A Comparison of the Legal Structures of REITs

REIT Regimes implemented around the world

Dr. Priscilla Mifsud Parker | Published on 31 May 2019

A Comparison of the Legal Structures of REITs

Many countries around the world have worked towards setting up a structure which provides investors of any size the ability to invest in real estate for rental purposes by way of a financial instrument on the capital markets. Such structures are known as Real Estate Investment Trusts (REITs), and each country has implemented its own legislation to regulate them. As a result, the legal context surrounding different REITs across the globe vary from one another, however, such an investment vehicle has gained traction worldwide as the majority of the annual profits must be distributed to shareholders in the form of dividends. Malta has recently joined the other countries by showing interest in REITs, as in the Budget speech for 2019, the Maltese Government announced that it was working on the related processes required to implement a REITs framework which will allow for trading on the Malta Stock Exchange (MSE). Whilst other instruments are directed towards speculative capital gains in real estate, REITs will allow for a new asset class available, that produces rental income, to the public. This will benefit investors who otherwise would not be able to obtain direct property in the local market. A REITs framework would also allow for greater liquidity to the real estate market.

How is a REIT different from a property company?

Whilst property companies are designed to cultivate real estate and resell them, REITs are not. Instead the aim of a REIT is to obtain property in order to rent them and management as part of an investment. Usually, REITs are listed and have shares which are transferable on the main market. In addition, in order to prevent abuses and moderate risks in the market, most REIT frameworks require that a REIT holds more than one property whereby each property cannot have more than 40% of the total value of all the properties owned by that REIT.

Commonalities amongst REIT frameworks

The number of jurisdictions offering REIT frameworks has increased to 37. Although REITs structures differ slightly from one another, key features can be identified across each regime.

REITs: A legal structure

Most jurisdictions are quite flexible in their approach to the legal structures of REITs, permitting REITs to be structured in various ways. For example, the US permits REITs to be structured as either a corporation, a trust or an association. Similarly, REITs in Japan can be set up as investment trusts or investment corporations, although all Japanese REITs have been set up as corporations. Greece permits such an investment vehicle to be structured as real estate investment companies or as unit trusts that take the shape of real estate mutual funds.

Belgium permits REITs to be structured as regulated real estate companies through a public limited company or through a partnership with limited shares.  The jurisdiction has also implemented a new system referred to as a specialised real estate company.

Many regulators require REITs to be listed on stock exchanges, yet some REITs frameworks are not too flexible in this respect. Singapore allows companies to not list shares publicly on stock exchanges, yet to encourage public participation, those which are listed may benefit from an advantageous tax regime. 

Countries like Australia, Hong Kong, India, Malaysia and Mexico chose to have a trust structure, whilst countries such as Canada set up REITs as funds or fund-like structures opting for a mutual fund trust.  

Luxembourg and Singapore employ a unit trust structure, but many others such as France, Germany, South Korea, Spain and the UK, prefer to use a public limited company or a joint stock company.

Malta and the Real Estate Investment Trusts

Although late in introducing this investment vehicle, Malta has the advantage of analysing those frameworks which have been successful such as those in the US, the UK and Hong Kong and adapt these locally.

In Malta, all the above types of frameworks may be adapted, although ideally, the jurisdiction opts for a listed public limited company administered by the Companies Act. Such a model has been utilised by jurisdictions such as the UK, a jurisdiction which has been highly influential in Maltese corporate law.  Should such a model be taken up, public companies must be tax resident in Malta and can be structured via an application with the elected authority.

Setting the requirement that REITs must list part of their shares on the MSE would ensure that investors are protected as a result of the listing’s transparency requirements as well as enhance participation by all investors, whatever the size.

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