Download Globalization of Real Estate Securities

Real Estate Investment Trusts
• • •
The United States Experience
CTPA Roundtable
February 2, 2006
Paris, France
Tony M. Edwards, EVP & General Counsel
Overview
• U.S. Tax Treatment of REITs and REIT
Shareholders
• Operation and Profile of U.S. REITs
• Benefits of Investment in U.S. REITs
• Globalization of Real Estate Securities
• Tax Treaty Issues for REITs and REIT
Shareholders
Qualification as REIT for U.S. Tax Purposes
• Company must be in the commercial real estate
business
– At least 75% of assets must be real property and be
held for the long-term
– At least 75% of revenue must come from real estate
• Stock must be widely held
– At least 100 shareholders
– 5 or fewer individuals can not collectively own more
than 50% of the REIT’s stock
U.S. Tax Treatment of REITs and Shareholders
• REIT structure intended to eliminate entitylevel tax
• At least 90% of taxable income must be
distributed annually to shareholders
• Company receives a dividends paid
deduction
• Income taxes are paid at the shareholder
level
What is a U.S. REIT?
• Full-time professional management teams
• Business plans designed to maximize shareholder
value
• SEC financial reporting and transparency
• Stock values backed by real assets
• Traditional corporate governance and accountability
• Tax transparency
The U.S. REIT Industry in 2005
• Over $475 billion of commercial real estate owned
–
–
–
–
15-20% of investment-grade commercial real estate
More than 24,000 properties nationwide
All major property sectors
All major geographic regions
• $331 billion equity market capitalization
• 197 publicly traded REITs in the NAREIT index
• 169 REITs trade on the NYSE
• 35 REITs in S&P indexes (9 in S&P 500)
5 Reasons to Invest in U.S. REITs
1. Diversification
2. Dividends
3. Liquidity
4. Performance
5. Transparency
Dividends
REITs Deliver Reliable Current Income
Average annual total returns: 13.8%
Average annual dividends: 8.1 percentage points or 59% of total return
Percent
50
50
40
40
Average annual
dividend return
8.1
30
30
20
20
10
10
0
0
-10
-10
Price
Income
-20
-20
-30
-30
1981
1984
1987
1990
1993
1996
1999
2002
Dividends
U.S. REITs Produce High Yields
Before-tax yields as of January 17, 2006
Percent
6.0
5.2
5.0
4.4
4.4
4.3
4.0
3.0
1.9
2.0
1.9
1.0
0.0
Corporate
Bonds
Equity
REITs
3-Month
T-Bills
10-Year
T-Notes
S&P
500
10-Year
TIPs
Performance
Short-Term and Long-Term Performance
Compound annual total returns in percent, December 31, 2005
3-Year
Compound Total Return
20
30
25
30-Year
Compound Total Return
25.1
15
20
13.8
14.4
15
12.7
10
10
5
5
0
0
REITs
S&P
500
REITs
S&P
500
Globalization of Real Estate Securities
• Many countries have adopted a REIT-type structure:
LPT - Listed Property Trusts (Australia)
Dutch FBI - Fiscal Beleggings Instelling (Netherlands)
S-REIT – Singapore Real Estate Investment Trust
J-REIT - Japanese Real Estate Investment Trust
SIIC – Sociétés d'investissements Immobiliers Cotées (France)
Canadian REITs – Legislated in 1993, growing universe
Belgium REITs – Growing universe
Hong Kong REITs – Largest REIT IPO Completed in November 2005
Bulgarian REITs – Newest country with REIT legislation
Malaysian REITs – Growing universe
• Under discussion:
United Kingdom – Draft legislation issued by UK Treasury in Dec. 2005
Germany – Enabling legislation expected in 2006 or 2007
Tax Treaty Issues for REITs and Shareholders
• Current tax treaty issues for REITs are
very different than the issues with respect
to collective investment vehicles
• The issue that has been addressed in the
United States has been treaty treatment of
dividends from REITs to REIT
shareholders
• Key question: treatment like other
dividends versus treatment like direct real
estate income
U.S. Tax Treaty Policy for REIT Dividends
• Pre-1988:
– Non-U.S. investors in U.S. REITs treated the same
as investors in non-REITs
– REIT dividends treated like all other dividends
• 1988-1997:
– Non-U.S. individuals owning less that 10% of the
REIT treated the same as investors in non-REITs and
subject to 15% withholding tax rate
– All other shareholders treated the same as direct RE
investors and subject to 30% withholding tax rate
(except as otherwise provided under U.S. tax code)
U.S. Tax Treaty Policy for REIT Dividends
• 1997-today:
– Non-U.S. shareholders treated the same as investors in
non-REITs and subject to 15% withholding tax rate if
the shareholder owns 5% or less of the REIT
and the REIT is listed
the shareholder owns 10% or less of the REIT
and the REIT is diversified
the shareholder owns 10% or less of the REIT
and the shareholder is an individual
– Other shareholders treated the same as direct RE
investors and subject to 30% withholding tax rate
(except as otherwise provided under U.S. tax code)
Theory Underlying U.S. Tax Treaty Policy
• “Our new policy takes into account that portfolio
investments in a REIT whether by individuals or
institutional investors may be indistinguishable in intent
and results from similar investments in other corporate
securities and should be afforded similar tax
consequences in appropriate circumstances. “
• - Statement of Department of the Treasury Joseph H.
Guttentag, International Tax Counsel Before the
Committee on Foreign Relations (October 7, 1997)
Future Treaty Issues for REITs and Shareholders
• As REITs become increasingly globalized, tax
treaties can help facilitate this cross-border
activity
• Cross-border investment in REITs by nonresidents
• Tax treaties could provide rules to address the
treatment of cross-border real estate
investments of REITs
• Tax treaties could provide rules to address the
cross-border investment of one REIT in
another REIT