A REIT, or real estate investment trust, is a closed-end investment entity that invests in income-producing real estate. The concept of the REIT was born in the US in 1960, with legislation that was intended to provide investors with the opportunity to invest in diversified real estate portfolios the same way they would invest in other liquid securities such as mutual funds, was reformed in 1976 when REIT vehicles were no longer limited to business trusts.

Since their introduction in the US, more than 30 other countries around the world have established regulations to allow the formation of local REITs.

The form and rules regarding REITs vary across each jurisdiction. In the US, REITs enjoy special tax treatment so long as they pay out at least 90% of their income as dividends. To qualify as a REIT in the US, an investment entity must:

• Have at least 100 shareholders (with no five shareholders owning more than 50% of the total share);
• Not invest in less than 75% of assets in real estate, cash, or government treasuries;
• Derive at least 75% of gross income from real estate.

While REITs can be private or public (listed or non-listed), the most popular REITs are exchange-traded. This provides investors with the opportunity to include real estate investments in their portfolio while at the same time maintaining liquidity, which is not possible with investment in direct real estate holdings.

As a hallmark of the REIT structure is to provide dividends to investors, REITs also provide investors with a relatively predictable revenue stream. Another advantage of REITs is that, depending on their mandate, they can also provide exposure across classes of income-producing real estate thus diversifying risk. 

Moreover, that REITs have tangible assets in the real estate in which they invest, makes them a relatively stable and low volatility investment. REITs invest in many types of income-producing real estate including office buildings, shopping centres, residential apartments, warehouses, and timberlands. Some REITs also focus on the finance of real estate.

In Cambodia, the formation and listing of a REIT on the Phom Penh Stock Exchange would be a welcome development. For the general economy, it could help provide capital for the development and management of class A real estate projects.

For investors, it could provide easy, diversified and liquid exposure to the fast-growing real estate market. For the exchange itself, it could provide a very interesting new opportunity to increase exposure and attract new investors thus improving the strained liquidity that the Cambodian bourse has experienced since its launch in 2012.

For more information or to discuss REITs in Cambodia's real estate market, email Joseph M. Lovell of Sciaroni & Associates via the contact details listed below.

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