Operational Risks Of Real Estate Investment Trusts (reits)

Recently, Real Estate Investment Trusts (REITs) has been a hot issue among industrial professionals and academicians. On the one hand, REITs is a useful tool dealing with shortage of funds for real estate developers. On the other hand, the good performance in Australian REITs market makes more and more attention for REITs in subprime mortgage crisis. However, we should not neglect the risks of REITs while it brings huge benefits to the whole industry and investors. The risks involved in REITs are more special and complex. REITs are not only affected by the inherent risks arisen from real estate industry and capital market, but also by lots of hidden troubles from the operation of funds. Therefore, based on the REITs cases in Hong Kong, this paper analyzes the hidden risk factors involved in REITs'operation, hoping to contribute to domestic REITs study.The paper falls into five parts. Part one briefly introduces the subject-selecting background, the study methods and the research framework as well as the previous researches. Part two introduces some aspects about REITs. For example, the REITs' conception and category, the difference between REITs and MBS, the unique advantage for investing and so on. While, we also introduce the mechanism of REITs' operation, divided into the IPO stage, operational stage and delisting. Part three analyzes the risk factors in the REITs' operation. Different risk factors are showed in different stages. In the process of REITs'operation, there are some factors. For example, the REITs assets'quality and valuation, the IPO timing, market liquidity, the investors'understanding about REITs, the ability to operate assets, REITs capital structure and size, agency relationship and so on. Besides, the poor assets and bad market environment may make REITs delisting. Part four introduces the cases of GZI REIT and RREEF CCT REIT. These REITs with Chinese commercial properties are listed in Hong Kong. Different risks are involved in the process of IPO and management. Finally, the most important risk factors are the quality of assets, the IPO timing and the management of assets pool, which determine the success of the REITs operation. Part five suggests control the risks in different ways to different stages, which can lower the risks to the minimum.Finally, in the process of REITs'operation, REITs suffers the operation and management risk of projects. These risks can be reduced by asset allocation strategy. However, this paper does not cover all risks of REITs. Coupled with no REITs in China, there are some difficulties to analyze REITs cases and collecting data. Therefore, it is a long way to study and manage the REITs'risks.