Somewhat late to the market, Portugal’s government has announced that it is to present a proposal for a law that will allow Real Estate Investment Trusts (REITs) to operate in the country.
These widely used property investment companies sell tradable shares and buy property for the long-term, a high percentage of the income then is distributed to shareholders. In the UK, 90% of a REITs’ net income is distributed and the company is exempt from corporation tax.
Deputy Minister Pedro Siza Vieira said of REITs, at the Portugal Real Estate Summit, "These are companies that will attract savings which they invest in real estate and let them on long-term leases. Companies will only own properties that will be in their portfolio for a long period and they have to be leased."
For this, the government will have to create a new tax and regulatory regime, which it intends to present, "in the very short term." Vieira hope this will be before the year end but the sector is not holding its collective breath.
Pedro Siza Vieira seems to have grasped the essence of REITs, "We now want to take an additional step by creating investment companies that can only invest in rental properties. There are several vehicles, such as funds and companies, that buy and resell real estate but what we need is to increase investment in long-term leasing."
Under this scheme, the Government hopes to create an, "increase of affordable housing in cities," but does not explain how a REIT can adhere to its own rules and policies while renting out urban properties at below market rates.
A REIT can be defined as a property investment company that, unlike many other property investments, can be easily traded on the stock exchange. This makes it an attractive way for ordinary investors to invest in property.
The UK model is that, in order to qualify as a REIT, at least 75% of profits must come from property rental, and 75% of the company’s assets must be involved in the property rental business. UK REITs also must pay out 90% of their rental income to investors and have been operating successfully since 2007 (1960 in the US) with most big property companies, such as British Land, converting to this corporate status.
In exchange for operating within these fairly strict rules, and to encourage investment in UK real estate, REITs don’t pay corporation or capital gains tax on their property investments.
The Portuguese model may vary, hopefully not too much and investors will remain wary of the pitfalls as, since REITs have to pay out most of their income to investors, it’s hard for them to build up enough capital to reinvest in new properties from their own profits.
For companies looking to expand, that leaves two main means of funding growth: selling new shares or taking on debt. Using debt prevents investors having to find more cash or risk being diluted, as they would be if the company chose to issue new shares. Interest rate rises with low inflation-linked rental increases can spell trouble.
Vieira said that his proposed model means these companies do not have to buy residential leases only, "We have a lot of companies investing in Portugal and creating jobs that need office spaces and for that we need to have an office rental offer as well.
“We have many companies that want to invest in industry that need industrial real estate and warehouses," he noted.
The maturing UK REITs sector now has a number of specialist companies that focus on real estate sectors, for example, healthcare, logistics and retail.