Real estate investment trust

A real estate investment trust or REIT (play /ˈrt/) is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors. The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.[1]

REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges.

REITs can be classified as equity, mortgage, or hybrid.

The key statistics to examine in a REIT are net asset value (NAV), funds from operations (FFO), adjusted funds from operations (AFFO) and cash available for distribution (CAD). In the period from 2008 to this writing (2011), REITs face challenges from both a slowing United States economy and the global financial crisis, which depressed share values by 40 to 70 percent in some cases.[2]

Contents

History

REITs originated in the 1880s at a time when investors could avoid "double tax," or a tax at corporate and individual level. In the 1930s, this tax benefit was removed, causing investors to pay "double tax." President Eisenhower signed the REIT tax provision contained in the Cigar Tax Excise Tax Extension in 1960.

By region

Australia

The REIT concept was launched in Australia in 1971. General Property Trust was the first Australian real estate investment trust (LPT) on the Australian stock exchanges (now the Australian Securities Exchange). REITs which are listed on an exchange were known as Listed Property Trusts (LPTs) until March 2008, distinguishing them from private REITs which are known in Australia as Unlisted Property Trusts. They have since been renamed Australian Real Estate Investment Trusts (A-REITs) in line with international practice.[citation needed]

There are now more than 70 A-REITs listed on the ASX, with market capitalization in excess of A$100bn.[citation needed]

Australia is also receiving growing recognition as having the world’s largest REITs market outside the United States. More than 12 percent of global listed property trusts can be found on the ASX.[citation needed]

Brazil

REITs were introduced in Brazil in 1993 by the law 8668/93 and initially ruled by the instruction 205/94 and, nowadays, by instruction 472/08 from CVM (Comissao de Valores Mobiliários - which is the Brazilian equivalent of SEC). Locally they are described as "FII"s or "Fundos de Investimento Imobiliário". FII's dividends have been free of taxes for personal investors (not companies) since 2006, but only for the funds which have at least 50 investors and that are publicly traded in the stock market. FIIs, referred to as “REIT” to correspond with the similar investment vehicle in the US, have been used either to own and operate independent property investments, associated with a single property or part property, or to own several real properties (multiple properties) funded through the capital markets.[citation needed]

Bulgaria

REITs were introduced in Bulgaria in 2004 with the so called "Special Purpose Investment Companies Act". They are pass-through entities for corporate income tax purposes (i.e. they are not subject to corporate income tax), but are subject to numerous restrictions.[3]

Canada

Canadian REITs were established in 1993. They are required to be configured as trusts and are not taxed if they distribute their net taxable income to shareholders. REITs have been excluded from the income trust tax legislation passed in the 2007 budget by the Conservative government. Many Canadian REITs have limited liability.[4] On December 16, 2010, the Department of Finance proposed amendments to the rules defining “Qualifying REITs” for Canadian tax purposes. As a result, “Qualifying REITs” are exempt from the new entity-level, “specified investment flow-through” (SIFT) tax that all publicly traded income trusts and partnerships are paying as of January 1, 2011.[5]

Finland

Finnish REITs were established in 2010, when 'the tax exemption law' (Laki eräiden asuntojen vuokraustoimintaa harjoittavien osakeyhtiöiden verohuojennuksesta, 299/2009)[6] was passed by the Finnish parliament. Together with the 'Law on Real Estate Funds' (Kiinteistörahastolaki, 1173/1997) [7] it enables the existence of tax efficient residential REITs.

Qualifications

  • REITs will have to be established as a public listed company (julkinen osakeyhtiö, Oyj) for this specific purpose. When the REIT is established the minimum equity is 5M€ and it has to be distributed over 5 separate investors.
  • Minimum holding period: 5 years.
  • At least 80% of its assets have to be invested in residential real-estate.
  • At least 80% of the REIT's gross revenues must come from residential rental income.
  • At least 90% of the REIT's taxable income, excluding unrealised capital gains, has to be distributed to its shareholders through dividends.
  • The corporation is income-tax-exempt, but the shareholders will have to pay individual income tax on the dividends.
  • Largest individual shareholder may own less than 10% of company shares (max. 30% till the end of 2013).

