funds of Singapore $1 million (approximately US$0.7 million) A REIT trustee must be approved by the Monetary Authority of Singapore REITs must comply with the listing rules (i.e., at least 25% of the units issued should be held by at least 500 public shareholders) to be listed on the Singapore Exchange The REIT needs to obtain approval from the Ministry of Construction and Transportation There is a minimum capital requirement of KRW10 billion (approximately US$11 million Founders must own at least 10% and up to 30% of shares issued at the time of set-up At least 30% of shares must be offered to the public at the time of setup In-kind contribution is allowed at the time of establishment, up to 50% of total paid-in capital – only real estate can be contributed inkind No single shareholder (including its related parties) is permitted to own more than 30% of shares The UK REIT regime was introduced with effect from January 2007 The „Principal Company‟ (of a group REIT) must be a UK resident 99     US       company and not dual resident in the UK and another jurisdiction, unless there is a treaty tie-breaker clause which gives residency to UK Subsidiary entities can be resident for tax purposes in any other country, but income will only be exempt to the extent that it derives from qualifying UK properties Dividends received from overseas subsidiaries not carrying on a UK property rental business will be taxable The REIT must be a closed-ended corporation and listed on a recognized stock exchange (which excludes AIM) The REIT must have only one class of ordinary share and the only other class of share it can issue is non-participating fixed rate preference shares REIT management may be internal or external There are no additional landlord requirements In a US REIT, there must be 100 or more shareholders Five or fewer „individual‟ shareholders cannot hold more than 50% of its value It may not be a bank or financial institution It must be otherwise taxable as a domestic corporation The REIT must be managed by one or more trustees or directors Ownership of the REIT must be evidenced by transferable shares 100 APPENDIX Total REITs by Region Market capitalization – total per region 101 APPENDIX List of Interviewees Mr Nguyen Dinh Khoa, Director of Mekong Land Joint stock Company; Mr Nguyen Son, Director of Nguyen Sơn Real Estate Joint-stock Company , Mr Tran Tu Thanh, Manager of Investment Department of Lien Viet Securities Company Mr Duong Thanh Tung, Head of Investment Department of Coma Corporation (Song Da corp.) 102 Mr Nguyen Duc Hung, deputy director of Techcombank Securities Company Mr Bui Trung Hanh, Director of Techcombank fund Management Company Mr Nguyen Ngoc Nam Deputy Director of Dong Do branch of Techcombank Mrs Ngo Ngoc Quynh, Director of ThangLong branch of Vpbank 103 ... 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,... collective investment vehicles including: real estate investment company (SII or REIC) and real estate investment fund (FII or REIF) These institutions of collective investment in the real estate. .. 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