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Invest in REITs & REMFs with tax benefits
1. Reits & remf REAL ESTATE INVESTMENT TRUST & REAL ESTATE MUTUAL FUNDS
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5. Types of REIT’s Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents. Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans. Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages
10. Pay dividends of at least 90 percent of the REIT's taxable income
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13. The rent collected from this real estate is the income generated by the REIT. This income, after accounting for operating and non operating expenses along with one offs is then distributed to the unit holders
16. Reits in india In India, there is no legislation yet for the establishment of REITs. SEBI has outlined draft regulations for these trusts in December 2007. This got indefinitely postponed with the current market conditions tending to be more bearish than expected, this legislation seems to have taken a back seat.
22. Real estate is defined to include land or buildings (irrespective of whether freehold or leasehold), car parks and other assets incidental to ownership of real estate such as fittings, fixtures, etc. However, REITs are not permitted to acquire vacant land.Who can set up a REIT Person setting up a REIT is referred to as a Sponsor. As such, any person could act as a Sponsor to the REIT.
23. REIT’s SEBI draft regulations Management of REITs REITs would be managed by its trustees. Trustees could be a scheduled bank, trust company which is a subsidiary of a bank, a public financial institution, insurance company or a body corporate. Individuals cannot act as trustees. Schemes floated by REITs REITs could float schemes which need to be close-ended schemes for the purpose of raising public money to invest in income-generating real estate properties.
24. REIT’s SEBI draft regulations Management of schemes Schemes of REITs would be managed by real estate investment management companies (‘REIMCs’). REIMCs are companies incorporated in India with the object of organising, operating and managing a real estate investment scheme. Eligibility conditions for registration of REITs/REIMCs Minimum net worth criteria of Rs 5 crores (initial net worth requirement of Rs 3 crores to be increased to Rs 5 crores over a period of 3 years from registration). At least 50 percent of trustees/ directors, as the case may be, to be independent. Management of REIMCs and REITs to be independent of each other.
48. A recent trend towards specialization of S-REITs has led to the establishment of S-REITs dedicated to sub-sectors such as hotels, retail properties and healthcare facilities.
50. At least 70% of total assets invested in real estate related assets and a minimum of 90% of taxable income distributed to investors.
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52. Legal Framework • Securities and Futures Act (Act) and Regulations • Code on Collective Investment Schemes (Code) published by MAS(Monetary Authority of Singapore) • Property Trust Guidelines (belonging to Code) • Listing Manual of the Singapore Exchange (SGX ST) • Trust Companies Act Restrictions Trustee • Independent trustee • Functions and responsibilities: Code, Act: Regulations, Trust Companies Act, Trust Deed and , common law principles (principles of equity) Trust Manager • At least 5 years experience managing property trusts • Required track record in Property Trust Guidelines • Listing Manual prescribes functions • If the manager will manage a portfolio of securities: a Capital Markets Service Licence from MAS will be required
53. Trust Deed • Act and Regulations spells out basic requirements • Deals with the creation of the trust, terms of appointment of trustee and trust manager and details of the unit trust scheme • To be approved by MAS Miscellaneous • Prospectus required in case of public offers in Singapore, in accordance , with the Act and Regulations and registered with MAS beforehand and reviewed by SGX SGX-ST • Prohibited activities: property development and investing in development securities, mortgages (except mortgage -backed securities) • At least 35% of unit proceeds must be invested in property within 24 months from launch and at least 70% invested in real estate related assets • Investments must be properly diversified • Maximum 35% of value of the property may be borrowed, except in case of ‘A’ rating by credit rating agency, in which case higher • If rating will be influenced by credit enhancement: MAS to be consulted • Related party transactions rules to be observed
60. Geographic restrictions None in Singapore model, Hong Kong and South Korea. In Japan, More than 50% of total shares of the J-REIT must be offered in Japan in order to qualify for tax deduction. borrowing restrictions Gearing is limited to 35% of total assets unless borrowings used rate A or above by Fitch Inc., Moody’s or Standard or Poor’s or credit rating of fund is at least A by one of these rating agencies.
