Friday 6 June 2014

Typical Structure of REITs

A typical REIT would have a structure similar to the diagram above.

The Trustee is an independent party to ensure that the interest of the shareholders is protected. They will ensure that the REIT managers comply the applicable laws, maintain expected standards of the REIT manager. The assets of the REIT also held by the trustee on behalf of the unit holders.

A REIT Manager is appointed to manage the REIT. Performance of the manager could be measured in different ways, for example by the total assets size under management or the growth in the annual dividend payout to shareholders. Managers would therefore seek out asset acquisition opportunities or try to increase yield of the current properties. The REIT manager is usually paid a base fee for their service and bonus fees should their performance exceed expectations.

The Trustee typically holds properties owned by the REIT in trust on behalf of the shareholders. An appointed Property Manager will ensure that the premises are well maintained, kept clean and infrastructures are good working condition. The property manager will be paid a fee for their services.

Properties that are tenanted out will provide a steady stream of income to the REIT. Income from the properties are first used to pay the expenses of operating the REIT including the fees to the managers and trustees. The remaining amount could either be kept in reserve in the REIT and the rest distributed to shareholders. REIT listing regulations in Asia requires REITs to distribute at least 90% of their taxable income to shareholders.

Finally, shareholders purchase units in the REIT as an indirect method of investing in the underlying properties. In return, shareholders receive a periodic distribution of dividends.

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