Malta Real Estate Investment Trusts - REITs

Real Estate Investment Trusts (REITs) will soon be introduced in the Maltese legislation as announced in the 2019 budget speech. Through REITs, investors would have the chance to invest on a large scale in various portfolios that generate property income. 

History of REITs

Although REITs should be introduced in the Maltese legislation in the near future, following the last budget announcement in this sense, the concept has been around since 1960 when REITs were first created in the US under former President Dwight D. Eisenhower. The idea behind the inception of REITs was to provide investors with another opportunity of investment similar to the purchase and sale of liquid securities. Through REITs, investors would have the chance to invest on a large scale in various portfolios that generate property income.

The momentum created through the enactment of the law in 1960, was immediately kept when a year later, the first REIT was set up by Thomas J. Broyhill, by the name of ‘American Realty Trust’. Ever since the first REIT was set up, 30 more countries have enacted a law to introduce REITs to their local legislative system, amongst which one would find Ghana, Australia, India, Belgium, Bulgaria, Ireland and Mexico.

What are REITs?

The acronym REIT stands for Real Estate Investment Trusts which provides an opportunity to investors to invest on a large scale in the real estate sector. A REIT would operate real estate that generates a profit, usually from rental income. Immovable property may vary from office buildings, apartments, hotels, warehouses and shopping malls. A REIT would not buy, develop a property and re sell it, rather even though a property would be bought to be developed, this would not be re sold but it would be operated as part of the REITs investment portfolio.

The shareholder/investors of a REIT would earn a share of the income generated. The investor does not need to buy, sell or even finance the immovable property and yet he would still profit from the immovable property.

The majority of REITs have a common business plan whereby an immovable property is leased and the rental income which would be the company’s generated income would eventually be distributed as dividend to its shareholders.

A common scenario when it comes to REITs, is the possibility that shareholders use the dividend distributed to buy further shares. The benefit would be that the purchasing through a dividend distribution would be at a discount.

Are there various types of REITs?

The main difference would be in relation to the trading aspect of the REITs. Indeed, one would note two primarily different REITs; publicly traded REITs and non traded REITs. The publicly traded REITs would be traded on the stock exchange whilst other REITs would not be traded. This distinction is very important to be looked into before one invests in a REIT as this might affect the benefits derivative from the REITs and the risks that they would entail.

What are the benefits derived from REITs?

A REIT carries with it risks like any other investment, but it surely provides for benefits as well, such as:

1. Investors would be earning their own share from the income produced from the immovable property without the need for the investor to actually buy the property;
2. REITs may offer higher dividends than other investment opportunities;
3. REITs that are listed on the stock exchange, can be easily sold and bought.

Additional Requirements for REITs to be listed on the Malta Stock Exchange

In terms of the Malta Stock Exchange’s bye laws, for an issuer to be considered as a REIT, a report issued by an auditor must be produced which confirms that, amongst other factors:

1. The Issuer has all its shares listed on the main market of the MSE
2. The Issuer must have a Property Rental Business (that is, a 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) which:

• Includes a portfolio of assets of at least three (3) immovable properties in Malta or abroad; and
• Includes a portfolio of assets of immovable properties in Malta or abroad with a total value of at least [nine million Euro (EUR 9,000,000)]; and
• Does not have one (1) immovable property within the portfolio of assets, valued at more than forty percent (40%) of the total value of the immovable properties included in the portfolio of assets of the Property Rental Business; and
• Does not include immovable property that would in accordance with the IFRS be described as owner-occupied.

3. The income arising from the Property Rental Business amounts to at least 75% of the Issuer’s total revenue and/or at least 75% of the aggregate market value of the assets of the Issuer consist of assets that are capable of generating income relating to the Property Rental Business of the Issuer.

What are the risks of REITs?

As mentioned earlier two major different REITs are the public traded REITs and the non exchange traded REITs. The latter involve a few risks which wouldn’t necessarily be present under a public traded REIT. In summary, one could list the following as risks for setting up a non traded REIT:

1. Non-traded REITs are usually illiquid investments – one would not be able to sell the asset immediately and consequently unable to raise money quickly;
2. Non-traded REITs usually do not provide a market price unlike a publicly traded REIT which would already be accessible upon creation.

Any Tax Considerations to ponder?

REITs usually pay approximately one hundred percent of the income to their shareholders. It is the shareholder, the investor of the REIT that is responsible to assess whether taxes need to be paid on the dividend distributed.

As a general principle, a company wouldn’t be taxed on a corporate level, whilst the shareholder would pay tax on the dividend distributed. This is highly dependent on the jurisdiction of residence of the shareholder and it is advisable to consult with a tax adviser before one proceeds to invest in REITs.

Malta shall regulate REITs?

During his 2019 Budget Speech, the Minister for Finance, remarked that “discussions surrounding an initiative about financial instruments, which are known as Real Estate Investment Trusts or REITS, which provide investors with the opportunity to invest directly in the property market, are close to conclusion.” He went on to say that it is planned that from 2019, “the administrative, fiscal and regulatory processes will be completed as well, so that REITS can also start being traded on the Malta Stock Exchange markets.”

Malta is not amongst the 30 countries that have regulated REITs and the Minister’s statement has long been awaited. The assumption would be that REITs would be listed to trading on the Malta Stock Exchange – as mentioned earlier this is a common REITs set up.

We await with anticipation to understand how REITs are going to be regulated in Malta, the requirements that need to be abided with and the ongoing monitoring of REITs.