Real Estate Investment Trusts The Beginning!

Transcription

1 Real Estate Investment Trusts The Beginning! 19 March Deloitte & Touche

2 Introduction Pádraic Whelan Opening address Phil Nicklin Where and Why? Pádraic Whelan Key Irish REIT features Deirdre Power Gross Roll up funds V REIT Michael Flynn An Irish financing perspective 2011 Deloitte & Touche

3 REITs: Where and Why? Phil Nicklin Deloitte LLP. Private and confidential

4 REITs: Where? 34 regimes around the world REITs are recognised as an effective structure to finance and manage listed real estate and are a key feature of the majority of the world's developed investment jurisdictions... EPRA's view is that there are 34 countries worldwide that have REIT or 'REITlike' legislation in place. 4 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

5 REITs: Why? UK Government s perspective Policy objectives include: Attracting capital into the UK built environment, especially the private rented sector Alongside wider reforms to the planning system, providing a route into which newly developed rented accommodation can be sold, thereby increasing the willingness of house builders to increase supply Allowing smaller scale investors the opportunity to access commercial property returns Improving stability in the property investment market by rebalancing some debt with equity among property companies 5 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

6 REITs: Why? Investor perspective Access to the global REIT brand and international capital Liquid and publicly available source of property investment Improved after-tax returns for shareholders: Removal of traditional double-layer of taxation Effective elimination of capital gains Add value by eliminating existing latent gains Competitive advantage on corporate acquisitions Commercial decisions in a tax exempt environment 6 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

7 The UK story so far Deloitte LLP. Private and confidential

8 The UK story so far Existing REIT population 25 REITs c 50 billion of property With the exception of the majors, REITs tend to specialise Diversified Industrial London Alternatives British Land Land Securities SEGRO Hansteen Mucklow (A&J) Group Derwent Great Portland Estates Big Yellow Primary Health Workspace Target Shopping centre Retail Alpha Micro-cap Hammerson Intu Properties Source: Deloitte research Shaftesbury Town Centre Securities Local Shopping REIT New River REIT London Metric Glenstone Pineapple Highcroft Investments Warner Estates McKay Securities ApexHi Ground Rent Income Fund By market capitalisation - source: FT 15/03/2013 Diversified Majors Specialised Micro-cap Deloitte LLP. Private and confidential

9 The UK story so far Capital raising Provides access to overseas capital Key overseas investors REIT investors 1 AMP Redding APG Blackrock Cohen & Steers Colonial First State GIC ING Clarion Morgan Stanley Norges Bank Ontario Teachers Pension Fund Third Avenue Non-UK: 60% Non UK 75% UK: 40% UK 25% Source: Bloomberg 14/03/ Notes: 1 Volume based upon the top 20 shareholders of the top 10 UK listed REITs by market capitalisation per Bloomberg 14/ Deloitte LLP. Private and confidential

10 Key Irish REIT features and conditions Pádraic Whelan Deloitte LLP. Private and confidential

11 Irish REITs Acquisition followed by development. Hold for 3 years to avoid 25% CT - 75% of income / assets are rental assets - At least 3 properties no one > 40% of M.V. of all - At least 1.25 times interest. Cover otherwise excess taxable. - Debt of REIT cannot exceed 50% of M.V. of assets of the REIT - 3 years from conversion to list and be non close - 3 years to have right mix of properties Rent profits and capital gains tax free Companies converting - CGT event Dividends to shareholders with excessive rights > 10% will result in REIT having taxable income Cease to rent an asset CGT event. Residual business asset moved over CGT event 20% DWT on property income dividend Distribute 85% of rent or C.T. at 25% on the GAP 11 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

12 Irish REIT the building blocks Foreign property possible but tax leakage Irish incorporated and resident Listing on main market of a recognised stock exchange (EU) Widely held Group structure 100% SPV s 2% stamp on real estate 1% duty on share transfers 12 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

13 REITS : Tax treatment of property investment income Investment via REIT Irish resident Investors Marginal tax rate on income Credit for 20% DWT Corporates on disposal of REIT shares REIT Tax payable by investors Foreign Investors Tax treaty benefits Disposal of REIT shares does not attract Irish CGT Profits flow through to be taxed annually on investor only 13 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

14 Potential future enhancements Deloitte LLP. Private and confidential

15 Potential future enhancements General Improvements to legislation? ( loan to Value / Entry Charge ) Mortgage REITs Private, unlisted REITs?? Residential Housing REITs 15 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

16 Gross roll up funds - How do they measure up to the REIT? Deirdre Power March, 2013 Leading business advisors 2013 Deloitte & Touche

17 QIF v. REIT Structure comparison QIF Form Company, Unit Trust, ILP Regulated Yes (24 hr approval possible) Company REIT No (but listed/possible AIFMD?) Shareholder requirements Min. initial subscription of 100k Professional investor PPIU rules Investments No restrictions Risk spreading principle for corporate structure Widely held Not close company Penalty tax charge re shareholders owning > 10% 75% of income must be property rental Min. 3 properties MV of any asset < 40% of total MV Leverage No restrictions Penalty charge if 1.25:1 property financing ratio breached 17 Gross roll up funds how do they measure up to the REIT? 2013 Deloitte & Touche

