"Globalizing REITs: What International best Practices have Emerged?

Abstract

Given the on-going globalization of REITs in recent years, this study aims to investigate two inter related questions: what international best practices have emerged so far out of the global experience with the REITs systems; and, what policy implications do they bring to those countries that have a less well-functioning system such as those in Korea and others. By synthesizing the research findings as well as the institutional variations documented, the paper extracts a set of drivers for successfully launching and sustaining an active REITs system in a country. Those identified success factors in the demand-side (of liquidity) include: an “asset-light” business strategy on the part of large real estate holders, usually triggered by an economy-wide shock; the supply of high-quality properties that generate acceptable returns to the capital market; and, a credible business counterparty for REITs stock offerings. For the last one, a well-capitalized listed corporation with an internal management structure has emerged as the choice in the U.S., while some hybrid management structures － the sponsored-REITs and the stapled-REITs － are observed in other countries. In the supply-side, the discipline imposed by the capital market through disclosure requirements, monitoring, as well as M&A threat, works as a critical factor in nurturing a REITs system, which is often replaced by regulatory requirements (on such operational parameters as mandatory listing, maximum leverage, and extent of development activity) in the Asian and European countries where the systems are less seasoned. In the supervision side, discussed as key policy issues are how to strike a balance between the two classes of investors-institutions vs. individuals, what norms to be considered to help foster the ever-increasing REITs’ cross-border investments, among others. In sum, the case for REITs is strong globally given the on-going population aging and other favorable trends. Given the international best practices identified, the paper examines the Korean case in terms of their key implications and policy directions to pursue for establishing a more efficient and welfare enhancing one in the country.