Real Estate Investment Trusts (REITs) are becoming more popular, especially with regards to global investors looking towards expanding their portfolios. REITs are organised in a special manner, which allows a wider variety of investors to contribute in real estate investments. As REITs and the market continue to globally expand, more countries are looking towards passing REIT legislation.
Quite a few EU Member States already boast a successful REIT industry, with more countries embracing the possibility of establishing REIT regimes in the near future. Specifically, Malta, with its thriving property market, provides various opportunities for smaller-scale investors seeking to capitalise in large-scale real estate plans. The Maltese Government, as part of the 2019 budget, promised to establish a legal framework which would allow REITs in Malta, and in fact, Malta is progressing towards its implementation.
This article provides an examination of the recent growth of REITs globally, in particular within the European Union (EU). It goes on to compare and analyse the different REIT legislative frameworks of the EU countries, focusing mainly on legal, capital and various other requisites found in different jurisdictions.
REITS: Capital Requirements
The original regime established by the US many years ago, is mainly relied on by most EU countries. The general principle in the US is that there is no minimum capital requirement. Nevertheless, US REITs are exposed to general equity/debt considerations and 90% of the taxable income must be allocated to shareholders. Various EU countries have implemented the US approach whilst other have opted for another regime.
For instance, initial capital requirements within EU countries vary from zero to €40 million. There are countries such as Ireland and the United Kingdom (UK) which have no capital requirements established, however, they still have certain financing restrictions in place. With regards to Ireland and the UK, REITs must also have a profit financing ratio in which the profits are not less than 1.25 times the price of financing. This also has an influence on potential taxes, as in Ireland where if the financial ratio is not kept, then the REIT will be liable to a corporation tax of 25% in order to obtain a 1.25:1 ratio.
REITs which are founded in jurisdictions like Finland and Spain necessitate a minimum capital of €5 million, whereas, in France and Belgium the minimum capital increases to €15 million. On the other hand, minimum market capitalisation in the Italian market is €40 million.
REITs: Further EU Requirements
REITs which are established in EU countries, possess similar requirements with regards to legal form. Mainly most of the countries require REITs to be organised as a limited liability or joint stock companies. Countries which necessitate that the REITs must be organised as public entities include, Belgium, Hungary, Bulgaria, France and Finland. However, countries such as Ireland, Italy and Spain require that the REIT must be domestically retained with limitations on foreign ownership.
In the Netherlands, the REITs requirements are more flexible, as they permit non-Dutch bodies to be offered as REITs, as long as the body is set up under the legislative framework of an EU member state. Moreover, Ireland and the UK provide the possibility for REITs to be established either under a single company listed REIT or else under a group of companies with a parent company. However, UK and Irish REITs must be set up within their respective jurisdictions.
REITs can function either privately or publicly, although the US necessitates that the REITs must be established as an association which is taxable or as a corporation, like a limited liability company or a limited partnership. The majority of EU jurisdictions have decided not to follow this strategy.
Furthermore, EU REITs also vary with regards to profit distribution. Countries such as Italy, Belgium, Ireland, Bulgaria, Germany, Finland and France require a minimum of 50% of the REITs to be operating income to be allocated. Countries which need to distribute all profits include Hungary, the UK and Netherlands.
Though every EU jurisdiction has diverse requirements for their respective REIT regime, enhancing the continued influx of capital from global investors and increasing economic confidence, provides optimism for real estate investment within the EU. This is mainly the situation with countries with a successful real estate market, such as Malta, in which a transparent REIT legislative framework would permit smaller investors, which are presently prohibited to actively participate in the market.
REITs in Malta
The Malta Stock Exchange has already initiated the processes to develop REITs in Malta and has engaged Chetcuti Cauchi Advocates 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. Click here for more information.