France

The French acronym for REIT is SIIC. Gecina is the largest French SIIC by market cap and the second largest publicly traded property company in France (after Fonciere des Regions and Icade), with the third highest asset value among European REITs.[8][9]

Germany

Germany is also planning to introduce German REITs (short, G-REITs) in order to create a new type of real estate investment vehicle. Government fears that failing to introduce REITs in Germany would result in a significant loss of investment capital to other countries. Nonetheless there still is political resistance to these plans, especially by the social democratic party ('SPD').

A law concerning G-REITs was enacted 1 June 2007, and is retroactive to 1 January 2007.[10]

Qualifications

  • REITs will have to be established as a corporation "REIT-AG" or "REIT-Aktiengesellschaft".
  • At least 75% of its assets have to be invested in real-estate.
  • At least 75% of the G-REIT's gross revenues must be real-estate related.
  • At least 90% of the REIT's taxable income has to be distributed to its shareholders through dividends.
  • The corporation is income-tax-exempt, but the shareholders will have to pay individual income tax on the dividends.
  • Some restrictions apply on establishing residential REIT's

Ghana

REITs have been in existence in Ghana since 1994. The Home Finance Company, now HFC BANK, established the first REIT in Ghana in August 1994. HFC Bank has been at the forefront of mortgage financing in Ghana since 1993. It has used various collective investment schemes as well as corporate bonds to finance its mortgage lending activities. Collective Investment Schemes, of which REIT’s are a part, are currently regulated by the Securities and Exchange Commission of Ghana.

Hong Kong

REITs have been in existence in Hong Kong since 2005, when The Link REIT was launched by the Hong Kong Housing Authority on behalf of the Government. Since 2005, there have been 7 REIT listings as at July 2007, most of which, including Sunlight REIT have not enjoyed success because of low yield. Except for The Link and Regal Real Estate Investment Trust, share prices of all but one are significantly below IPO price. Hong Kong issuers' use of financial engineering (interest rate swaps) to improve initial yields has also been cited as having reduced investors' interest[11]

India

As of January 2010, India was formulating legislation for REITs in the Indian real estate market. Once introduced these Indian REITs (country specific/generic version I-REITs) will help individual investors enjoy the benefits of owning an interest in the securitised real estate market. The greatest benefit will be that of fast and easy liquidation of investments in the real estate market unlike the traditional way of disposing of real estate. The government and Securities and Exchange Board of India SEBI through various notifications is in the process of making it easier to invest in real estate in India directly and indirectly through foreign direct investment, through listed real estate companies and mutual funds.

Japan

Japan is one of a handful of countries in Asia with REIT legislation (other countries/markets include Hong Kong, Singapore, Malaysia, Taiwan and Korea), which permitted their establishment in December 2001. J-REIT securities are traded on the Tokyo Stock Exchange, and most service providers of the J-REITs are Japanese real estate companies, Japanese conglomerates and foreign investment banks.[citation needed]

Since the burst of the real estate bubble in 1990, property prices in Japan have seen steady drops through 2004, with some signs of price stabilization and possibly price increase in 2005 and 2006. Some see J-REITs as a way to increase investment in the real estate market, although notable increases in asset values have not yet been realized.[citation needed]

A J-REIT (a listed real estate investment trust) is strictly regulated under the Law concerning Investment Trusts and Investment Companies (the "LITIC") and established as an investment company under the LITIC.

In addition to REITs, Japanese law also provides for a parallel system of special purpose companies which can be used for the securitization of particular properties on the private placement basis.

Nigeria

In 2007, the Securities and Exchange Commission (SEC) issued the first set of guidelines for the registration and issuance of requirements for the operation of REITs in Nigeria as detailed in the Investment and Securities Act (ISA). The first REIT, the N50 billion Union Homes Hybrid Real Estate Investment Trust, was launched in September 2008.

