Real Estate Investment Trusts Around the World

Understanding the outlook towards International REITs.

Dr. Priscilla Mifsud Parker | 21 Apr 2019

REITs  International REITs

Real estate investments have always upheld certain popularity amongst investors who wish to diversify their portfolio of assets on an international level. The Maltese government, in its 2019 Budget speech, announced that it intends to create a legislative framework for REITs, where it will officially be one of the 35 states around the world which has established some form of REIT legislative framework.

Hence, Real Estate Investment Trusts (REITs) are frequently used as investment vehicles which allow investors to acquire property in part, creating a rental income which will subsequently be distributed to all shareholders who have shares in that property. This will provide investors with indirect access to the real estate market, benefitting from limited exposure to the financial risks of owning an entire property. Investors who are interested will be able to buy REIT shares with a significantly low capital expenditure, when compared to that of purchasing the property as a whole. This will make it easier for investors to sell shares of their property, rather than having to sell the whole property.

Stakeholders will need to rely on professional experts who are dedicated towards providing the most advantageous offers present on the market. With their mind at ease, investors will henceforth be able to enjoy the benefits arising from lower management risk and easy access to information, which is not available to other investors.

 

The concept of international REITs dates back to the 1960s in the US, where its Congress created a scheme which provided its individuals with the opportunity to pursue commercial real estate portfolios, from which they would receive regular income. As a result of its high success rate in the US, many other countries followed suit and introduced regulatory frameworks which enabled international REITs investments.

The European and US Perspective

An effective real estate investment strategy must ensure diversification since all real estate markets have intrinsic features which provide for the creation of valuable benefits. These days, the US is seeing higher interest rates which are causing concern in investors due to the fact that REITS are commonly believed to be quite sensitive to the fluctuations of interest rates.  On the other hand, in Europe, interest rates remain remarkably low, attracting investors to their shores.

The REIT sectors in Europe are also deemed to be affordable, with a record-high discount on the Net Asset Value (NAV). Commercial real estate valuations are normally performed upon the determination of this NAV, which reflects the current market value of the asset in question, less the current market value of its obligations and liabilities. Currently, European REITs are seeing approximately a discount of 8% to the NAV, allowing prospective investors to make a profit in the future by purchasing REITs at a substantially discounted price.

Comparing International REITs within Top Jurisdictions

Although the legislation regulating REITs may differ from state to state, there are certain common aspects which are intrinsic to the personality of this type of investment vehicle.

This article will provide an analysis of the current international REITs frameworks which are implemented within 5 jurisdictions in Europe: UK, Germany, Finland, Belgium and Ireland; in comparison with that in the US. Throughout the overview, the seven main pillars of REITs will be considered: capital requirements, legal requirements, other requirements, restrictions, assets profile and tax profiles. The common traits within these jurisdictions will be highlighted as well as the different frameworks adopted and the taxation structures which are offered to investors. 

It may be noted that the UK and Irish model adopted follows the framework used in the USA in relation to capital requirements. In fact, these jurisdictions do not set a minimum capital requirement to set up a REIT. This provides flexibility and easy penetration into the market, however supplementary financial requirements may be imposed with the aim of safeguarding and informing investors on their respective investments. Contrastingly, in Belgium and Finland, the legal framework in place upholds a minimum share capital of €1.2 million and €5 million respectively. Germany upholds a minimum share capital of €15 million and at least 100 shareholders forming part of the REIT.

In relation to legal requirements, most jurisdictions require REITs within their jurisdiction to be incorporated in a limited company residence. Although the US doesn’t pose such a constraint, European REITs, require the company in question to be listed within the EU/EEA stock exchange. Varying listing rules will apply according to the process developed by that country.

All jurisdictions allow for shareholders to enjoy a high percentage of the profit made from REITs, where the minimum at the time being is of 75% of the total profits. In fact, the UK has set the distribution rate to 90% of the net income received from the property.

Shareholding restrictions may also be imposed, as seen in Finland and Ireland, where unless the shareholder’s owning is not more than 10% of the capital, penalties will apply. Belgium doesn’t uphold any of these restrictions on shareholders as it is deemed prejudicial to minority shareholders.

The manner in which international REITs asset profiles are regulated enjoys some common aspects amongst states, where generally, over two thirds of the overall asset value must be related to the business of property rental. So much so that in Finland, an 80% minimum of REIT assets must to be allocated towards the production of rental assets. Furthermore, Finish law specifically upholds that any entity which holds REIT shares must be a resident within the European Economic Area. Other states like the US, don’t pose any restrictions on assets arising from foreign jurisdictions, allowing for further diversification.

The way in which international REITs are perceived from a taxation point of view differs significantly from one jurisdiction to another. Shareholders of REITs in Europe are not subject to any tax from their rental income or capital gains. Most countries, bar the UK, charge withholding tax on dividends. In fact, it has been argued that the UK provides the most advantageous tax scheme at the time being.

International REITs in Malta

In light of the real estate boom in Malta, this legislation has been much anticipated, with the hope that various favourable investment opportunities will be available within its shores to investors from all around the world.  

The Malta Stock Exchange has begun the process of developing a system for REITs on the island and have engaged Chetcuti Cauchi to provide legal assistance on the changes which need to be made from a legislative and regulatory perspective.


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