The announcement in Budget 2013 that Ireland is to provide for the establishment of Real Estate Investment Trusts (“REITs”) is welcome news for the Irish property industry and for investors from Ireland and overseas. International investors acquired a significant proportion of the Irish investment properties sold in 2012, enticed by the value and yields currently available in the Irish real estate market. The establishment of REITs is expected to result in increased international investment in Irish real estate.
A REIT is a listed company, used to hold rented investment properties, which enables investors to obtain broadly similar returns to those from direct investment in real estate, while also having the benefits of risk diversification by investment in a pool of properties. It is an internationally recognised model for investment in real estate that will be familiar to investors from the US, Europe, Asia and Australia and attractive to institutional investors, private equity and pension funds.
Typically where a company holds investment property this can result in double taxation, as the company may be liable for corporation tax on profits and the shareholders may be liable to pay tax on any distributions from the company. In contrast, a REIT is exempt from corporation tax on qualifying profits from rental property. Tax is payable only at the level of the shareholder, with the company being required to distribute most of its profits to shareholders each year.
REITs are liquid, income producing investments with the benefit of transparent pricing. Investors in Irish REITs will hold shares that may be listed on the Irish stock exchange and that can be sold at any time, without impacting on the underlying real estate assets held by the REIT. The limits on debt within a REIT usually reduce exposure to negative equity risk and ensure that income is not wholly allocated to service debt. As REITs are required to distribute the majority of profits each year to shareholders, REITs should generate a regular income stream for investors.
While historically institutional investors in Ireland have targeted commercial real estate, large scale acquisition of residential buy-to-let developments is an emerging trend in the Irish market, with both Irish and international investors acquiring entire apartment blocks / development schemes in 2012. The establishment of REITs is likely to encourage further investment in the residential property sector. REITs are seen as a structure which will in future encourage responsible property development and professional management of both commercial and residential real estate.
As with REITs in other jurisdictions “terms and conditions will apply”. Details of the conditions which will apply to the operation of REITs in Ireland will be contained in Finance Bill 2013, which is due to be published in the first quarter of 2013. Only when this legislation is available will it become clear how significant an impact the introduction of REITs will have on the Irish real estate market. A further update will be circulated when further details emerge.