REITs: Asset Classes & Activity Comparisons

A Comparative Analysis of REITs Asset Classes & Activities, particularly Malta's new REIT regime

Dr. Maria Chetcuti Cauchi | Published on 13 May 2019 | Updated on 04 Sep 2019

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During the 2019 Malta Budget, the Maltese Government announced intentions to introduce a Real Estate Investment Trust (REITs) regulatory framework. As one of the few countries within the developed world that does not yet have such a regime yet in place, the announcement was very much welcomed by investors as well as the industry itself.


Introduced in 1960, REITs was first established in the USA in order for small investors to take part in bigger real estate opportunities by purchasing equity, and so, in turn, earn a bigger income.  Today around 30 jurisdictions around the world have a REITs regime in place. Some of these frameworks allow for established REITs to put themselves for sale in order to achieve maximum value for shareholders. For example, Ireland’s real estate investment trust, known as Green REIT with property assets values at €1.5B, recently focused on selling the company and assets. 83% of Green REIT's portfolio is located in Dublin and is made up of office space rented to companies such as Barclays and Allied Irish Banks.


But what is a REIT?  A REIT is a vehicle that has ownership and operational control of real estate or estates that produce revenue. REITs are similar to funds in that they are not only an investment vehicle within real estate, but they permit investors of any size to have a share of the ownership of real estate assets that produce income. The key differences between REITs and any unit-linked property fund are that unlike REITs, funds are not legally required to distribute part of their net property-related income to shareholders on a yearly basis.  Liquidity is another key difference, as REITs are more liquid, whereas direct property holdings usually enforce a ‘deferral period’ if redemption requests made by investors are not met. In addition, typically REITs are set up in Europe on regulated stock exchanges as public companies listed. 


The generation of revenue via rental income is a key element of a REIT. A REIT naturally and fundamentally attempts to evade the advancement into a property speculator or developer. 


Both commercial and residential estate may be properties in which a REIT may invest. Sometimes, a REIT chooses to invest in properties in different sectors such as shopping malls, residential property, showrooms, office buildings, hotels, hospitals, and storage facilities amongst others.  Other times, REITs prefer to invest in one type of asset. In order to preserve a healthy portfolio as well as provide strong investment returns, REITs utilise sector expertise through specialised teams. As a result of investing in REITs, investors can benefit from the availability of quality properties not otherwise attainable, such as commercial property. Some REITs have also encouraged investments with social aids which support local communities, such as healthcare-related real estate, like elderly care homes, medical centres, different, as well as doctor’s specialised or general practices. Other REITs have also presented creative opportunities for social housing financing in certain states.


There are many common factors which bring REITs frameworks in different jurisdiction together.  Below is a brief analysis of three key REITs frameworks in different jurisdictions:

Comparative Analysis 


United States


In the USA, there are three types of real estate investment trusts.  These are equity REITs, mortgage REITs, and hybrid REITs. 


These REITs can be set up as a corporate, as a trust or as an association. Yearly, a minimum of 95% of the gross taxable income of a REIT must come from real estate-related income (for example, rental income, income from sale of property etc), interest, dividend income and security gains


Each quarter, a minimum of 75% of the gross assets of a REIT must be made up of real estate assets, cash and cash items, as well as US Government securities. A 100% penalty tax is placed on REITs on the gain from the sales of property as ‘dealer property’ (that is the active development and dealing of property).


Most US REITs are made up of equity REITs which invest in a specialised real estate typology and not spread out. 


Residential equity REITs are REITs which invest in property such as apartment blocks, homes for single families, as well as student housing.  On a broader note, these REITs may also include hospitality real estate such as lodging and resorts, self-storage facilities, data centres, infrastructure, industrial, and timberland products and services that focus in harvesting and the sale of timber. 


REITs, mortgage REITs, are designed for the loaning of money to real estate owners and operators through mortgages and direct loans or through the attainment of mortgage-backed securities. Essentially their income is generated by the net interest margin, that is, the spread between the interest they earn on mortgage loans and the cost of funding such loans. 


Hybrid REITs utilise investment strategies belonging to both mortgage REITs and equity REITs.


United Kingdom


UK REITs were introduced in 2007 and have grown substantially since then. A UK group REIT is made up of a group of companies aimed at having a property investment business that lets property to tenants. 


In the UK, there are a number of start-up REITs as well as larger listed UK property companies that have changed to UK REITs. 


UK REITs are usually centred on definite property asset classes, like industrial property, commercial property and residential property, but not the letting of owner-occupied construction. 


A UK REIT may include real estate rental business. This can either be a UK or an overseas property investment business, if they are held by the above-mentioned group / JV companies and have at least 75% of the REITs profits produced from rental, and at least 75% of gross assets related to rental activities. 90% of a REITs annual taxable income must be distributed to shareholders with this income being treated as property rental income rather than dividends.


Ireland 


Irish REITs were introduced in 2013 and are designed to manage assets in their local market.  Despite this, it is still possible for REITs to hold non-Irish assets.


Irish REITs permit investors to attain tax neutrality as well as allow them to retain a percentage of a bigger property portfolio.  This way investors would be able to have more diversification and decrease risk. Irish REIT can have both a property rental business and other activities. 

Irish REITs must distribute 85% of property related income. At the end of the REIT’s first accounting period, a minimum of 75% of its income, as well as the market value of the assets, must be linked to assets of the property rental business. After the first three years, the REIT must oversee a property rental business with a minimum of 3 properties.  Each property must not account for more than 40% of the total market value of the properties. However, corporation tax is applied when an asset is developed at a cost exceeding 30% of its market value and later transferred within 3 years. 


The Malta Proposal


Malta’s REIT framework has yet to be decided yet it is anticipated to bring a number of advantages such as the attainability of large real estate projects to smaller investors to whom such investments would otherwise be inaccessible, more transparency and specialised property management.


Maltese commercial property is very illiquid. International investors look towards big urban centres instead of a small island. In addition, Malta does not flaunt local pension funds or family offices who would typically invest in such commercial property. The few local institutions with enough resources to invest in commercial real estate, are already close enough or at their highest permissible apportionment. A REITs framework would, therefore, allow for the release of such properties and provide funding solutions. 
Should the regime ask that REITs be listed on the Malta Stock Exchange, then investors will have more transparent disclosures. No decisions have been made on the asset class, that is if commercial real estate or residential assets will be permitted. 


REITs frameworks have been around for around 60 years, and have proven to be advantageous in that they have strong return potential, allow better property management, enhance liquidity, and provide higher dividend returns. REITs in Malta are most welcome as the island’s property market continues to thrive. 

With international REITs regimes having been around for circa six decades, and with benefits ranging from strong return potential, to better property management, to enhanced liquidity, to higher dividend returns and easier reach for more minor investors, the introduction of REITs in Malta is certainly welcome, especially in light of the island’s booming property market and local and international investors’ appetite to be part of the real estate story.

 

Click here for more information on REITs around the world.


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