Pakistan

The Securities and Exchange Commission of Pakistan is in the process of implementing a REIT regulatory framework that will allow full foreign ownership, free movement of capital and unrestricted repatriation of profits. It will curb speculation in Pakistani real estate markets and gives access to small investors who want to diversify into real estate. The Securities and Exchange Commission of Pakistan is proposing a regulatory framework similar to that of Singapore and Hong Kong.[citation needed]

The Securities and Exchange Commission of Pakistan expects that about six REITs will be licensed within the first year, mainly large asset management companies. Pakistan has recently seen an outflow of investments by foreign real estate development companies, mostly based in Malaysia and Dubai.[12]

Philippines

REITs in the Philippines will soon be available to the public after the Real Estate Investment Trust Act of 2009 (RA 9856) passed into law on December 17, 2009. Its Implementing Rules and Regulations were approved by the Securities and Exchange Commission in May 2010.[13]

Singapore

Commonly referred to as S-REITs, there are currently 20 REITs listed on the SGX, the first one to be set up being CapitaMall Trust [14] in July 2002. They represent a range of property sectors including retail, office, industrial, hospitality and residential. S-REITs hold a variety of properties in countries including Japan, China, Indonesia and Hong Kong, in addition to local properties.[citation needed]

S-REITs are regulated as Collective Investment Schemes under the Monetary Authority of Singapore's Code on Collective Investment Schemes,[15] or alternatively as Business Trusts.[16]

S-REITs benefit from tax advantaged status.

United Arab Emirates

The REIT legislation was introduced by Dubai International Financial Centre (DIFC) to promote the development of REIT’s in the UAE by passing The Investment Trust Law No.5 that went into effect of August 6, 2006. This restricts all 'true' REIT structures to be domiciled within the DIFC. The first REIT license to be issued will be backed by Dubai Islamic Bank with a REIT named 'Emirates REIT' headed up by the dot com entrepreneur, Sylvain Vieujot. The issue is that DIFC domiciled REIT's cannot acquire non-Freezone assets within the Emirate of Dubai. The only federally approved Freezone within the UAE is the DIFC itself so therefore we expect to see Emirates REIT focusing all of its attention within this zone. Outside of the zone properties are purchasable by local Gulf (GCC) passport holders only.

United Kingdom

The legislation laying out the rules for REITs in the United Kingdom was enacted in the Finance Act 2006 and came into effect in January 2007 when nine UK property companies converted to REIT status, including the five that were FTSE 100 members at that time: British Land, Hammerson, Land Securities, Liberty International and Slough Estates (now known as "SEGRO"). The other four were: Brixton (now known as "SEGRO"), Great Portland Estates, Primary Health Properties and Workspace Group.[citation needed]

British REITs have to distribute 90% of their income. They must be a close-ended investment trust and be UK resident and publicly listed on a stock exchange recognised by the Financial Services Authority.[citation needed]

To support the introduction of REITs in the UK, the REITs and Quoted Property Group was created by several commercial property and financial services companies. Other key bodies involved are the London Stock Exchange the British Property Federation and Reita. The Reita campaign was launched on 16 August 2006 by the REITs and Quoted Property Group, in order to provide a source of information on REITs, quoted property and related investments funds. Reita's aim is to raise awareness and understanding of REITs and investment in quoted property companies. It does this primarily through its portal www.reita.org, providing knowledge, education and tools for financial advisers and investors.[citation needed]

Doug Naismith, managing director of European Personal Investments for Fidelity International, said: "As existing markets expand and REIT-like structures are introduced in more countries, we expect to see the overall market grow by some ten percent per annum over the next five years, taking the market to $1 trillion by 2010."[citation needed]

United States

In the United States, a REIT is a company that owns, and in most cases operates, income-producing real estate. Some REITs finance real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.[citation needed]

Qualifications

In order to qualify for the advantages of being a pass-through entity for U.S. corporate income tax, a REIT must:

