In the 2019 budget speech, Hon. Finance Minister Edward Scicluna announced that plans are underway to create a regulatory regime for Real Estate Investment Funds (REITs) as a new financial instrument granting investors the possibility to invest directly in the property market. It has been noted that in 2019, the ‘administrative, fiscal and regulatory processes’ will be completed so as to allow REITs to start being traded on the Malta Stock Exchange Markets (MSE).
With the introduction of a new legislative framework, Malta will join the 14 EU Member States who have already established a framework for REITs. Malta’s prosperous and booming property market makes it an ideal jurisdiction for the establishment of a REIT framework since it grants smaller investors the possibility of benefitting from large-scale real estate projects and the appreciation of property, without the need to own a physical property.
What are REITs?
Although there are various models which different jurisdictions have adopted and applied with respect to REITs, these are generally companies which manage and own a portfolio of properties, and which make an income through the rental of such properties. Shareholders in such companies would be investors who decide to invest in such REITs which are often listed on stock exchanges, and will receive regular dividends in return.
REITs find their roots in 1960 when the US Congress established a regime which allows individual investors to buy shares in commercial real estate portfolios that receive income from a variety of properties, including apartment complexes, data centres, healthcare facilities, hotels, infrastructure (e.g., fiber cables, cell towers and energy pipelines), office buildings, retail centres, self-storage, timberland and warehouses.
Today, there are more than 35 jurisdictions worldwide which have a framework for REITs or REIT-like structures. REITs can take the form of sector-specific REITs which invest in one specific real estate sector such as residential properties, retail properties, industrial properties or offices. REITs may also have a more diversified portfolio of properties spanning various real estate sectors. Sector specific REITs can also have a social function whereby the REIT manages and/or owns hospitals, medical centres, homes for the elderly or social housing, among others. REITs can also serve as an alternative financing option for such social causes, allowing investors to receive dividends while simultaneously benefiting the community through the financing of large-scale projects with a social cause.
As attested by the various frameworks established by different jurisdictions, REITs can vary significantly in terms of legal structure. Despite their differences in structure, a number of parallelisms can be observed with respect to the benefits which such companies offer. By way of example we find a number of jurisdictions which opt for public limited liability companies which must be listed on a stock exchange as their chosen structure for REITs as evidenced by Finland. Countries such as France and Germany opt for joint stock companies which must be listed on a stock exchange. Other countries, including Greece and Singapore opt for a unit trust structure which must also be listed. A Singaporean REIT may also be unlisted, but it may only benefit from tax concessions if listed. Interestingly, Canada has opted for a close ended/ open ended fund structure while Hong Kong opts for a trust structure listed on the Hong Kong Stock Exchange. Other jurisdictions such as Ireland opt for a simpler form which allows a REIT company or a group of companies where the parent is a REIT to list on the Irish Stock Exchange on the basis of a notification being served upon the Revenue Commission and the adherence with a number of conditions.
What are the benefits of REITs?
REITs have gained popularity as tax efficient structures which support the development of large real estate projects and brings liquidity to the real estate market which can yield high profits, but which is often illiquid and inaccessible to a vast majority of investors who do not have the required capital to participate in this market.
Through REITs, properties are professionally managed, bringing benefits to both shareholders as well as tenants who use the properties being rented out. REITs are generally open to both retail and professional investors and provide the possibility of diversifying one’s portfolio of assets. Retail investors have the possibility to pool in relatively small amounts and share in terms of dividends in a lucrative real estate project which would otherwise be inaccessible to them, without having to tackle the issues that come with property ownership and management. On the other hand, real-estate projects will no longer have to rely on bank financing as REITs provide an alternative for project financing.
REITs can also offer solutions to communities seeking funding for social purposes as highlighted above, thus providing investors with the possibility of investing in projects with a social cause.
The fact that a majority of REIT structures require these companies to be listed, or only provide tax benefits once these companies are listed, grants additional safeguards to the investor by ensuring transparency and imposing further reporting disclosures on a frequent basis. Moreover, organisations such as the European Public Real Estate Association have provided their own recommendations on what is to be considered as best practice, and further promote transparency, reporting disclosures and public reporting requirements.
Our Financial Services Practice
Chetcuti Cauchi welcomes the government’s proposal to introduce the REIT regime which has proven to be successful in several jurisdictions and has benefited investors and tenants alike. This structure may allow the public to benefit from the boom experienced within the Maltese real estate sector which has remained relatively stable even during times of global financial crisis.
Should you wish to attain more information on the services which we offer or require more information on how you can benefit through setting up your financial services business in Malta, we welcome you to get in touch.
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