International Bar Association Conference Real Estate Investment Trusts Panel 2 - REIT formation 17...
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Transcript of International Bar Association Conference Real Estate Investment Trusts Panel 2 - REIT formation 17...
International Bar Association ConferenceReal Estate Investment TrustsPanel 2 - REIT formation
17 October 2007
Singapore9142562_1
2
REITs
Growth in global REIT market in last 5 years = 350% 1
Proportion of value of global real estate currently in listed form = 8.8%
Number of countries which now have REIT-type legislation = 25+
Proportion of Australian REIT asset base which is offshore = 40%+
Sources: NAREIT, ASX
Note (1): Jan 2002, 237 REITs with combined value of USD270.7B;Jan 2007, 334 REITs combined value USD 944.6B
3
REITs Worldwide
Luxembourg (1988/2002)
Brasil (1993)
Australia (1971)
Mexico (2004)
USA (1960)
Canada (1994)
France (2003)
Belgium (1995)
The Netherlands (1969)
Germany (2007E)Dubai (2006) UK (2007E) Finland (2007E) India (2007E) Bulgaria (2004)
Israel (2006)
Turkey (1998)
Singapore (2002)
South Korea (2001)
Taiwan (2003)
Hongkong (2005)
Malaysia (1989/2005)
Japan (2000)
Greece (1999)South Africa (1981)New Zealand (1956)Italy (1994)Spain (2003)
Countries in which REIT structures already exist
Countries in which structures similar to REIT structures already exist
Countries in which the introduction ofREITs is already planned
4
What are typical structures for REITs and why have they developed?
Tax is an important factor. What are the key considerations?
A regulator perspective. What are regulators focussed on?
REIT IPOs. Why list a REIT? What are key trends in major markets? How does the process differ to a corporate float?
REIT Formation – Discussion Points
5
John Sullivan, Partner, Mallesons Stephen Jaques (Chair)
Michael Blair, Partner, Mayer Brown LLP
Scott Newman, Partner, K&L Gates
Jan Peeters, Partner, Stibbe
Mark Berman, Principal, CompliGlobe Ltd
Peter de Ridder, Partner, Loyens & Loeff
REIT Formation - Panel
6
REIT – basic structure
Trust or corporate structure
REIT buys property (diversified or sector focus - offices, shopping centres, logistics)
Issues securities which are listed on stock exchange
Professional manager (and in some cases trustee)
Income fully distributed to investors
Investors
REIT(trust structure)
TrusteeManager
Securities
Holds property(directly or through SPV)
Fees
Management services
Property income
Dividend/ distribution
ServicesFees
7
Structures: North America
Regulatory Requirements
US Canada
Structure/Name REIT (company/trust) REIT (trust)
First REIT listed 1960Modern era 1991
Mid 70’s
Number of REITS/Market Capitalisation
165 publicly traded REITs in FTSE NAREIT Index
US$344 billion capitalisation (July 2007)
32 REITs/C$33billion (2006)
Main regulatory body SEC/Stock Exchanges Provincial Securities Commission
Main Regulation Securities Act of 1933Securities Exchange Act of 1934
Trust Indenture Act of 1930 (for debt)
No applicable Incorporation Statute
Subject to all securities laws
Management Internal or External Internal or external
Local listing required May list, but some REITs don’t Yes
Shareholder base 100 holders, 5 or fewer individuals may not have more than 50% in value
9
Structures: Asia Pacific
20022005First REIT listed
18 / US$17.8Bn (incl bus trusts)
7 / US$8.7BnNumber of REITS/Capitalisation
ExternalExternalManagement
SingaporeHong KongRegulatory Requirements Australia
External or Internal
69 / US$ 115Bn
1971
Main regulatory body SFC MAS/SGX ASIC/ASX
Main Regulation Securities and Futures Ordinance
and Code on REITS
Securities and Futures Act and Property Funds
Guidelines
Corporations Act
Local listing required Yes Yes No
Shareholder base25% units held
publicly25% units by 500 + holders
400 + holders with A$2,000 holdings
Structure/Name REIT (trust) S-REIT (trust) LPT (A-REIT)
10
Structures: Europe
Regulatory Requirements
France Belgium Germany UK Netherlands
Structure/Name SIIC SICAFI REIT-Aktien gesellschaft
REIT Fiscale belegings instelling
First REIT listed 2003 1995 None listed yet 1 January 2007 1969
Number of REITS/
Capitalisation
30/ US$38bn 14 / US$ 10,5bn Pre Reits 4; applications for pre Reits 6; Corporates intending to apply for status 11
17/US$67bn 9 / US$19bn
Main regulatory body FTA (Tax authorities) CBFA Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
HM Revenue & Customs UK Listing Authority
Autoriteit Financiële Markten (AFM) – Belastingdienst
Main Regulation Finance Act Law 20 July 2004
RD 10 April 1995
Reit-Gesetz Finance Act 2006
UK Listing Authority Listing Rules
Wet Financieel Toezicht; Corporate Income Tax Code
Management Internal/external Internal/external Internal Internal/external Internal/external
Local listing required Yes Yes (EU) Yes (EU) No (but need a “recognised Stock Exchange)
No (no formal listing requirement)
Shareholder base 15% of capital by holders of 2% or less. Max 60% any holder/group.