  • Be structured as a corporation, trust, or association[17]
  • Be managed by a board of directors or trustees[18]
  • Have transferable shares or transferable certificates of interest[19]
  • Otherwise be taxable as a domestic corporation[20]
  • Not be a financial institution or an insurance company[21]
  • Be jointly owned by 100 persons or more[22]
  • Have 95 percent of its income derived from dividends, interest, and property income[23]
  • Pay dividends of at least 90% of the REIT's taxable income
  • Have no more than 50% of the shares held by five or fewer individuals during the last half of each taxable year (5/50 rule)
  • Have at least 75% of its total assets invested in real estate
  • Derive at least 75% of its gross income from rents or mortgage interest
  • Have no more than 20% of its assets invested in taxable REIT subsidiaries.

See also

References

  1. ^ "UPREITs, Down-REITs And Other REIT Vehicles: Should You Go Along For The Ride?". FindLaw.com. http://library.findlaw.com/1998/Aug/1/126264.html. 
  2. ^ Carrick, Rob. "REITs battered down to eye-catching levels". ctv.ca. http://www.globeinvestor.com/servlet/story/GAM.20081206.STMAIN06/GITrusts. Retrieved 2008-12-08. 
  3. ^ "Real Estate Investments in Bulgaria". http://tax.uk.ey.com/NR/rdonlyres/egcdkrifqz33z36rqxhsdzf3ndwjg4wg4nqhvruw5hyjr5n5x3shfe3cpts5xklscwrwtkfmiln4kvgkzrgkqbpudoc/International+Alert+13.pdf. Retrieved 2008-01-01. 
  4. ^ Mark Rothschild (November/December 2005). "Spotlight on North America/Canada". Reit.com. http://www.nareit.com/portfoliomag/05special/p73.shtml. Retrieved 2006-10-17. 
  5. ^ David Dittman. "REIT Investing, Canadian Style". InvestingDaily.com. http://www.investingdaily.com/ce/18204/reit-investing-canadian-style.html. Retrieved 2011-01-14. 
  6. ^ http://www.finlex.fi/fi/laki/ajantasa/2009/20090299
  7. ^ Kiinteistörahastolaki; http://www.finlex.fi/fi/laki/ajantasa/1997/19971173
  8. ^ "Gecina largest office space in France". http://www.nareit.com/portfoliomag/05special/p61.shtml. 
  9. ^ "Gecina Reports First-Half Profit as French Company's Properties Gain Value". 2010-07-28. http://www.bloomberg.com/news/2010-07-28/gecina-reports-first-half-profit-as-french-company-s-properties-gain-value.html. 
  10. ^ Alan O'Sullivan (1 June 2007). "G-Reit news for German property". citywire.co.uk. Archived from the original on 2007-09-27. http://web.archive.org/web/20070927082324/http://www.citywire.co.uk/News/NewsArticle.aspx?VersionID=92737. Retrieved 2007-06-30. 
  11. ^ Tim LeeMaster & Yvonne Liu, "Swire considers Festival Walk reit", Page B1, South China Morning Post, July 12, 2007
  12. ^ Pakistan ready to allow REITs - It aims to draw $3 billion from overseas investors in 5 years
  13. ^ [1]
  14. ^ Capitamall.com
  15. ^ Gov.sg
  16. ^ Gov.sg
  17. ^ Internal Revenue Code Sect. 856(a)
  18. ^ Internal Revenue Code Sect. 856(a)(1)
  19. ^ Internal Revenue Code Sect. 856(a)(2)
  20. ^ Internal Revenue Code Sect. 856(a)(3)
  21. ^ See Internal Revenue Code Sect. 856(a)(4). See also Internal Revenue Code Sect. 582(c)(2) (defining financial institutions for these purposes); Internal Revenue Code Sect. 801 et. seq. (defining insurance companies for these purposes).
  22. ^ Internal Revenue Code Sect. 856(a)(5).
  23. ^ Internal Revenue Code Sect. 856(c)(2)

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