The Government’s recent tax clampdown on overseas funds which have bought billions of euro of property assets in the past five years is likely to prompt some to set up real-estate investment trusts (Reit), which must ultimately be listed on the stock market.
The Finance Act 2016, signed into law by the President, Michael D Higgins, on Christmas Day, gives breathing space until July for investors who used previously highly tax-efficient funds, targeted by the new laws, to move assets into a company structure, or January 1st next year to transfer rental properties into a Reit.
"The clear legislative intention is to facilitate and encourage additional Irish Reit structures over the coming year," William Fogarty, a partner with corporate law firm Maples and Calder, said in a note issued to clients on Tuesday. "It is expected that many significant investors will look closely at the Reit provisions and we may see additional activity in this area during 2017."
The Act imposes a 20 per cent withholding tax on investor distributions on property held in so-called qualifying investor alternative investment funds (QIAIFs) and Irish collective asset-management vehicles (Icavs). European pension funds, life assurance funds and regulated investment fund are exempt, subject to a number of anti-avoidance provisions built into the laws.
Withholding tax
Profits from the sale of Irish land held for at least five years can also be exempt from withholding tax.
“Initially this relief was available to a wide range of investors, however, it has been restricted during the passage of the legislation,” said Mr Fogarty. “It is now only available in respect to investors who were unable to control or select the assets or business of the fund.”
Some overseas investors, who are estimated to hold about €12 billion of property in QIAIFs and Icavs, may consider moving real estate assets that are being developed into an Irish company structure, where profits would be levied at 12.5 per cent, according to an adviser to a number of private equity firms active in Ireland in recent years, who asked not to be identified.
Deliberations and projections of some firms have been further complicated by the Government’s recent move to cap residential rent increases at 4 per cent a year over the next three years, he said.
Rental properties
The option of setting up a Reit for a pool of mainly rental properties was facilitated by laws enacted four years ago. Between 2013 and 2014, three property companies, Green Reit, Hibernia Reit and Irish Residential Properties Reit, were listed on the Irish Stock Exchange. However, Reits are covered by various restrictions, including that they must distribute 85 per cent of income to shareholders and not have borrowings of more than half their market value.
Under Irish law, a Reit has up to three years from the time it is established to secure a stock market listing.
Hibernia Reit's chief executive, Kevin Nowlan, has spoken in the past of the likelihood of private-equity firms floating portfolios of shopping centres in the coming years as they seek to exit their investments.
New York-based hedge fund manager Davidson Kempner has been the most active buyer of shopping centres in recent times. The firm has spent almost €290 million in the past two years acquiring assets in the sector, including shopping centres in Athlone, Gorey and Templogue in Dublin, and retail parks in Letterkenny, Sligo and Killarney.
