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After decades since its conception and establishment, Real Estate Investment Trusts, or REITs, are finally introduced to the United Kingdom through a legislation passed by the Government along with its Budget. This reform was prompted after a consultative study done on the country’s housing sector. Currently, the United States and Australia have the most established systems and processes regarding REITs. Asian markets as well are starting to show their potentials in the industry. Japan’s REITs are said to be the most established in the region and comes after Australia in the ranking.

With the foreseen saturation of the US market, more and more investors are looking at foreign investments and this opportunity is being seized by other emerging economies as well – China, India and the United Kingdom. Real Estate Investment Trusts are the most hotly anticipated investment vehicle in UK’s property sector. Considered as the ultimate investment vehicle for individuals and institutions alike, they claim to offer a high-gain and low-tax channel of investment and are welcomed positively by both investors and industry analysts.

This reform is aimed at providing a more diverse quality investments and giving equal opportunity to investors. There are a number of REITs available in the market to b and being a REIT allows an organization to enjoy tax privileges. However, there are qualifications and certain conditions must be met before one may recognized as a real estate investment fund and continue to enjoy such status. Background Real Estate Investment Trusts have long been in existence though only recently introduced in the United Kingdom.

Alongside its Budget 2004, the Government produced a consultation document “Promoting More Flexible Investment in Property: A Consultation” which was aimed assess economic and industry impacts. In 2005, further discussion to this document entitled “UK Real Estate Investment Trust: A Discussion” was produced to address issues raised in the consultative study and contained answers to the questions posed. What is a Real Estate Investment Trust or REIT? Under the Internal Revenue Code (TITLE 26, Subtitle A, CHAPTER 1, Subchapter M, PART II, Sec. 856.

), the term “Real Estate Investment Trust” or “REIT” means a corporation, trust or association – which is managed by one or more trustees or directors; the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; which (but for the provisions of this part) would be taxable as a domestic corporation; which is neither (A) a financial institution referred to in section 582(c)(2), nor (B) an insurance company to which subchapter L applies; the beneficial ownership of which is held by 100 or more persons;

subject to the provisions of subsection (k), which is not closely held (as determined under subsection (h)); and which meets the requirements of subsection (c) (which defines critical asset-limitation and source-of-income requirements). In less technical terms, a REIT is a corporation that purchases, invests, owns and/or manages real estate properties, mortgages and other real estate-related securities. Types of REITs REITs can be categorized into three types: equity, mortgage and hybrids. The major difference among the three types is the source of income generation.

Equity REIT REITs in this category invest in and directly own the income-generating properties. Their properties are their only source of income. Compared with other real estate companies, equity REITs must acquire their properties with the objective of operating them as part of their portfolio rather than reselling them once developed. Subcategories of equity REITs include Apartment, Healthcare, Hotel and Motel, Industrial/Warehouse, Manufactured Homes, Office, Parking, Public Storage, Restaurant, Retail and Specialty (Google Finance, accessed 28 August 2006).

Mortgage REIT Mortgage REITs, on the other hand, deal in investments and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans. Subcategories would include Commercial, Residential (Google Finance, accessed 28 August 2006). Hybrid REIT Hybrid REITs basically combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

History of REITs Real Estate Investment Trusts were introduced and established in the United States in 1960 as a way of levelling the playing field for investors. The Real Estate Investment Trust Act exempted REITs, a special purpose company, from corporate income tax should defined and specific conditions be met. Over the years, after significant modifications and amendments, the REIT Modernization Act was passed in 1999. It was only a decade after its conception in the US that REITs were introduced to Australia.

At present, Australian market is considered to be the second strongest after that of the US. Both US and Australian systems have been the basis of other markets who have slowly been introducing the instrument to their own markets. As of April 2005, there are over 193 publicly traded REITs operating in the United States with assets totalling over $500 billion. Approximately two-thirds of these organizations trade on the national stock exchanges (Reitnet. com, accessed 27 August 2006). REIT-like rules are also emerging in over twenty countries on six continents, each with its own set of regulations.

In the recent years, France, South Korea, Japan, Singapore, Taiwan and Hong Kong have already adopted legislation creating REIT-like regimes (Einhom, 2004). The Japanese REIT market, which began in 2001, is now the third largest in the world following US and Australia. There are currently around 15 REITs holding approximately USD 16 billion in assets with several more in the planning stage (Asian Legal Online, accessed 28 August 2006). REIT: Australia The Australian, along with the US market, is the most developed and mature Real Estate Investment Trust market in the world, both legislatively and in the level of securitisation.

The listed property legislation was enacted in Australia in 1971 and is one of the most open regimes available. There are no restrictions on developments or on gearing as long as the listed property trust pays all of its earnings out as dividends to shareholders. Most listed property trusts have external property managers but quite a few trusts have internalised their management and operate as a “stapled” security, which is effectively a trust with management and/or a development company attached. Taken from Ernst & Young website, the following summarizes the structure and limitations of Australian REITs:

Structure: ALPT (Australian Listed Property Trust) Legal Status: Rules enacted in 1981 and 1985 Organizational Rules: Organized as a fixed trust and may adopt one of two structures: ? Stand-alone, passively holding real estate portfolio, or ? Form part of a listed stapled security with a company that undertakes range of activities relating to ALPT’s real estate (such as management, redevelopment, funds management etc. ) – an investor acquires a stapled security that consists of one unit in ALPT and one share in the company ? No minimum/maximum shareholder requirement ? Managed by a corporate trustee/fund manager

