Malta property investment trusts: exciting tax concessions proposed

The concept of Real Estate Investment Trusts (REITs) originated in the United States in 1960, marking a significant evolution in the way individuals invest in real estate.

The first-ever REIT, named 'American Realty Trust,' was established in 1961 by Thomas J. Broyhill. These investment vehicles enable individuals to invest in a diverse portfolio of real estate assets, ranging from commercial properties to residential developments and infrastructure projects. The appeal of REITs lies in their ability to offer investors a share of the income generated from these properties without the need to manage physical assets, providing liquidity and diversification in the real estate market.

Globally, more than 40 countries, including several in Europe, have adopted the US-based REIT approach. As of December 2021, there were 893 REITs listed with a combined equity market capitalization of approximately $2.5 trillion. However, Europe has only seen a handful of countries with successful REITs, with the US dominating the market. Malta, while seemingly late to embrace REITs, surreptitiously recognized their potential to attract foreign investment .It introduced a REIT framework as part of the 2019 budget joining 35 jurisdictions at that time that already had established a regulative framework for REITs.

In 2021, the Malta Stock Exchange (MSE) changed its byelaws to accommodate the listing of real estate investment trusts. According to these by-laws, a Real Estate Investment Trust or REIT is a publicly traded company which complies with the conditions set out in bye-law 5.02.09, 5.02.10 and 5.02.11 and which has been recognised as eligible as a REIT by the Exchange.

This means in detail that the company operating the REIT must own three separate properties and pay at least 85 per cent of its distributable income to shareholders via a dividend. From a tax perspective, REIT rental incomes will not be taxed. Instead, the dividends will be charged a 15 per cent tax. While the rapid pace of interest-rate moves over the past 2 years has impacted all sectors, it may have been felt most acutely in the real estate sector. Higher interest rates have meant a higher cost of borrowing for real estate investment trusts (REITs), which has created performance headwinds for 2 straight years.For the second consecutive year, rising borrowing costs were the most significant factor impacting REITs in 2023. Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns. This is because rising rates generally reflect improvement in the underlying fundamentals. Market interest rates typically increase during periods when macroeconomic conditions are strengthening, the same strengthening that often drives positive REIT investment performance. Strengthening macroeconomic conditions typically lead to higher occupancy rates, stronger rent growth, increased funds from operations and net operating income , rising property values and eventually higher dividend payments to investors. During 2023, in US the overall volume of purchases and sales remained low due to high interest rates and scarce capital. Negative headlines about empty downtown office spaces – stemming from the shift to remote work – may also have impacted investor sentiment. Altogether, these drivers contributed to a sideways performance year. As a general rule, 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.As a tax incentive, a company wouldn’t be taxed on a corporate level, whilst the shareholder would pay tax at 15% on the dividend distributed. 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 shares through a dividend distribution would be at a discount.

With the announcement of the Budget 2024, Malta is poised to introduce further fiscal and other incentives for REITs. Finance Minister Clyde Caruana expressed Malta's commitment to developing new financial niches like REITs and announced plans for a consultation on tailored tax incentives. This strategic move aligns with the experiences of Portugal, which introduced REITs, known as "SIGI," (Sociedades de Investimento e Gestão Imobiliária) in 2019. Nearly 5 years ago, Portugal was in a similar situation to Malta now, wondering whether their new Portuguese REIT regime would be a success story. SIGIs must distribute at least 90% of their net profit as dividends and as of mid-2022, two Portuguese REITs were listed with a sector market cap of €54m. Drawing parallels between Malta and Portugal highlights potential barriers that Malta may need to overcome to ensure the success of its unique REIT framework. Firstly, Portugal faced challenges due to the absence of a specific tax regime for REITs. Undoubtedly, providing clear incentives for converting existing structures, such as investment funds, into REITs, played a pivotal role in driving the success of REIT regimes globally. Without the importance of tax neutrality on the on-boarding Real Estate portfolios, converting to new REITs structures might be less appealing to companies.

Additionally, as Malta navigates the development of its REIT niche, it must not overlook the sustainability challenges associated with real estate investments. Buildings contribute significantly to energy consumption and emissions, with the construction and operation of structures accounting for 40% of global energy use. Responding to these concerns, there is a growing emphasis on Environmental, Social, and Governance (ESG) factors in the real estate sector. Businesses, including REITs, are recognizing the imperative to manage sustainably, preparing for a carbon-neutral future. Notably, REITs incorporating strong ESG principles into their business operations tend to exhibit higher market values, with governance and social scores emerging as primary drivers of year-over-year changes in market value.

In conclusion, Malta has a unique opportunity to learn from the experiences of other successful REIT jurisdictions and address contemporary challenges, including those related to ESG. With the upcoming fiscal incentives and a commitment to tailored tax frameworks, Malta is positioning itself to capitalize on the global success of REITs. As the government moves forward with its consultation on REIT tax incentives, careful consideration will be noted of lessons from other jurisdictions. Interested parties wishing to make use of PKF trust and fiduciary services may contact the author by email as stated below.