18 QIF v. REIT Tax comparison QIF * REIT Income and gains No tax at fund level Property rental income/ gains exempt 25% tax on gains from property developed in 3 year period 25% tax on Residual business Distributions No WHT 20% - must pay out 85% of property rental income Treaty access Treaty by treaty analysis Yes Conversion to REIT No new set up needed Yes: -2% commercial stamp duty -CGT on transfers *ILP s are treated differently for tax purposes tax transparent 18 Gross roll up funds how do they measure up to the REIT? 2013 Deloitte & Touche

19 QIF v. REIT Investor Tax comparison Irish resident income Individual PPIU Corporate Pension funds 8 year rule for Irish residents Irish resident gains: Individual PPIU Corporate Pension funds 8 year rule for Irish residents QIF* 33% 53% 25% (12.5% if trading) Nil Yes 36% 56% 25% (12.5% if trading) Nil Yes REIT Marginal rate/usc/prsi N/A 25% Nil No 33% N/A 33% Nil No 19 *ILP s are treated differently for tax purposes tax transparent 2013 Deloitte & Touche

20 QIF v. REIT Investor Tax comparison QIF* REIT Non-residents Income Gains Nil Nil 20% DWT subject to treaty access Nil *ILP s are treated differently for tax purposes tax transparent 20 Gross roll up funds how do they measure up to the REIT? 2013 Deloitte & Touche

21 AIFMD Qualifying Investor Fund (QIF) regime The existing QIF regime already has many of AIFMD s attributes Independent depositary Valuations guidelines Authorisation & supervision Investor disclosure Corporate governance 21 Gross roll up funds how do they measure up to the REIT? 2013 Deloitte & Touche

22 QIF to QIAIF What s changing? Promoter regime Appoint AIFM Investment flexibility Borrowing/leverage permitted Speed to market Independent depositary Capital requirements Delegation framework Detailed risk management rules Detailed regulatory report Investor disclosures Conduct of business EU Passport 22 Gross roll up funds how do they measure up to the REIT? QIF QIAIF (+) (+) (+) (+) (+) 2013 Deloitte & Touche

23 REITs An Irish Financing Perspective Michael Flynn 23

24 Agenda What investors want and don t want Irish context Issues to be solved for REITs to succeed Can it work in Ireland 24 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

25 What are REIT investors typically seeking? Some of the key requirements for a REIT seeking capital 1. Specialism Geography, sector, income type 2. Low LTV Average across the majors is only 43%* 3. Strong dividend yield REITs are primarily seen as an income investment with capital upside 4. Scale Where seeking to attract capital, a market capitalisation around 150m is typically sought for liquidity 5. Free float Where seeking to attract capital this needs to be sufficient to provide secondary trading liquidity 6. An asset pool Blind vehicles are difficult to raise (unless rock-star management) 7. Management track record and alignment 1 *Source: Jeffries 19/09/2011 Preferably made money for listed investors before Typically these are requirements when raising significant capital as a REIT 25 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

26 What investors do not want!! Investors will typically not provide capital to Deleverage Do not want to pay for the de-leveraging of an over-geared company 2. External management Strong preference for internal management external is difficult but not impossible 3. Opaque vehicles Premium valuations for transparency and disclosure 4. Diversification A diversified portfolio with no clear story will be unattractive 26 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

27 Irish Context Significant levels of Real Estate investment in past Most real estate highly leveraged Significant value impairment in recent years Economic owner in many cases is bank(s) Strong desire of international capital to acquire assets Agreeing valuation remains stumbling block 27 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

28 Issues to be solved in Ireland Why would company put assets into REIT? particularly if LTV underwater Need to solve what happens residual debt Is there enough appropriate assets to put in REIT Could banks use REIT as potential deleveraging structure rather than portfolio sales Need to attract capital What will Irish REIT provide versus International REITs What assets will attract greatest interest Will other Irish opportunities distract from REITs 28 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

29 Can Ireland Deliver? Some of the key requirements for a REIT seeking capital 1. Specialism Yes 2. Low LTV Will require funder agreement 3. Strong dividend yield Potential selected assets 4. Scale Yes 5. Free float Yes 6. An asset pool Should be possible 7. Management track record and alignment Potential Yes potential for small number of large scale ( 500m) REITs 29 Real Estate Investment Trusts The Beginning! 2013 Deloitte & Touche

30 Contact details Deloitte LLP. Private and confidential

31 Contact details Phil Nicklin, Partner Tel: Padraic Whelan, Partner Tel: [email protected] Deirdre Power, Partner Tel: [email protected] Michael Flynn, Partner Tel: [email protected] Deloitte & Touche

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