Ireland to Introduce a REIT Regime
Tommy Conway NCB, Bill Nowlan WK Nowlan, John Moran, Dept of Finance
In his 2013 Budget speech Michael Noonan announced that he would introduce legislative changes to enable REITs to be introduced to Ireland. Our REITs legislation is now in place and closely resembles, but is an improvement on, the UK structure which has operated very successfully since 2007 (see Legislation section)
What are REITs?
The name REIT is an acronym for Real Estate Investment Trust, a name coined in the US where REITS were conceived in the 1960s. The T for “trust” component of the name is no longer appropriate as REITs are publicly listed real estate companies not trusts, but the moniker has stuck.
The distinguishing feature of a REIT is that, subject to strict conditions, they are exempt from tax at corporate level. The rationale for this exemption is that currently the ownership of property through a corporate structure involves an additional layer of taxation compared to direct personal ownership of property. In the first instance the company is liable to pay tax on its rental profit. It then distributes its after tax rental income by way of dividends to shareholders. These dividends, which are not tax deductible for the company, are then subject to income tax in the hands of shareholders. This anomaly has resulted in the demise of property companies in Ireland and the concentration of property in private ownership – including syndicates. The introduction of REITs does not amount to a tax break nor should it result in a loss of tax revenue, rather it will simply mean that the mode of property ownership (direct or via a REIT) is tax neutral.
The conditions that a company needs to comply with to qualify as a REIT are an obligation to distribute the bulk of its rental income (net of management costs) and restrictions on the amount of gearing and development activities and on the percentage of the total shareholding that an individual shareholder can control in a REIT.
REITs are listed companies and their shares can be bought and sold in the same way as any other share.
Why introduce REITs to Ireland?
Attract International Investors
REITs are established in the US and throughout almost all major economies and are a globally understood and accepted investment medium. The role of EPRA in promoting REITs’ good governance and the transparency of their reporting enhances REITs’ attractiveness to international investors. The introduction of REITs to Ireland will promote international investment in Ireland’s troubled property sector.
Promote a rational and professionally managed Irish Property Industry
The Irish property industry prior to its implosion was irrational. The majority of property investment deals were characterised by being overpriced, over-geared, and undiversified single asset investments.
Best practice REITs will consist of competently constructed and well diversified portfolios that will be professionally and proactively asset managed by property and specialist financial professionals.
Enhance Investor Protection
In the past, the private and unregulated nature of property investment in Ireland resulted in minimal protection for private investors. All REITs will be subject to the rigorous governance of the Irish Stock Exchange’s listing rules and on a voluntary, but essential, basis compliance with EPRA’s exacting standards. The REIT legislation will prohibit over-gearing and over-exposure to higher risk property development
Whilst no regulation or adherence to good practice will guarantee positive returns, rational and professional management in conjunction with conservative gearing will prevent the utter devastation of investors’ equity that was a feature of Irish property market’s recent collapse.
Provide an Exit Mechanism for the Banks and NAMA
Prime Irish property is currently getting the attention of leading international real estate investors and is seen as one of the most attractive markets in Europe. Its combination of high initial yield and the real prospect of significant capital appreciation (on the basis of the incipient recovery in Dublin’s CBD occupational markets and, in time, market normalisation) offer investors the prospect of double-digit returns over the medium term.
The banks and NAMA who take control of assets underlying non-performing loan portfolios can use REITs as a route to market and a component of their deleveraging strategies. In addition they can retain an interest in the assets’ upside by leaving some money on the table in the form of REIT shares.
Provide a Liquid High Yield Investment Opportunity for Irish Retail Investors
Since the demise of the previously high dividend paying and seemingly solid Irish banks the Irish private investor and pension funds have few indigenous liquid high yielding investment opportunities. And as bank deposit rates decline, the lower net returns on holding cash make meeting the 5% annual distribution in Approved Retirement Funds very difficult to achieve. Irish REITs, paying high and sustainable cash yields, can fill this gap.
What are REITs?
The name REIT is an acronym for Real Estate Investment Trust, a name coined in the US where REITS were conceived in the 1960s. The T for “trust” component of the name is no longer appropriate as REITs are publicly listed real estate companies not trusts, but the moniker has stuck.
The distinguishing feature of a REIT is that, subject to strict conditions, they are exempt from tax at corporate level. The rationale for this exemption is that currently the ownership of property through a corporate structure involves an additional layer of taxation compared to direct personal ownership of property. In the first instance the company is liable to pay tax on its rental profit. It then distributes its after tax rental income by way of dividends to shareholders. These dividends, which are not tax deductible for the company, are then subject to income tax in the hands of shareholders. This anomaly has resulted in the demise of property companies in Ireland and the concentration of property in private ownership – including syndicates. The introduction of REITs does not amount to a tax break nor should it result in a loss of tax revenue, rather it will simply mean that the mode of property ownership (direct or via a REIT) is tax neutral.
The conditions that a company needs to comply with to qualify as a REIT are an obligation to distribute the bulk of its rental income (net of management costs) and restrictions on the amount of gearing and development activities and on the percentage of the total shareholding that an individual shareholder can control in a REIT.
REITs are listed companies and their shares can be bought and sold in the same way as any other share.
Why introduce REITs to Ireland?
Attract International Investors
REITs are established in the US and throughout almost all major economies and are a globally understood and accepted investment medium. The role of EPRA in promoting REITs’ good governance and the transparency of their reporting enhances REITs’ attractiveness to international investors. The introduction of REITs to Ireland will promote international investment in Ireland’s troubled property sector.
Promote a rational and professionally managed Irish Property Industry
The Irish property industry prior to its implosion was irrational. The majority of property investment deals were characterised by being overpriced, over-geared, and undiversified single asset investments.
Best practice REITs will consist of competently constructed and well diversified portfolios that will be professionally and proactively asset managed by property and specialist financial professionals.
Enhance Investor Protection
In the past, the private and unregulated nature of property investment in Ireland resulted in minimal protection for private investors. All REITs will be subject to the rigorous governance of the Irish Stock Exchange’s listing rules and on a voluntary, but essential, basis compliance with EPRA’s exacting standards. The REIT legislation will prohibit over-gearing and over-exposure to higher risk property development
Whilst no regulation or adherence to good practice will guarantee positive returns, rational and professional management in conjunction with conservative gearing will prevent the utter devastation of investors’ equity that was a feature of Irish property market’s recent collapse.
Provide an Exit Mechanism for the Banks and NAMA
Prime Irish property is currently getting the attention of leading international real estate investors and is seen as one of the most attractive markets in Europe. Its combination of high initial yield and the real prospect of significant capital appreciation (on the basis of the incipient recovery in Dublin’s CBD occupational markets and, in time, market normalisation) offer investors the prospect of double-digit returns over the medium term.
The banks and NAMA who take control of assets underlying non-performing loan portfolios can use REITs as a route to market and a component of their deleveraging strategies. In addition they can retain an interest in the assets’ upside by leaving some money on the table in the form of REIT shares.
Provide a Liquid High Yield Investment Opportunity for Irish Retail Investors
Since the demise of the previously high dividend paying and seemingly solid Irish banks the Irish private investor and pension funds have few indigenous liquid high yielding investment opportunities. And as bank deposit rates decline, the lower net returns on holding cash make meeting the 5% annual distribution in Approved Retirement Funds very difficult to achieve. Irish REITs, paying high and sustainable cash yields, can fill this gap.
