The Malta Stock Exchange (MSE) was late last year, given approval by the MFSA to amend its bye laws to allow for the listing of Real Estate Investment Trusts (REITS)
Whilst a new concept for Malta, Real Estate Investment Trusts (REITs) have been a popular vehicle in the US since the 1960s and there are now 38 REIT regimes globally with a total market cap of approximately US%1.7 trillion.
What is a REIT?
Given the different tax and legal frameworks regulating REITS globally, REITS may look substantially different from one jurisdiction to another although they share certain characteristics. Notwithstanding that they are referred to as trusts, REITs are usually, although not necessarily, companies. They are essentially vehicles which allow investors to pool assets to be invested in income-generating real estate.
REITs are set up for the limited purpose of owning immovable property in order to generate rental income therefrom. The property may range from single residential units, multi-residential units, commercial properties or a combination of the three.
Exposure for smaller investors to property market and reduction of risk
In this manner a REIT allows investors with a lower investment threshold, to have exposure to the property market, without the recourse to borrowings typically associated with property investments thus providing access to returns from investment grade property which would be beyond their reach as individual investors.
Given that a REIT portfolio must be diversified in order for the entity to qualify as a REIT, investors hold a share in a larger and more diverse property portfolio than would be possible on an individual basis thus reducing their risk.
The investment in a REIT, rather than in bricks and mortar directly, is more liquid given that investors can buy and sell shares in the REIT on the MSE on a daily basis as opposed to the cumbersome process involved in selling any immovable property directly. Furthermore, a REIT allows for fragmentation of the holding such that part of the shares held may be disposed of as required as opposed to the entire property being transferred where the investment is made in property directly.
Regular return on investment
REITs are typically required to distribute most of their property rental income thus guaranteeing a regular flow of income to investors who also benefit from the expertise of professional property asset managers in the selection and management of assets.
Capitalisation of value for property owner
From the property owner’s perspective, a REIT provides a means to market properties by converting such property into tradeable securities on a regulated market and capitalising a part of the value of such property. This will provide cash flow advantages to him without the need to divest of the entire property.
In order to qualify as a REIT on the MSE, the Issuer must have its shares listed on the main market of the exchange and thus be subject to the listing rules applicable to all listed entities. In addition, it must satisfy the additional conditions to qualify as a REIT in the Bye-laws. Such conditions mainly cover the business and activities which the Issuer must carry out and the distribution of dividends.
The issuer must have a Property Rental Business defined as the business of owning or leasing immovable property whether residential or commercial for the purposes of renting out such immovable property to third parties and receiving rental income therefrom.
In order to carry out this business it must have a portfolio of assets which is made up of at least 3 distinct and non-contiguous immovable properties in Malta or abroad with a total value of at least €9,000,000 and none of which may be owner occupied in accordance with IFRSs. A single property within the portfolio of assets cannot be valued at more than 30% of the total value of properties included in the portfolio.
Income arising from the Property Rental Business must make up at least 75% of the Issuer’s total Revenue whilst at least 75% of the aggregate market value of the Issuer’s assets must consist of assets that are capable of generating income relating to the Property Rental Business.
Distribution of Dividends
Subject to the provisions of the Companies Act in relation to sufficient distributable reserves and any restrictions relating to distributions, the Issuer is obliged to distribute to the shareholder by way of an annual dividend at least 85% of the profits arising from the property rental business in each financial year.
Taxation of REITS
REITS are subject to tax in the same manner as other companies and can opt on an annual basis for rental income to be subject to a 15% final withholding tax on the gross rental income provided properties are not rented to related parties. Investors receiving dividends from the REIT will not be subject to any further tax on their dividend income.
All other income of the REIT would be subject to the standard corporate income tax rate of 35%.
Investment in real estate has traditionally been favoured by many Maltese investors as the property market is seen as a stable and a resilient one which has withstood even the upheaval of the Covid pandemic, albeit through market supporting measures provided by government. In this context, the introduction of REITS is an exciting one providing innovative options to the traditional property investments.