Investment in real estate has always been a priority for investors holding a well-diversified portfolio of assets. In the 2019 Budget speech, the Maltese government announced its intention to create a regulatory regime for Real Estate Investment Trusts (REITs). With the introduction of this new legislative framework, Malta will join 35 jurisdictions across the world that have already established a regulation for REITs.
REITs are investment vehicles that essentially own property that creates rental income, which is in turn distributed to shareholders. REITs allow individual investors to indirectly access the real estate market with a limited exposure to financial risks. An investor can buy REITs shares which require a much lower capital expenditure than purchasing an entire property, as well as being far more liquid, and shares may be sold far more quickly and easily than an entire property.
Stakeholders rely on the expertise of professional operators who commit themselves to maximising the advantages offered by the market. This way, investors can also benefit from a lower management risk, as professional operators have both the know-how and the access to relevant information that usually is not available to a common investor.
REITs originated in the US in the 1960s, where the US Congress established a regime to allow individuals to invest in commercial real estate portfolios that receive a regular income from a variety of properties. Following their success in the US, numerous other countries introduced legislative frameworks that enable investments in REITs.
Real estate investment trust trends in Europeand US
Every real estate market has inherent characteristics, which contribute to create valuable diversification benefits when investing in REITs. Today, there is a trend towards higher interest rates in the US and this creates concerns among investors, as REITs are commonly perceived to be sensitive to interest rates fluctuations. In contrast, the current European scenario sees interest rates remaining exceptionally low, and spreads are particularly attractive.
Additionally, many European REITs are affordable with historically high discounts to Net Asset Value (NAV). Valuations of commercial real estate are typically performed with the determination of net asset value, or NAV, which is the current market value of its assets, less the current market value of its liabilities and obligations. At present, European REITs trade close to an average of eight per cent discount to NAV, which means that investors are purchasing at substantially discounted prices.
A comparison of REITs in top jurisdictions
While each jurisdiction adopts its own REITs framework, it is possible to identify certain commonalities that are inherent to this type of investment vehicle.
Within the context of a booming real estate market in Malta, the much-anticipated legislation regulating REITs in Malta will offer attractive investment opportunities
In our recent study on the regulatory frameworks of REITs, we have assessed five European jurisdictions, namely the UK, Germany, Finland, Belgium and Ireland, in comparison with the US, and for each jurisdiction analysed seven characteristics of REITs, these being: capital requirements, legal requirements, other requirements, restrictions, assets profile and tax treatment.
The comparison highlights that while REITs in these jurisdictions share common traits, different regulations and tax structures offer investors varying benefits. The UK and the Irish models, for example, follow the American model with regard to the capital requirements. In fact, in these jurisdictions the law does not require a minimum capital in order to establish a REIT, which makes the system more flexible and it is therefore easier for investors to enter the market.
However, there are other financial requirements imposed on the REITs to safeguard investors. In contrast, the legal frameworks in Belgium and Finland envisage a minimum capital of €1.2 million and €5 million respectively. Germany requires a minimum share capital of €15 million and at least 100 shareholders.
Concerning the legal requirements, most of the jurisdictions under examination require REITs to be incorporated as a company resident in that jurisdiction, whereas in the US, REITs can also be held under a trust of association taxable as a corporation. Moreover, in contrast with the US, European REITs must be listed on a stock exchange within the EU or the EEA. Different listing rules apply in each country, which makes the process different in each case.
A common trait noted across all jurisdictions is the high percentage of profit distribution to shareholders, with the minimum being 75 per cent of total profits. In the UK, the law requires the REIT to distribute 90 per cent of its net property rental income.
Jurisdictions like Ireland and Finland impose shareholding restrictions, with shareholders owning more than 10 per cent of the capital attracting penalties. On the other hand, Belgium does not impose any restrictions on shareholding, a fact that may potentially prejudice minority shareholders.
A commonality among the jurisdictions is identified with respect to the REITs asset profile. In general, over two-thirds of the total asset value must relate to property rental business, with Finland requiring a minimum of 80 per cent of the REIT assets to generate rental income.
Finland also imposes a restriction on foreign assets, as the law specifies that any entities in which the REIT holds shares must be resident in the EEA. Conversely, other jurisdictions, including the US, do not impose any restrictions on foreign assets. This allows for diversification that is appealing to investors.
Remarkable differences can be observed in the tax treatment of REITs across the jurisdictions analysed. European REITs are not subject to any tax in respect to either the rental income or capital gains at the REIT level. Withholding tax on dividends is charged in most countries, with the US distinguishing between domestic shareholders and foreign shareholders, which are subject to varying levels of withholding tax.
REITs in Malta
Within the context of a booming real estate market in Malta, the much-anticipated legislation regulating REITs in Malta will offer attractive investment opportunities to investors. In this regard, the Malta Stock Exchange has already initiated the processes to develop REITs in Malta and has engaged Chetcuti Cauchi to advise on the legal changes to the regulatory and legal framework that would effectively see the introduction of REITs in Malta in the coming months. For more information, visit http://reits.chetcuticauchi.com/reits-comparison
Priscilla Mifsud Parker is senior partner, corporate, trusts and fintech at Chetcuti Cauchi.
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