Research On The Principal-agent Problem In REITs

Real Estate Investment Trusts (referred to REITs) is a trust product specialized in real estate investment, which is established for the purpose of gathering funds, diversifying risk, acquiring higher economies of scale and promoting the healthy development of the real estate market. REITs need to be entrusted to professional managers to perform real estate investment and management, simultaneously REITs trustees accepts the commission to storage the assets of REITs. Then special principal-agent relationship comes among REITs investors, managers and trustees, which leads to adverse selection and moral hazard problems.This paper analyzes the principal-agent relation both in trust-type and company-type REITs , then empirically studies on the real estate trust that has been operated. The result shows that the principal-agent problems in REITs stem from: Information asymmetry between REITs investors and managers, inconsistent interests among parties, REITs managers' right to obtain the surplus income does not match their right to control the surplus income, incomplete REITs contract.In order to resolve adverse selection in REITs, the paper recommends to establish necessary qualification examination and approval procedures for REITs managers and trustees, besides, to improve the information disclosure system .In order to ease moral hazard in REITs, this paper suggests to exert the efforts of REITs investors, the market and the trustee to supervise REITs managers. What is more, develops a reasonable incentive mechanism, which includes pay design, stock options, reputation mechanism, hostile takeover and other incentives, to encourage the REITs managers act for the sake of REITs investors.