Home > About J-REITs > Comparison with Foreign REITs
REITs throughout the world must function as non-taxable conduits. Consequently, each REIT system largely depends on the tax system of the country it operates in. Nevertheless, REIT systems can be largely categorized into two major forms, the U.S. system where REITs are based directly on the country's tax system and are usually though not always internally managed, and the Australian system where REITs are established through an investment trust law and act as collective investment schemes with external asset managers.
Most recently established systems, including Japan's, have adopted the Australian system using closed-end funds that are managed by a separate asset manager. However, many countries are adopting the American style of external management which allows investment in real estate development by REITs in addition to the more common “passive” activities of asset management and portfolio development.
The non-taxable conduit nature of REITs is largely achieved through a pay through structure with each country establishing different requirements to attain such status. These requirements usually involve minimum dividend levels, asset and income amounts, a minimum number of stockholders and additional requirements for public offerings and listings on exchanges.
The U.S. System
The U.S. REIT system is the oldest existing REIT system and still maintains a large lead over other systems with regard to overall market capitalization and number of listed REITs. From the first listing of a U.S. REIT in 1961, the U.S. system has maintained consistent growth and today accounts for approximately two-thirds of total global market capitalization of REITs. The fact that most U.S. REITs are actually unlisted on stock exchanges or private points to the enormous scale of the U.S. system compared with other countries. The U.S. system is characterized by its flexibility including both internally and externally managed REITs and both corporation and trust vehicles. U.S. REITs have traditionally been categorized according to investment type with equity REITs that invest directly in real estate assets being the most common, followed by mortgage REITs which invest in real estate financing and finally hybrid REITs which combine both types of investment strategies.
The savings and loan crisis of the early 1990s caused the bankruptcy of many U.S. banks and savings and loan institutions which in turn led to large amounts of real estate being released into the market. This collapse had the positive effect of triggering another growth period for the U.S. REIT market and represented a seminal period in the development of the market as it exists today. The current umbrella partnership structure (UP-REIT) was established then and allowed REITs to write off taxes from latent profit of real estate. Additionally, restrictions were eased for investment in REITs by pension funds which infused massive amounts of capital into the system. Since then, U.S. REITs have also primarily specialized in real estate market sub-segments such as office properties, commercial real estate, residential properties, logistics facilities and hotels. This trend enabled administrative efficiency and an accumulation of expertise among U.S. REITs and attracted additional investors to the market.
The U.S. REIT is a real estate investment trust system directly based on U.S. tax law established with the revisions to the federal tax code in 1960. Requirements for conduit status include the distribution of at least 90% of its taxable income to investors, a minimum of 100 shareholders and a minimum of 75% income generated from assets related to real estate. U.S. REITs may be corporations, trusts or associations but are not permitted to be financial institutions or insurance companies.
The Australian System
The Australian REIT system was the third system established worldwide after the U.S. and Dutch systems and is currently the second largest both in terms of market capitalization and number of investors. Australian REITs also constitute the largest proportion of the securities market in their country compared with other systems, comprising about 10% of total market capitalization of the Australian stock market. Australian REITs (A-REIT), more commonly known as listed property trusts (LPT), were born through the establishment of the General Property Trust in 1971. Although initial interest in the A-REIT market was stagnant, the establishment of sector-specific A-REITs such as Lend Lease and Westfield Trust catalyzed market growth by providing new investment diversity and opportunities in previously limited sectors.
A-REITs are regulated according to the tax law, company law, and the Managed Investment Act (MIA) enacted in July 1998 to provide additional regulations concerning the management of external asset managers, stipulate licensing requirements for asset managers and clearly designate final legal responsibility for the owned assets to the asset manager. A-REITs are closed-end funds, either listed or unlisted, whose securitization vehicle is a trust. A-REITs use an external management structure that was the model for J-REITs and REIT systems of other countries in Asia including Singapore, Malaysia, Hong Kong and Taiwan.