61. Shareholders restrictions None Earning payout Required to distribute at least 90% of taxable income each year on operative income. No requirements for capital gain on disposed in-vestments. No depreciation.
62. Tax treatment Tax treatment at the level of REIT Income tax: not taxable at trustee level to the extent of taxable income distributed. No capital gains tax. 70% on distributions to non-resident corporate unit holders TAX treatment at the shareholder’s level: S-REITs established as a unit trust are tax transparent if they distribute over 90% of income. S-REIT dividends are ex-empted from tax for individuals. Local and overseas corporate unit holders are taxed on income distributions at 20%.
63. Tax treatment Mandatory listing: Yes for S-REITs established under a corporate structure Special listing requirements: Minimum asset size of S$ 20m if denominated in Singapore Dollars. At least 5.000 shareholders before listing and at least 25% of units must be held by at least 500 public share-holders. No. Of entities: 5 S-REITs listed on Singapore Stock Exchange
65. Australia has a mature and increasingly sophisticated REIT market, which ischaracterized by strong but flexible regulation with a focus on disclosure. The Australian REIT market is the largest in Asia and the second largest inthe world after the United States.2 REITs (commonly referred to as “listedproperty trusts” or “LPTs” in Australia)3 play a very important role in theAustralian market. LPTs are one of the largest sectors on the AustralianStock Exchange Limited (ASX) and now account for around 10% of totalmarket capitalization, a much higher level than other Asian markets.
66. A-REIT’s 1) The REIT concept was launched in Australia in 1971. General Property Trust was the first Australian real estate investment trust (LPT) on the Australian stock exchanges (now the Australian Securities Exchange). 2) REITs which are listed on an exchange were known as Listed Property Trusts (LPTs) until March 2008, distinguishing them from private REITs which are known in Australia as Unlisted Property Trusts. They have since been renamed Australian Real Estate Investment Trusts (A-REITs) in line with international practice. 3) There are now more than 70 A-REITs listed on the ASX, with market capitalization in excess of A$100bn.
67. A-REIT’s 4) Australia is also receiving growing recognition as having the world’s largest REITs market outside the United States. More than 12 percent of global listed property trusts can be found on the ASX. 5) A-REITs are traded on market and allow investors to buy an interest in a professionally managed and diversified portfolio of commercial real estate. Investors gain exposure to both the value of the real estate the trust owns, and the regular rental income generated from the properties. A-REIT investments may include the following types of real estate: • Office buildings • Industrial estates • Retail shopping centers • Hotels and pubs and • International (US, Asia, Japan and Europe)
68. Working of A-REIT’s 1) The fund manager selects the investment properties and is responsible for all maintenance, administration, rentals, and improvements. Most property trust managers include properties across a diversity of geographic regions, lease lengths, and tenant types. 2) Returns from A-REITs are generated from income and capital growth. Income is generally distributed quarterly or half-yearly while the on-market price may increase as the value of the underlying properties increase over the long-term.
70. Value achievement through investing in A-REIT’s Regular Income with capital growth The distribution yields on A-REITs are made either quarterly or twice yearly, allowing investors to regulate their cash flow. Apart from distributions, A- REITs also offer the opportunity for capital growth though they have long been viewed as stable income style investments. Rising yields, attractive valuations or movements in other markets, can cause A-REIT prices to rise. Diversification A-REITs invest across a range of properties in a wide variety of geographic regions, lease lengths and tenant types to decrease investor risk. Investments in A-REITs can therefore be used to further diversify an investment portfolio, providing a greater degree of balance. Liquidity A-REITs can be bought and sold via any stockbroker on ASX and through accredited financial planners, with the proceeds of sales received in three days. Unlike most property investments, part or all of your A-REIT holdings can be sold at short notice
71. Value achievement through investing in A-REIT’s Low cost exposure to real estate A-REITs offer access to the property market with professional investment management at a relatively low transaction and management cost. Taxation advantages Due to the unit trust structure used by most A-REITs, including the unit trust component of stapled securities, income or distributions paid to investors are untaxed when paid. The investors will still have to pay tax at such time as they are accessed following the filing of their tax returns. A-REITs also have access to tax concessions like depreciation (capital) allowances, while some of the tax associated with the rental income earned by the A-REIT can be deferred.