Minimum free float of 30 %
15% (25 %) of capital by holders of 3% or less. Max 9.99% any holder.
Must not have less than six controlling members. Max 10% any holder.
No individual may hold 25% or more of shares in the listed entity.
Other restrictions apply
11
Belgium – Corporate Structure with General Partner
Commanditaire Vennootschapop aandelen (CVA)
Public
GeneralPartner
Assets
12
Trust, Limited Partnership or Limited Liability Company in order to achieve tax neutrality concept of the REIT?
Capitalisation of the REIT: equity and debt/borrowings – does it matter for tax purposes?
Investor home tax considerations and structuring opportunities
Tax considerations
13
REIT Formation – U.S. Tax Requirements
REIT provisions initially enacted by the U.S. in 1960
Designed to allow individual investors to invest in real estate through a public, liquid vehicle as if such investors had invested directly in the underlying real estate
If properly structured and operated, REIT is a “conduit” for purposes of U.S. income taxation (i.e., no corporate level tax and only one level of tax imposed at the shareholder level)
U.S. REITs: Equity versus Mortgage
Can be a corporation, trust or association, provided the following conditions are met:
⇒Managed by one or more trustees or directors
⇒Beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest
⇒Would be taxable as a domestic corporation if not a REIT
14
REIT Formation – U.S. Tax Requirements
Not a financial institution such as a bank, savings bank, domestic building and loan associations or an insurance company
Beneficial ownership of which is held by 100 or more persons
Not closely-held (i.e., not more than 50% of the value of the stock of the REIT may be owned, actually or constructively, by or for not more than 5 individuals
Elects to be taxed as a REIT
Satisfies certain gross income, asset and distribution tests to be discussed in connection with “REIT Operating Considerations” and which are generally designed to insure that the REIT operates as a “passive” investment vehicle
15
REIT Formation - Canada
Many jurisdictions, including Canada, have adopted legislation designed to accomplish the same or substantially similar objectives as prompted the U.S. to enact legislation authorizing REITs
Although Canada’s REIT legislation, which was initially enacted in 1994 and has recently been amended, is in many respects similar to that of the U.S., there are significant differences.
16
Regulatory Issues
Disclosure: fees, transactions with affiliates/interested party transactions, valuations, projections and forecasts, materiality threshold for disclosure, restatements and decisions on impairment, leverage
Operational issues: caps on holdings (concentrations) and on non-real estate investments, uses of guarantees and cross-suretyships, paying dividends in excess of current income
Enforcement issues: misuse of material non-public information, restatements, options grants, timing of revenue recognition, suitability (via regulatory inspections), failure to disclose adequately interested party transactions, misrepresentation (of listing/market), failure to disclose commissions/fees
Valuations: assumptions, exposure to “sub-prime” issues
Significant transactions: M&A activity, fairness opinions in LBOs, proxy contests
17
Hot topics for regulators
Disclosure of forecasts and projections of distributions, including assumptions and risks
Short-term yield enhancing arrangements/financial engineering (more on this in panel 3)
Funding distributions through debt or return of capital
Manager entrenchment and disincentives to removal: rights in trust deeds vs regulatory/legal requirements
Gearing levels and related risks
Clear, concise and effective disclosure
Approach varies between jurisdictions – regulation v disclosure
18
Key Benefits of Listing a REIT
Investors Vendors / Sponsors
Access to quality property
Replicates direct ownership (with tax pass through)
Liquidity
Diversification of risk
Transparency
May maximise sale price (broader pool of investors)
May be more attractive than private sale
Ongoing management fee income stream
Free up capital on balance sheet for other uses
Potential purchaser for developed assets
Potential value uplift in REIT structure
19
Market trends
• strong deal flow in some markets, less in others – cost of capital is a key driver; property capitalisation rates another factor
• off-shore and cross-border REITs
• broader asset classes – hotels, tourism, retirement villages etc
• subsidiary wholesale funds/private real estate funds
Offering process and disclosure
• relatively highly regulated
• speed to market varies between jurisdictions
• offer document:
− length and regulatory involvement varies
− incorporation by reference
• related party aspects important – like other spin off transactions
REIT IPOs
20
REIT IPOs
Regulatory requirements• listing (spread, scale and suitability) or means to sell if not listed
• collective investment authorisation required?
• ongoing reporting and disclosure obligations
• future acquisitions, capital raising and takeovers
Key design factors• tax efficiency
• pipeline of properties to underpin future growth
• management structure and protections
• ownership of assets (including co-ownership and pre-emptive rights)
21
Example Australian REIT IPO Structure
Passive Assets
Public Investors
Trust 1 Trust 2Responsible Entity (RE)
ManagerActive
(development) Assets
Extra layer of collective
investment regulation as
well as securities law
and stock exchange
rules
Often sponsor has pre-emptive rights to take assets back if RE removed
External manager – fixed term
management contract as protection
feature
Units
REIT
Co-owner of asset
Management agreement
Sponsor/Vendor
Often sponsor is also
spinning off properties - related party consideration
s
Units
Stapled