Recently, A-REITs have begun to adopt a unique structure known as the stapled securities approach where the units of the trust are listed together with the asset manager's shares as an integrated unit. Australian tax law limits trusts that function as non-taxable conduits to passive real estate activities. The stapled securities approach enables the group as a whole to manage and develop real estate and divides the group into a corporation that conducts non-passive tasks such as property development and a trust that passively owns real estate. In this way, the passive income of the trust paid to investors as dividends is untaxed.
A-REITs are required to invest in real estate that generates real estate income but no specific requirements are stipulated for the ratio of real estate owned to the overall portfolio. Additionally, no requirements are placed on the A-REIT regarding dividend amounts, although all profits are generally distributed and no income is retained to avoid taxation.
A-REITs have increasingly invested in overseas real estate in recent years as no limitations are placed on such investment and most investment-grade real estate in Australia has already been incorporated into the A-REIT market. Most overseas investment has been in U.S. properties although A-REITs that specialize in European and Japanese real estate also exist.
European Systems
European REITs first appeared in the Netherlands (1969), and then subsequently in Belgium (1995), France (2003), and the United Kingdom (2007), Germany (2007) and Italy (2007). They each have their own unique characteristics but also share common traits due largely to the fact that they are often competing for the same investors. Similar to J-REITs, European REITs are generally publically-listed vehicles with corporation structures that make long-term investments in real estate and are exempt from corporation taxation provided certain dividend requirements are met.
The Dutch system was primarily based on the U.S. system and investment by Dutch REITs in real estate development (non-passive activities) is not permitted. Most Dutch REITs are internally managed, though structures with external management of assets also exist.
Belgian REITs, or Sociétés d'Investissment a Capital Fixe en Immobiliere (SICAFI), like their Dutch counterparts are limited to passive real estate activities. SICAFI are all listed, closed-end funds with corporation structures. Both external and internal management structures exist.
In late 2003 in France, legislation was enacted to allow foncieres, or joint-stock corporations managing real estate assets, to attain conduit status and the current French REIT system, or Sociétés d'Investissements Immobiliers Cotées (SIIC) system, was born. SIICs are by definition publicly-listed, closed-end funds that use corporation structures. All SIICs are internally managed and are governed by French regulations for for-profit companies listed on the French securities market as well as accounting standards for for-profit companies.
The introduction of REIT systems in the United Kingdom, Germany and Italy during 2007 represents a landmark development in real estate securitization in Europe. Britain and Germany represent two of Europe's largest markets and the number of listed REITs in the continent as well as total market capitalization is expected to increase rapidly in the coming years. In fact, the UK REIT market surged to become the third largest in a mere year.
Other Systems in Asia
With the exception of the South Korean REIT system, most Asian REITs have followed Australia's model and use closed-end structures with external asset managers. In addition to Australia and Japan, REIT systems were established in Malaysia (1986), Thailand (1997), Singapore (1999), South Korea (2001), Hong Kong (2003) and Taiwan (2003). The systems in Singapore and Hong Kong are the largest in terms of total market capitalization and have seen the most dramatic growth in recent years, particularly due to increasing investment in real estate assets in mainland China. They are considered the most liberal among Asian REITs due to the absence of a capital gains tax as well as the lack of listing requirements such as minimum paid-in capital and number of investors.
The Singaporean S-REIT system is considered one of the most established in Asia with recent investment overseas including mainland China spurring further investor interest in the market. A recent trend towards specialization of S-REITs has led to the establishment of S-REITs dedicated to sub-sectors such as hotels, retail properties and healthcare facilities. S-REITs are closed-end funds that utilize collective investment schemes. Both trust and corporation vehicles as well as listed and unlisted REITs are permitted. However, conduit status is only granted to listed trusts under the tax law and consequently all current S-REITs are trusts. Other requirements for conduit status of S-REITs include a minimum of 35% of total assets invested in real estate, at least 70% of total assets invested in real estate related assets and a minimum of 90% of taxable income distributed to investors. S-REITs are not permitted to actively engage in real estate development activities but may invest in development projects up to a certain degree.
