In the second part of a seven part series on Vulture funds, we look at Real Estate Investment Trusts.
Real Estate Investment Trusts (REITs) are basically property investment companies.
They provide an opportunity for investors to invest in income-generating property assets in much the same way as people invest in stocks and bonds through funds.
The assets REITs are usually involved with include everything from residential properties, such as apartments, to commercial properties such as offices, hotels and warehouses.
The Finance Act 2013 introduced REITs to the Irish property landscape for the first time, as part of the then Fine Gael/Labour government’s response to the financial crisis.
Generally exempt from corporation tax, REITS must adhere to several rules, the main one being in relation to distribution of rental profits.
Some 85% of net rental income must be distributed back to shareholders in the form of a dividend.
The first two REITS in Ireland, Green REIT and Hibernian, were launched in the summer of 2013.
One of the reasons given by then Minister for Finance, Michael Noonan, for introducing REITS was to try and entice international investors to Ireland.
Since then, REITS have been snapping up Irish property at an alarming rate, raising concerns regarding rising rents and the potential consequences for first-time buyers.
They have been doing this with tax exemptions subsidised by the Irish tax-payer.
There are four REITs – Green, Hibernia, Yew Grove and Irish Residential Properties – listed on the Irish Stock Exchange, which own around €3.7 billion worth of property.
Irish Residential Properties Real Estate Investment Trust (IRES REIT), is now the country’s largest residential landlord, owning more than 3,000 homes in Dublin alone.
This year, they’ve seen their rental income increase 18% to €22.7m in the first half of 2019.
The average rent charged by IRES increased 3.8%, to €1,598 per month, during the first half of the year.
Hibernia REIT has 32 properties, valued at €1.3b, and the latest figures revealed their rental income increased by 7.3% to €28.6m in the first half of 2019.
Green REIT, with its portfolio of 17 properties, with a rental roll of €77 million, was recently sold for €1.34bn to UK-based Henderson Park.
Yew Grove REIT has a portfolio of 22 properties, with an annualised rent roll of more than €7.9 million.
Last year, only €12.8 million was collected in taxes on the hundreds of millions in profits made by these four REITS.
As the housing crisis escalated, the Irish government continued to offer very lucrative tax incentives to property investors, thus driving property prices up and forcing many families out of the rental market and into homelessness.
In the six years since REITs started buying property off NAMA, at knock-down prices, many calls were made, and ignored, to close loopholes they used to minimise tax bills on profits made from Irish property.
Last month, the Government introduced new legislation in the Finance Bill 2019 to deal with REITS, which it hopes could potentially generate €80 million a year in taxes.
Minister for Finance Paschal Donohoe had laid out his plans in his budget speech by saying he was “concerned about the level of tax” Irish Real Estate Funds (IREFs) and REITs were paying.
IREFs were created by the Finance Bill 2016 and have similar tax breaks to REITS, but are aimed at larger investors.
Their shares do not have to be traded on the stock exchange and, unlike REITs, they can also purchase development land.
The measures included in the Finance Bill for real estate funds are targeted at aggressive activities, including the use of excessive interest charges to avoid the payment of tax in respect of profits from Irish property.
Among the amendments to the REIT framework, designed to ensure that the appropriate level of tax is being collected, are as follows:
- Expenses in calculating profits available for distribution must be wholly and exclusively for the purpose of the REIT business, and any excessive amounts are chargeable to tax in the REIT.
- The distribution of proceeds from the disposal of a rental property will be subject to dividend withholding tax upon distribution.
- Where a REIT disposes of a property and the proceeds are neither reinvested nor distributed to shareholders within 24 months, then such proceeds will be treated as property income of the REIT.
- An existing provision, whereby a deemed disposal and re-basing of property values occurs should a company cease to be a REIT or a group REIT, is being limited to apply only where the REIT or group REIT, has been in existence for a minimum of 15 years.
Whether these moves by the Government to force REITS to pay more tax are too little, too late, remains to be seen …