72. Trusts In Australia, REITs have traditionally been structured as unit trusts. There are two main reasons for this: · Capital flexibility. The rules governing return of capital from a trust are less cumbersome than the equivalent rules for companies. · Flow through tax treatment. Trusts that only hold passive investments, rather than carrying on business activities within the trust, enjoy a ‘flow through’ treatment for income tax (if all the trust’s income for the year is distributed to investors, the trust itself does not pay tax and only the investors are taxed). The advantage of flow through taxation is that income and gains derived by the trustee retain their character in the hands of the investors. Therefore, any tax preferences will flow through to the investors. By contrast, a company is a separate taxpayer
73. . Other key features Other key features of an LPT are similar to the features of REITs in other jurisdictions: · Property. The LPT acquires property (either a diversified portfolio or one focused on a specific sector, such as offices, shopping centres or industrial properties). · Listed Securities. Investors are issued with securities that are quoted on the ASX. · Management. The LPT is typically managed by an external body, called the responsible entity, who provides professional management services for the portfolio (although there are also many instances of internal management). · Distributions. The LPT generally distributes all of its income for each year to investors. · Gearing. The LPT typically carries moderate levels of borrowing. LPTs which operate hotels, car parks, development assets and other “active” businesses, or which have internal management, often have a ‘stapled structure’, which allows passive investment and active management to exist in a single stapled entity.
74. . Overview of the regulatory regime Most of the rules which are applicable to LPTs are contained in theCorporations Act 2001 and the Listing Rules of theASX. LPTs are also subject to the general law of trusts.
75. . Corporations Act regulation generally The Corporations Act provides for a national framework of companies, securities, financial products and financial services legislation. The Australian Securities and Investments Commission (ASIC) is the regulator. Since the mid 1990s, the laws governing unit trusts have changed substantially. New chapters have been introduced into the Corporations Act covering establishment and operation of unit trusts such as LPTs.
76. REMF Real-Estate Mutual Fund (REMFs ́) introduced by Securities and Exchange Board of India (SEBI ) gives options to the investors for investing in real- estate. Before REMFs, through the capital market, money was invested in the equities of real-estate companies and not in real-estate REMF gives an additional mode of raising money through the capital market for the activities in the real-estate sector. These correspond with the Real-estate Investment Trusts in USA and Pool Management Vehicle in U.K which are popular modes of investment in USA and U.K respectively.
77. INVESTMENTS THROUGH REMF REMFs have been allowed to invest in: 1.directly in real-estate properties; 2.mortgage backed securities; 3.equity shares, bonds, debentures of listed/unlisted companies which deal in properties ;and also undertake property development; REMFs provide better alternative for investors as they have been given a wide opportunity from investing in real-estate properties to equity shares etc. of companies dealing in properties. The investors allowed to invest in real-estate are 1. High Net worth Investors (HNWI ) 2. Foreign Institutional Investors (FII’s ) REMFs are still not open for the retail investor.
78. IMPORTANT CONSIDERATIONS REMFs are governed by SEBI (Mutual Fund) Regulations, 1996 and periodic guidelines issued by SEBI. Like any other mutual fund REMFs should be in the nature of trusts and are required to be registered and they must set up a board of trustees and trustee companies. Asset Management Companies (AMC ) should manage REMFs but cannot act as the trustees of any REMF The net worth of the AMCs should be at least INR 100 million. No trustee of an REMF can be the trustee of any other REMF.
79. LISTING OF UNITS The units of REMFs have to be compulsorily listed on the stock exchange. The REMF has to appoint a SEBI approved custodian who will act as the custodian of securities. No scheme can be launched by the REMF unless it is approved by the board of trustees. The REMF is required to file the offer document with SEBI. If the draft is approved by SEBI then the AMC can issue the offer document.
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81. No scheme can be open for subscription for more than 45 days
82. The REMF is required to return the subscription amount to the investors within six weeks from the date of closure if there is over subscription or under subscription
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