The real estate market offers opportunities not only for buyers and sellers, but also for investors who want to make a long-term return on their capital. One of these opportunities, which is profitable and backed by tax incentives, is the regulated real estate investment trust (REIT). But what are the benefits and challenges for those who choose this legal form? Setting up and operating a REIT requires a specific regulatory framework, offering not only benefits to investors but also considerable legal and financial responsibilities.
What is an REIT?
A REIT in Hungary is a legal form that allows retail and institutional investors to participate indirectly in the growth of the real estate market. The main advantage of a REIT is that investors do not buy the property directly, but acquire shares in a company which earns its income by renting, developing and selling property.
The advantages of the scheme are
REITs offer a number of advantages to investors, in particular favourable tax treatment. From a tax point of view, the REIT has the advantage of not having to pay corporate tax, provided it meets certain criteria. One of the most important related criteria is that a large part of the company’s income, at least 75%, must be derived from the rental of real estate. In addition, an important requirement is that at least 90% of the profits must be paid out as dividends to shareholders, and individual shareholders are only liable to pay personal income tax on the dividends received. It should be noted that REIT shares can also be held in a long-term investment account, which gives the investor the possibility to be exempt from paying income tax if he holds the shares in a long-term investment account at least for 5 years. This is also advantageous because real estate cannot be placed directly in an investment account, but REIT shares can, so a regulated real estate investment company can be a tax-efficient, liquid and regulated way of investing in the real estate market. The shares of a REIT must be traded on a stock exchange, such as the Budapest Stock Exchange or other stock exchanges in the Member States of the European Economic Area, which ensures transparency of operations and protection of shareholders’ rights.
REITs have the practical advantage of diversification, as investors can diversify their portfolio more widely, as they do not buy real estate directly, but shares in a company that can manage a variety of real estate projects, which also allows better management of real estate market risks. An additional advantage can be liquidity, as the REITs are listed on a stock exchange, which allows for a quick sale of shares, as opposed to the less liquid nature of direct real estate investments.
Processes requiring due diligence
However, the operation of REITs requires specific attention as they have to comply with strict compliance requirements. These include the provision of the required capital, financial reporting, which may entail higher operating costs. In addition, their operation is subject to specific legal requirements. For example, the tax exemption is only applicable if the company meets all legal requirements, including qualitative and quantitative criteria for the real estate portfolio.
Market risks are a further challenge. Fluctuations in the real estate market, for example during economic crises, can have a serious impact on the functioning of a REIT. A fall in property prices, a loss of tenants or an increase in development costs can all pose significant risks.
REITs offer a great opportunity for those who want to invest their capital in the real estate market, while also giving small investors the chance to participate in the returns of the real estate market. Benefits such as favourable taxation, investment diversification and liquidity make them attractive to investors. However, it is also important to be aware of the legal and market risks associated with their operation. Regulated real estate investment companies have to comply with strict legal and tax requirements, which are mainly set out in Act CII of 2011 on Regulated Real Estate Investment Companies and the relevant tax legislation. In case someone is considering investing in a REIT, it is advisable to be well informed about the details of the legal requirements and the market environment in order to make the best decision.
Disclaimer: this article is a translation of our original article written in Hungarian, which you can find here
