Several jurisdictions worldwide have implemented a framework that allows investors, be they small or large, the possibility to invest directly in the rental property market through a financial instrument offered on the capital markets.
These frameworks are generally referred to as Real Estate Investment Trusts (REITs). However, different jurisdictions have employed highly diverse legal structures to regulate them.
While the legal framework established for these investment vehicles varies considerably from one jurisdiction to another, REITs have gained popularity due to the fact that there is an obligation to distribute the vast majority (generally up to 90 per cent) of their annual profits to their shareholders in the form of dividends.
Although REITs have long been established in several countries, Malta’s interest in this investment regime arose relatively recently.
In the 2019 Budget speech, the Maltese government announced that it would establish the regulatory, fiscal and administrative processes that will enable REITs to launch and trade on the Malta Stock Exchange (MSE).
This development is welcome and will make available to the public a new asset class that derives rental income, as opposed to other instruments on the market that have, to date, targeted speculative capital gains in property.
Such a move will permit those investors who are unable to acquire real estate directly to benefit from the rental returns in the local property market. The REIT structure will also provide liquidity to the real estate market which is notoriously illiquid.
How do REITs differ from property companies?
Unlike a listed property company, REITs aren’t created to develop real estate properties and resell them. Their main objective is to acquire real estate properties with the sole aim of renting such properties and to manage them as part of an investment portfolio.
Generally, REITs are listed entities with their shares being freely transferable on the main market. To avoid abuses and mitigate the inherent risks of the property market, most jurisdictions require that REITs must hold more than one property, and no single property in their portfolio can constitute more than 40 per cent of the value of the total properties owned by the REIT.
Common features among foreign REIT regimes
Market research by one of the larger auditor companies revealed that the number of countries which offer REITs as investment vehicles has increased substantially in the last decade to 37. Despite differences in structure and nomenclature, identifying REIT frameworks worldwide is a matter of substance over form, since different jurisdictions have developed different frameworks, but key constant features can be identified in each regime.
Legal structure of REITs
A number of jurisdictions allow significant flexibility with respect to the legal structures available to REITs and allow REITs to be structured in various ways under their local frameworks. By way of example, the US, which was the first jurisdiction to enact a framework for REITs back in the 1960s, allows these investment vehicles to be set up as a corporation, a trust or an association.
Japan also allows REITs to set up as investment trusts or investment corporations, but market practice shows that all Japanese REITs have been set up as corporations. Greece also allows REITs to be set up as real estate investment companies or as unit trusts in the shape of real estate mutual funds.
Belgium, which allows REITs to be set up as regulated real estate companies through a public limited company or a partnership with limited shares, has also introduced a new regime known as the specialised real estate company.
It is also highly common for regulators to require REITs to be listed on stock exchanges, although certain foreign REIT regimes do allow flexibility in this respect.
By way of example, Singapore has interestingly given companies the possibility not to list their shares publicly on stock exchanges, however, only listed REITs may benefit from the beneficial tax regime open to them – the aim clearly being to facilitate participation in the real estate market by the public.
A number of jurisdictions have opted for a trust structure, namely Australia, Hong Kong, India, Malaysia and Mexico. Some jurisdictions have opted to structure REITs as funds or fund-like structures such as Canada, which has opted for a mutual fund trust, while Luxembourg and Singapore utilise the unit trust structure.
However, the vast majority of jurisdictions, including France, Germany, South Korea, Spain and the UK, favour a public limited company or a joint stock company.
Compared to its peers, Malta is late in implementing its own REIT regime. However, this allows the regulator the benefit of the ability to research in depth the successful regimes adopted by global REIT hubs such as the US, the UK and Hong Kong, as well as to improve upon and adapt these regimes to the local scenario.
From a local perspective, all of the entity types mentioned above may be set up in Malta, including companies, trusts, unit-trusts or associations. A listed public limited company incorporated and governed by the Companies Act may be the ideal option.
This entity type has been taken up by a significant number of jurisdictions that have implemented REIT regimes, most importantly the UK, which has significant influence in Maltese corporate law.
Such public companies, which would need to be tax resident in Malta, can then elect to be regulated under the future REIT regime through a notification or an application with the designated competent authority.
Moreover, imposing a requirement upon REITs to list a relevant portion of their shares on the regulate MSE would be a sound choice from an investor protection perspective since listed companies are required to abide with enhanced reporting and transparency requirements and would permit the participation of all investors, from those with a little saved up to larger institutional investors.
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