Inura ended very well and I travelled with Massimo Alamandola in the train to Brussels, so we could write up our notes of meetings in the train. Then in Brussels enjoying a bit of solitude, sitting in my favourite cafe Fontainhas with its free wifi I wrote a document which was needed for Inura – a very simple explanation of REITs on which we are starting some campaigning and research. There is very great apprehension among soicial housing tenants in Germany and elsewhere as international investors acquire big stocks of formerly-social housing….. It seems quite right to be doing this in Brussels, the one place from which all this could conceivably be regulated. If you are interested please do read it and comment so we can make it a better and more useful document. It is in the extended entry below.
Draft for comment only. NOT finished. Do not quote or rely on this version please.
Real Estate Investment Trusts: what are they?
and what can be done about them when they get into housing?
This note is designed as a briefing to people who don’y know anything about Real Estate Investment Trusts (REITS), who don’t know why they are a problem when they start investing in housing, or who wonder what we can do to reduce the damage they cause.
What are REITs?
At least since ancient Roman times, people with wealth have been buying housing, renting it to other people and living on the rents. It was never simple because tenants need good housing they can afford and the art of being a landlord is to get rents as high as possible, do as little maintenance as the tenants will accept, evict those who do not pay. There has always been tension about it and governments have always had to intervene to protect tenants and settle disputes. Sometimes whole groups of tenants go on rent strike and the landlord has to back down. It’s a high-risk business.
REITs were invented as a new device to enable individuals or companies to own properties (often shops, offices or factories, rather than housing) as investments, but with two new features:
(1) lots of small investors can take part by owning shares in the Trust which owns the building(s). This means they can buy or sell their shares in the Trust easily whenever they like. And
(2) No tax is paid by the Trust. Tax is paid only by the shareholder – according to his / her / its individual tax position.
Why is tax so important?
Ordinary companies have to pay tax themselves on their profits (“corporation tax” in the UK). Then they decide what to do with the profits remaining after thay have paid tax. Some of the profits they can decide to keep for re-investment in the business. The rest they distribute to shareholders as “dividends”. These dividends are then liable to tax as part of the shareholders’ incomes. Rich individuals may have to pay a high rate of tax on this money. Others (especially poor, retired, people) may pay little or nothing because their income is low. If the shareholder is a charity or a workers’ pension fund it may pay no tax at all, or very little.
In a REIT, all shareholders receive the whole of their share of the profits, without any tax deducted. Then they pay tax if they have to, in the light of their individual position. This is called “tax transparency”.
Peculiarities of REITs
National finance ministries, of course, dislike loosing tax revenue so they impose a lot of rules if they decide to permit REITs.
1. They insist that all, or nearly all, of the profits are passed straight on to the shareholders (where they then get taxed) in order to prevent the REITs accumulating money out of reach of the tax statem.
2. They limit the REITs to holding property and prevent them from building / developing new properties. Sometimes this is justified as reducung the the risk for shareholders by protecting them from development projects which can go wrong. Sometimes it is argued that development should be done by ordinary companies which have to pay coproration tax on their profits.
3. Many existing companies which own property want to convert to REITs and, if they do, it will normally produce less tax for the government (even after the shareholders have paid their tax), So governments usually charge such companies a one-off fee at the time of conversion.
Missing bit – please suggest
Add some paragraphs of interpretation / summarise national experience / explain why housing is so different from shops, offices and so on….
Who is it supposed to help?
The supporters of REITs often argue that they help small investors like people saving for their retirement…
1. by enabling people to buy small shares in big and costly buildings. This is called “divisibility”.
2. by enabling people to buy or sell shares cheaply and easily—whereas buying or selling an actual building can be very expensive. ( It can take months, involve lots of professionals and cost 5-15% of the value of the property.) This is called “liquidity”.
3. because the REIT can normally only own completed properties, not build new ones, investors are protected from all the risks of developent.
4. Low- and middle-income investors whose incomes are small will be especially helped because their tax rates will be zero or low.
It is also sometimes aregued that
5. REITS will bring more investment money into property.
What can be done to reform and regulate the REITs if we are being forced to have them?
1. Encourage or force them (at least in the social housing field) to do new building, instead of stopping them from building. This would mean that the stock of buildings would increase. If the stock does not grow, all the pressure of new money coming into REITs just helps inflate prices.
2. Insist that they do maintenance to a good standard.
3. Control rents – not just for a few years but permanently. Ensure that rents can only be increased in line with general inflation or where there are real improvements in quality and services, agreed by the tenants, and then only by regulated amounts.
4. Protect teants from eviction, especially where increases in rents have been imposed.
5. Ensure that tenants have enforceable rights to participate in decisions about their housing.
6. Establish simple and indpendent appeal mechanisms so tenants can complain about landlords’ services, behaviour, rent demands, eviction threats etc without incurring legal costs.
Michael Edwards, Bartlett School, UCL, July 5 2006
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