? If eligible, taxed as flow-through vehicle (i. e. , the net income of the ALPT is taxed in the hands of the unit holders upon distribution and not in the trust) ? Otherwise taxable as a domestic company Income Rules In order to be eligible for flow-through treatment, ALPTs must not directly or indirectly carry on a “trading business” (i. e. , a business that does not consist wholly of an eligible investment business) Asset Rules Must invest in land either inside or outside Australia for the primary purpose of deriving rental income Distribution Rules (No minimum distribution requirements)

Income that is not distributed to unit holders is taxed in the ALPT at the top marginal tax rate for individuals (i. e. , 48. 5%) Foreign Considerations Trustee of ALPT must pay tax with respect to Australian source income distributed to foreign unit holders. Foreign unit holders are taxed on an assessment basis (i. e. , must file an Australian tax return) and receive a credit for tax paid by trustee – to the extent that the foreign unit holder has deductible expenses that relate to the units (i. e. , interest), unit holder can obtain a refund of tax withheld by trustee following filing of return

Disposal of ALPT units by foreign unit holders are only subject to Australian capital gains tax if the foreign unit holder owns 10% or more of issued units of ALPT Restrictions on Long-Term Debt Thin-capitalization rules will apply if the ALPT is foreign controlled (either five or fewer foreign entities own 50% or more of the ALPT or a single foreign entity owns at least 40% of issued units). If thin-capitalization rules apply, the permissible debt to equity ratio is 3:1. Loss of Status Rules. If ALPT fails eligibility criteria, it is treated as a corporation for tax purposes. Other Tax Considerations

Trust income taxed on a flow-through basis retains its character in hands of unit holders (i. e. , as interest, rent, capital gains, etc. ) Differences between the net income of the ALPT for income tax and accounting purposes due to variances in depreciation rates and capitalization policies will give rise to “tax-preferred” distributions to unit holders – broadly, this is a cash distribution that generally should not be subject to tax at either the trustee or beneficiary level The receipt of a tax-preferred amount by a unit holder will reduce the Capital Gains Tax (CGT) cost base of the ALPT units held by the unit holder.

Where the tax-preferred distribution exceeds the cost base of the ALPT units, a taxable capital gain will arise Tax losses incurred by the ALPT will be trapped in the ALPT REIT: Asia Analysts and experts foresee that the REIT market in Asia is likely to continue to evolve rapidly and bring an even greater diversification to the property market. Real estate giants such as China and India, and including Singapore, Hong Kong and Korea, are already developing initiatives that will lead to a predicted exponential growth in their respective markets (Real Estate Investment World, accessed 29 August 2006).

To give Asia proper representation in the global market, the Asian Public Real Estate Association (APREA) came into being in June 2005. To date, the association is already supported by committed founding members, which include: Hong Kong Land, Westfield Group, Prime, Ayala Land Inc, ARA Asset Managers, Ascendas REIT, Mitsubishi Corp. , UBS Reality Inc, Henderson Global Investors, UBS, Macquarie Group, YTL Corporation Berhad and Morgan Stanley. APREA is fully endorsed by EPRA, NAREIT and the Association of Foreign Investors in Real Estate (AFIRE). With its establishment, Asian sector can now be truly represented in the global market.

Its aim is to become the pre-eminent independent (non-profit) association, collectively representing the interests of the Asian public real estate sector, investors and other key industry participants and thus facilitate the flow of capital into the sector throughout the region. APREA will work with its members to raise standards and awareness in the areas of accounting, reporting, valuation and corporate disclosure; will lobby governments for practical regulations, viable structures and tax harmonisation; and will provide education and training (Real Estate Portfolio, NAREIT.

Accessed 28 August 2006). The following data will summarize the structure and limitations of Japanese REITs: Structure: J-REIT (Japanese Real Estate Investment Trust) Legal Status: Enacted 2000 Organizational Rules: J-REITs are generally formed as corporations rather than trusts Registration based on Investment Trust Law is required One of the following must be met with regard to the investment certificates: • The certificates must be publicly offered and the issuing amount must be at least 100 million yen (approximately U. S. $ 900,000) at the time of the incorporation

• The certificates must be owned by at least 50 investors at the end of the fiscal year ? Must not be a closely-held corporation at the end of the fiscal year ? In the case of listed J-REITs, (i) the J-REIT’s net asset value must be at least yen 1billion (approximately U. S. $ 9 million), (ii) the J-REIT’s total asset book value must be at least yen 5 billion (approximately U. S. $ 45 million), (iii) the number of units must be at least 4,000 and (iv) the number of unit holders must be at least 1,000 ? At least 50 individual investors or qualified institutional investors hold units

? The articles of incorporation must evidence that more than 50% of the issuing investment certificates have been offered within Japan ? The three largest investors must own less than 50% of the units ? The 10 largest investors must own less than 75% of the units in order to be listed on the Exchange (not required for tax purposes) Income Rules: Income must be derived from qualifying investments (see Asset Rules) Asset Rules: At least 75% investment in real estate required for listing on the Exchange (not required for tax purposes)

At least 50% of total assets must be income producing and not likely to be sold within a year in order to be listed on the Exchange (not required for tax purposes) Must not hold 50% or more of the equity in other companies except for investment in Tokutei Mokuteki Kaihsa (TMKs) where J-REIT holds 100% of the preferred investment certificates issued Distribution Rules: At least 90% of profits must be paid as dividends to satisfy the requirements for the dividends paid deduction Receives dividends paid deduction for qualifying dividend distributions

Foreign Considerations 20% withholding on foreign distributions. Reduced rates may apply under tax treaties In the case of listed J-REITs where the foreign investor owns less than 5% of total units, reduced withholding tax rates (10% or 7%) are applicable to dividends received by the foreign investor between 01 Apr 03 and 31 Mar 08 Restrictions on Long-Term Debt: No restrictions, but loans must be extended from qualified institutional investors and any violation of the Investment Trust Law can lead to the loss of tax status.

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