The Hong Kong system consists of H-REITs that are listed, closed-end funds employing a trust structure and external management of assets. H-REITs are more strictly regulated than their Singaporean counterparts to ensure high corporate governance standards. Transactions with interested parties require the prior approval of investors and all publicity materials must also be approved by the regulatory authority. Investor enthusiasm remains high, particularly due to increasing investment by H-REITs in property in mainland China. Due to China's lack of a legal framework for establishing REITs, the H-REIT market as well as the S-REIT market are looking to China as a key to future market success.
Comparison of Major REIT Systems
| Country | United States | Netherlands | Belgium | France | Japan |
|---|---|---|---|---|---|
| System | REIT | FBI | SICAFI | SIIC | J-REIT |
| Date Established | 1960 | 1969 | 1995 | 2003 | 2000 |
| Collective Investment Scheme | No | Yes | Yes | No | Yes |
| Listed or Unlisted | Both | Both | Only listed | Only listed | Both |
| Closed-end or Open-end | Closed | Closed | Closed | Closed | Both (only closed-end exist) |
| Internal or External Management | Both (most internally managed) | Both | Both | Internal | External |
| Fund Vehicle | Corporation, Trust | Corporation, Trust | Corporation, etc. | Corporation | Corporation, Trust |
| Minimum Paid-in Capital | None | 180,000 euros for unlisted corporations, 450,000 euros for listed corporations | 1.2 million euros | 15 million euros | 100 million yen |
| Minimum Number of Stockholders | 100 | None | None | None | More than 50 individuals or only qualified institutional investors |
| Investment in Real Estate | At least 75% | 100% | 100% | None | At least 75% |
| Development | Yes, both investment in and active development of properties | Only investment in development projects | Only if development property is owned for over 5 years | Limited to 20% of total assets | No |
| Dividend Requirements | At least 90% | 100% | At least 80% | At least 80% of rental earnings, 50% of capital gains and 100% of dividend income | Over 90% |
| Conduit Structure | Pay through | Tax free | Tax free | Tax exempt | Pay through |
| REIT Taxation | Corporation tax (35%) of unallocated amount | 0% tax of taxable income | Corporation tax (33.99%) and value added tax (3%); however rental income and capital gains are not taxed. | Corporation tax (33.03%) and value added tax (3.3%) of non-exempt earnings | Corporation tax (30%) of unallocated amount |
| Country | Australia | Canada | Singapore | Hong Kong | Japan |
|---|---|---|---|---|---|
| System | A-REIT | C-REIT | S-REIT | H-REIT | J-REIT |
| Date Established | 1971 | 1993 | 1999 | 2003 | 2000 |
| Collective Investment Scheme | Yes | Yes | Yes | Yes | Yes |
| Listed or Unlisted | Both | Both | Both | Only listed | Both |
| Closed-end or Open-end | Closed | Both | Closed | Closed | Both (only closed-end exist) |
| Internal or External Management | External | Both | External | External | External |
| Fund Vehicle | Trust | Trust | Corporation, Trust | Trust | Corporation, Trust |
| Minimum Paid-in Capital | None | None | None | None | 100 million yen |
| Minimum Number of Stockholders | None | 150 | None | None | More than 50 individuals or only qualified institutional investors |
| Investment in Real Estate | At least 50% of revenue from rent | At least 80% | At least 70% | At least 75% | At least 75% |
| Development | Only if stapled securities structure is used | Only with business REITs | Only investment in development projects | No | No |
| Dividend Requirements | None | None | At least 90% | At least 90% of profit after tax | Over 90% |
| Conduit Structure | Pay through | Pay through | Pay through | Pay through | Pay through |
| REIT Taxation | Trust tax (30%) of unallocated amount | Trust tax (29%) of unallocated amount | Corporation tax (20%) on unallocated amount | Business income tax (17%) charged on special purpose vehicles | Corporation tax (30%) of unallocated amount |
| Note: | Original data was compiled by the Association for Real Estate Securitization (ARES) and presented in its Real Estate Securitization Handbook (2006-2007). Data was translated by Transpacific Enterprises Y.K. |
The preceding is an overview of information regarding REIT systems around the world and is provided as a service to promote general understanding of REITs. Please note that, due to the rapid development of the global REIT market and the various legal and taxation changes in each country, Kenedix Realty Investment Corporation does not guarantee the accuracy of this information.
