Investments in the real estate market should be regarded as a special form of capital multiplication. The main advantage is its ability to protect capital from inflation and to create, so-called, passive income, and in the case of buying a property below its market value, comes the possibility of multiplying the invested capital or increasing its value in the future.
Attention should be paid to the proposed concept of the law on companies for rental market real estate, REIT (Real Estate Investment Trust), prepared by the Ministry of Finance. This law would apply in Poland from the beginning of 2018.
The REIT concept was created in the USA in the 1960's. Its goal was to create a legal framework that would allow the development of the real estate market by activating the cumulative capital of smaller investors and allocating it to investments of a larger size. Outside the USA, the most important REIT markets are Japan and Australia, and in Europe - Great Britain, however, this model is also found in many other countries including Germany, Belgium and France. REIT is in fact a specialized investment fund dedicated to investing in the real estate market, and the functioning model is similar in every jurisdiction. As a rule, REIT buys ready-made real estate and earns profits from renting them with affordable forms of income taxation.
Benefits of investing in REIT
The tax implications of rental income are particularly significant. The law also imposes a change in the Corporate Income Tax Act.
- REIT revenue would be subject to 8.5% CIT. Earned income (without the ability to make depreciation charges).
- In addition, income from REIT investors (dividends, dividend payments) would be subject to income tax exemption, which would apply to both CIT and PIT taxpayers.
According to the draft law a real estate company is a joint stock company having its registered office or management in the territory of the Republic of Poland and whose primary purpose is the regular payment of dividends to shareholders from the profits of rental income of the properties (Article 2 of the Act). The company uses an additional mandatory brand ‘Spółka Rynku Wynajmu Nieruchomości’ – abbreviated to ‘SRWN’ - which in English translates as "Real Estate Rental Company".
The law establishes the following:
- Obligatory share capital of not less than 50,000,000 PLN
- Maintaining real estate by the company, maintaining shares or shares of subsidiaries and shares of other companies renting real estate market at a level not lower than 70% of the balance value of the assets of the company
- Obligation to pay annual dividends at no less than 90% of profit for the last financial year
Impact of the law on the real estate market
Adopting the REIT Act could make a significant contribution to increasing interest in investing in real estate and the inflow of new capital. REIT may also seek to consolidate Polish capital in Poland by creating an attractive investment structure conducive to the merging of individual investors. It should be noted, however, that with such a small current rental market, the proposed form of investment may significantly alter the trend and eventually lead to the expansion of investor portfolios of residential property. Of course, in the first few years the focus is likely to be placed primarily on the safest commercial real estate investor. However, as the market grows, REIT investors may also find flats for rent.
There are also some critical voices. The regulations proposed by the Ministry of Finance do not provide investors with sufficient protection for their interests, ignoring the need for transparent disclosure by REITs. There is a lack of supervision by public institutions, analogous to the obligations imposed on participants in the capital market. In the proposed law, there is also a lack of company "risk mitigation" limited to the company as well as the absence of a catalogue of company information, including its assets and liabilities, is available to the individual investor.
Another problem, especially in the commercial real estate market, may be a very good market situation. The consequence of low interest rates and high liquidity of the financial sector is the excess of cash, which in the long term may threaten the market's downfall due to the unnaturally high demand which is particularly noticeable in the office space market. The introduction of new players can deepen this crisis, resulting in a sudden breakdown of the speculative bubble; As a result, the market downturn will be most affect small investors.
REIT is an interesting investment instrument. It is worthwhile though to approach its introduction and validity critically. Improving the Law in several respects should help prevent the negative effects of being too hasty.