Real Estate Investment Trusts – MSE’s latest initiative

Last Updated on Monday, 5 April, 2021 at 2:01 pm by Andre Camilleri

It has always been the vision of the MSE’s Board to innovate and modernise the Exchange and, along with it, the local capital markets. We have always been committed to enable Maltese companies to raise capital cheaply and efficiently. We are pleased to have recently rolled out changes to the Exchange’s byelaws to accommodate the listing of real estate investment trusts, better known as REITs. We believe this initiative is one of the more exciting projects we’ve rolled out since we introduced the national capital market strategic plan in 2016.

We are very pleased that today, apart from derivative trading, the MSE is as accommodative to its capital market as any major stock exchange anywhere in the world. There are currently fewer than three dozen countries globally that offer a REIT framework and I’m pleased to report Malta is now one of them. The Exchange recently hosted a webinar introducing our new REIT framework and, considering over 160 people signed up, this proves the REIT concept resonates.

So, what is a REIT? A REIT is a corporate entity that owns and manages properties, and generates rental income. The properties could be an apartment complex, office space, warehouses, commercial space and shopping malls. This makes it possible for individual investors to earn dividends from real estate investments – without having to buy, manage or finance the acquisition of whole properties themselves. To be sure REITS are not designed to act as a vehicle from where to raise capital to finance the development of new real estate projects. They should ideally be used for existing and operational property.

In the past, large-scale landlords could sell properties in one of two ways. Either by breaking up their property portfolio and selling individual properties piecemeal or by selling their portfolio to large, deep pocketed companies or high net worth individuals. The problem with this scenario is there are only so many investors who can afford purchasing multi-million euro real estate projects.

However, with the introduction of REITs, property owners can now package income paying properties into a security and sell shares of these properties to thousands of small investors. REITs trade on an Exchange, offering investors an efficient and cost-effective manner to invest in real estate. Indeed, small investors can invest as little as just a few hundred euros, buying a few shares of a REIT.

Also, foreigners, indeed investors from anywhere in the world, can invest in Maltese real estate rental property easily by simply buying a REIT traded on the Malta Stock Exchange.

Now, one may ask, don’t we already have real estate development companies listed on the Exchange? What’s the difference between these companies and REITs? The difference is significant. There are a number of companies listed on the Exchange that are in the business of purchasing property, developing, and then selling units hoping to generate a capital gain. It is up to the company’s board of directors to decide whether a dividend should be paid and how much that dividend should be.

On the other hand, a REIT is a company that buys, owns and operates income-producing properties and manages properties for the long-haul. To qualify as a REIT, the company must adhere to the Exchange’s byelaws, which includes owning three separate properties and paying at least 85% of its distributable income to shareholders via a dividend. This should offer REIT investors some comfort in knowing that, if the properties generate rental income, it will be shared with shareholders through a dividend.

Most importantly, REIT rental incomes will not be subject to tax; instead REIT dividends will be charged a flat 15% tax, comparable to the taxes paid on rental income.

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