A global REIT regime to encourage long-term growth

Increasingly, REITs are viewed as the global standard for investors seeking exposure to property as an asset class. But, worldwide, REITs regimes differ; BDO Global conducted a survey of 35 companies from across the globe to find out how REIT leaders hoped the sector would develop in 2018.

 

 

Nearly three quarters of those interviewed felt the creation of a new, global REIT regime would help the sector expand: whilst there are a number of distinct hallmarks associated with the REIT “wrapper”, there remain differences between each country’s individual REIT regimes. Although it would be difficult to achieve, greater standardisation of REIT regulations would be a positive for both companies and investors alike. After all, if a country is setting up a REIT regime without standardisation, it is hard to attract investors.

For example, in the Philippines, REIT legislation has been in place since 2009, but, so far, no companies have converted. This is because the required free float for companies is lower than elsewhere in the world, reducing the appeal for investors. Meanwhile, the amount of annual tax REITs must pay would be higher than in other jurisdictions, reducing the incentive for companies to convert. Thus, a country with a strong real estate market has no REIT sector, making it harder for international capital to access. Since the global real estate sector is already challenged when it comes to attracting investors, anything that can be done to make investment simpler is undoubtedly a positive.

 

Refining regulation to entice investors

With this in mind, BDO’s Noel Clehane, Global Head of Regulatory Affairs and Public Policy, noted the importance of revising REITs regulation in order to channel more vibrancy into the sector. As a reaction to the global financial crisis (GFC), a torrent of regulation was introduced, and the listed property sector was one of the industries affected by the flood.

Since the GFC, much of the sector regulation, including that around REITs, has proven overly complex, fragmented across jurisdictions, occasionally in conflict with other domestic regulation, and, all too often, designed to dampen investment rather than facilitate it.

Such regulation resists a cohesive, globally consistent regulatory and investment environment for REITs. Complex and lengthy pieces of legislation, such as Dodd-Frank in the US, the AIFMD in the EU, and changes brought about through new fair value accounting standards, coupled with uncertainty around tax laws and regulatory compliance costs, shape the environment for REITs, making it difficult to attract global investors.

But, there are examples of progressive jurisdictions. In India, focussed changes in REITs regulation have resulted in a well-regulated but dynamic listed real estate sector. Having accessed new pools of investment, the sector is now seen to be supporting overall economic development. If efforts to establish a global REITs regime progress, its architects would do well to follow India’s example.

 

Looking ahead, long term

When asked to outline key issues for 2018 and beyond, a number of REIT leaders spoke about the impact of the ageing population on listed real estate – undoubtedly a trend for 2018 and beyond. In terms of real estate, the need for more senior living and healthcare facilities, as well as more housing as people live longer, must be a priority.

But in addition - and equally pressing - there is the fact that, as global populations age, pension funds and insurance companies have an ever-increasing need for secure and stable long-term income to match their growing liabilities. REITs should be an excellent vehicle to provide this, especially in a low interest rate environment.

Overall, REIT companies are looking for increased global cohesions. Looking at countries like India, it is clear that the REIT model has the potential to turn real estate into an extremely attractive investment opportunity. Moreover, as the trends that drive real estate, such as the ageing population, become increasingly global, rather than national, the need for a global REIT regime becomes ever more pressing.  

Read the full report here.