Factors influencing the decision to set up a REIT

Abstract

Real Estate Investment Trusts (hereinafter, REIT) are investment companies which capitalize real estate assets by offering company shares on the stock markets. The recent economic upturn has led to a sharp increase in the constitution of REITs. Nevertheless, real estate managers should weigh up the advantages of these securities compared to other alternatives of financing real estate activity. Variables affecting REIT performance that managers should analyse include market price and market capitalization (compared to net asset value), expected liquidity, start-up costs, systematic risk, finance costs and tax benefits, and also other aspects such as company control, transparency requirements and regulatory limits. REITs have become a competitive way to finance real estate activity, especially in the light of the credit constraints that still affect the industry. This paper analyses the factors that managers should take into account when considering whether to set up a REIT.