Real Estate Investment Trusts The Beginning!

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Real Estate Investment Trusts

The Beginning!

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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

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REITs: Where and Why?

Phil Nicklin

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“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 'REIT-like' legislation in place.”

REITs: Where?

34 regimes around the world

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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

UK Government’s perspective

REITs: Why?

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• 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

REITs: Why?

Investor perspective

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The UK story so far

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• 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 • 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

Source: Deloitte research

Existing REIT population

By market capitalisation - source: FT 15/03/2013

Diversified Majors Specialised Micro-cap

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The UK story so far

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Capital raising

Notes: 1_{Volume based upon the top 20 shareholders of the top 10 UK listed REITs by market capitalisation per Bloomberg 14/032013}

Source: Bloomberg 14/03/2013 1

Provides access to overseas capital

Key overseas investors REIT investors1 • 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% UK: 40%_UK 25% Non UK 75%

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Key Irish REIT features and conditions

Pádraic Whelan

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Irish REITs

Rent profits and capital gains tax

free

- At least 1.25 times interest. Cover otherwise

excess taxable. - Debt of REIT cannot exceed 50% of M.V. of

assets of the REIT

Dividends to shareholders with excessive rights > 10% will result in REIT having

taxable income

- 75% of income / assets are rental assets - At least 3 properties no one > 40% of M.V. of all

Distribute 85% of rent or C.T. at 25% on the GAP

Cease to rent an asset – CGT event. Residual business – asset moved over – CGT

event - 3 years from conversion

to list and be non close - 3 years to have right

mix of properties Companies converting - CGT event 20% DWT on property income dividend Acquisition followed by development. Hold for 3

years to avoid 25% CT

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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

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REIT

REITS : Tax treatment of property investment income

Investment via REIT

Tax payable by investors

Profits flow through to be taxed annually on

investor only

 Marginal tax rate on income  Credit for 20% DWT

 Corporates CT @25%

 CGT @33% on disposal of REIT shares

Irish resident Investors

Foreign Investors

 Tax treaty benefits

 Disposal of REIT shares does not attract Irish CGT

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• General Improvements to legislation ? ( loan to Value / Entry Charge ) • Mortgage REITs

• Private, unlisted REITs?? • Residential Housing REITs

Potential future enhancements

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Deirdre Power

Gross roll up funds -

How do they measure

up to the REIT?

March, 2013

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17 Gross roll up funds – how do they measure up to the REIT?

QIF

REIT

Form

• Company, Unit Trust,

ILP

• Company

Regulated

• Yes (24 hr approval

possible)

• No (but listed/possible

AIFMD?)

Shareholder

requirements

• Min. initial subscription

of €100k

• Professional investor

• PPIU rules

• Widely held

• Not close company

• Penalty tax charge re

shareholders owning

> 10%

Investments

• No restrictions

• Risk spreading principle

for corporate structure

• 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

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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

• DWT @ 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

QIF v. REIT

Tax comparison

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QIF*

REIT

Irish resident income

Individual

PPIU

Corporate

Pension funds

8 year rule for Irish

residents

33%

53%

25% (12.5% if trading)

Nil

Yes

Marginal rate/USC/PRSI

N/A

25%

Nil

No

Irish resident gains:

Individual

PPIU

Corporate

Pension funds

8 year rule for Irish

residents

36%

56%

25% (12.5% if trading)

Nil

Yes

33%

N/A

33%

Nil

No

QIF v. REIT

Investor Tax comparison

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QIF*

REIT

Non-residents

Income

Gains

Nil

20% DWT – subject to

treaty access

Nil

QIF v. REIT

Investor Tax comparison

Gross roll up funds – how do they measure up to the REIT?

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AIFMD

Qualifying Investor Fund (QIF) regime

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Corporate

governance

Valuations

guidelines

Investor

disclosure

Authorisation

& supervision

Independent

depositary

The existing QIF regime already has many of AIFMD’s attributes

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QIF to QIAIF

What’s changing?

QIF

QIAIF

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

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REITs

An Irish Financing Perspective

Michael Flynn

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Agenda

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• What investors want and don’t want • Irish context

• Issues to be solved for REITs to succeed • Can it work in Ireland

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What are REIT investors typically seeking?

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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

• Preferably made money for listed investors before

1 –*Source: Jeffries 19/09/2011

Typically these are requirements when raising significant capital as a REIT

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What investors do not want!!

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Investors will typically not provide capital to...

1 . 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

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Irish Context

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• 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

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Issues to be solved in Ireland

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• 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

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Can Ireland Deliver?

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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

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Phil Nicklin, Partner

Tel: +44 20 7007 2984

Email: pnicklin@deloitte.co.uk

Padraic Whelan, Partner

Tel: +353 1 417 2848

Email: pwhelan@deloitte.ie

Contact details

Deirdre Power, Partner

Tel: +353 1 417 2448

Email: dpower@deloitte.ie

Michael Flynn, Partner

Tel: +353 1 417 2515

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