Insights into Cross-Border Real Estate Investments into Europe and Australia
Singapore, 19 May 2014
40395302 1 1 Presenters
Hong Kong Europe HAYDEN FLINN BRYAN PICKUP Corporate & Securities Real Estate Partner, Hong Kong Partner, Europe T +852 3443 113 T +44 20 7111 2468 [email protected] [email protected]
Australia JOHN SULLIVAN MARK BAYLISS Mergers & Acquisitions Real Estate Partner, Sydney Partner, Sydney T + 61 2 9269 2254 T +61 2 9296 2670 [email protected] [email protected]
2 Presenters (cont’d)
TEO WEE HWEE Partner, PricewaterhouseCoopers, Singapore T +65 6236 7618 [email protected]
3 Presenters (cont’d)
TIM FROGLEY
Managing Partner Emerge Capital Sydney T: +61 2 8277 9200 [email protected]
4 Program
Time Topics Presenters
1.00pm-1.30pm Investment market overview Emerge Capital Partners
1.30pm-2.00pm Recent cross-border deals into Australia and King & Wood Mallesons Europe (Part I) Emerge Capital Partners
2.00pm-2.30pm Sources of capital King & Wood Mallesons PricewaterhouseCoopers Emerge Capital Partners
2.30pm-2.50pm Key aspects of transaction process King & Wood Mallesons PricewaterhouseCoopers Emerge Capital Partners
2.50pm-3.20pm Break
5 Program (cont’d)
Time Topics Presenters
3.20pm-4.00pm Special considerations for investing into King & Wood Mallesons Australia and Europe PricewaterhouseCoopers Emerge Capital Partners
4.00pm-4.30pm Recent cross-border deals into Australia and King & Wood Mallesons Europe (Part II) PricewaterhouseCoopers Emerge Capital Partners
4.30pm-5.00pm Joint ventures with Chinese counterparts King & Wood Mallesons PricewaterhouseCoopers Emerge Capital Partners
5.00pm-5.15pm Summing up and final questions King & Wood Mallesons PricewaterhouseCoopers Emerge Capital Partners
6 Investment market overview
7 Key themes
° Global increase in consumer confidence and in consumer spending Rising Interest ° Rates have reached historical lows and are forecasted to increase Rate ° Rising interest rates make fixed rate real estate yields less attractive Environment ° Continued switch to focus on growth investments rather than just income
° Slow down in domestic volumes due to further cooling measures being implemented Chinese ° Government initiative in encouraging Chinese companies to globalise Outbound ° Continued RMB liberalisation and easing of capital flow restrictions Flows Continue ° Economic slowdown makes offshore purchasing more attractive
° European markets continue to enjoy strong capital inflows, especially in the UK, France and Germany European ° London has gained popularity as it is perceived to be a safe-haven ° Increase in investor appetite despite the difficult climate Value ° Rise in transaction volumes that are supported by international investors ° Premium & A-grade CBD commercial office yields circa 6.9%
Sources: APREA, May 2014 RBA, May 2014 JLL, May 2014 Property Wire, May 2014 Prudential, May 2014 Key themes
° Improved investor activity due to the sustained economic recovery and improved investor appetite US ° Increase in net capital flow has helped drive a strong improvement in US transaction volumes ° More than half of the world’s most active cross-border trading cities are in the US Growth ° Premium & A-grade CBD commercial office yields circa 7.5%
° Australian yield spreads remain large , but seen as a defensive yield play Australian ° Base rate is currently 2.50% ° Average commercial property lending spread 150-200 basis points Yields ° Premium & A-grade CBD commercial office yields circa 7.0%
° Strong corporate portfolio sales and capital inflows have caused activity in hotel investments to surge Alternative ° Growth in both business and tourism are improving demand for serviced apartments across major cities Assets ° Popularity of student accommodation is increasing due to the rise in international student numbers Attractive ° Purchasing an existing commercial office building and redeveloping it into residential apartments ° Increased interest in healthcare real estate
Sources: APREA, May 2014 RBA, May 2014 JLL, May 2014 Property Wire, May 2014 Colliers International, May 2014 Comparative REIT performance 2014
USD, 12 months common-base, index returns 135
29.80%
125
115
105
0.01%
95 - 7.71%
- 8.25%
- 12.23% 85 - 15.45%
75 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14
Sources: Global Property Research, May 2014 Comparative REIT performance 2014
Local Currency, 12 months common-base, index returns 125
19.18%
115
105
0.38%
0.01% 95 - 6.90%
- 12.33% 85 - 15.54%
75 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14
Sources: Global Property Research, May 2014 Global Real Estate Capital Flows
Direct Commercial Real Estate Volumes Global Cross-Border Real Estate Transactional Volumes (by Region, Q1 2007 - Q1 2014) (Q1 2009 - Q1 2014)
° Asia Pacific recorded a 15% decrease in overall volume in ° International partners constitute 43% of all deals in Q1 2014 Q1 2014 due to China’s cooling measures ° Transaction volume surged to a 5 year high in Q4 2013 ° Americas recorded improved investor activity in Q1 2014 ° EMEA reflected widespread growth across the larger markets
Sources: JLL, May 2014 Global Real Estate Capital Flows
Top 10 Real Estate Cross-Border Purchasers Historical & Forecast Global Real Estate Transactional Volumes (by Source of Capital, Q1 2013 & Q1 2014) (by Regions, 2003 - 2014)
° USA and Germany remain major cross-border purchasers ° The overall demand for direct real estate is in an upward trend by source of capital ° Americas is expected to be close to historical peak market ° Chinese volumes decreased over the past 12 months activity in 2014
Sources: JLL, May 2014 Inbound Capital Flows to Australia
Sources of Fund Investment in Australia from Overseas
Cross-Border Investment in Australia – by Asset Class
Note: Excludes direct real estate
Cross-Border Investment in Australia by Type of Investors
Sources: Financial Services Council and The Trust Company, May 2014 Emerge Capital Views…
° US: We see growth, low interest rates, a steady recovery, but large pools of domestic capital to Market compete against ° Europe: We see value in growth, but challenges in getting deals closed Fundamentals ° Australia : Strong fundamentals but cap rates continue to compress. More capital than product. Need to work harder to find opportunities
° We see continued value opportunities in Australian residential but it is becoming more scarce e.g. commercial office conversion, fringe product etc. Value ° Work out opportunities are still able to be found in Europe as higher risk capital remains in limited Opportunities supply ° A lot more off-market transactions are occurring. Access to deal flow remains difficult when not present to assess the opportunities
° Increased opportunities for strategic investors to invest into alternative asset classes e.g. Alternative healthcare real estate, hospitals, aged care and retirement, student accommodation, car parks, logistics and distribution etc. Asset Class ° Solid cap rate compression opportunities, but need the right partners ° Also seeing opportunities for vertically integrated Asian investors to move into tourism assets where they can bring supply Recent cross-border deals into Australia and Europe: Part I
16 Global cross-border transaction destinations
Top 30 cities for direct commercial real estate investment 2010-2013
Oslo Stockholm Moscow Berlin LONDON Seattle Toronto Frankfurt Chicago PARIS Munich San Francisco Boston Beijing Seoul Dallas NEW YORK Los Angeles TOKYO Washington DC San Diego Atlanta Shanghai Houston Miami HONG KONG Taipei
Singapore
Sydney Melbourne >$30bill 30 cities account for nearly half of $15-30bill global commercial real estate investment $7-15bill
Source: JLL 17 Global cross-border purchasers by source of capital
Global
USA
Germany
Middle East
Canada
China
UK
Singapore
Hong Kong
Norway
- 5 10 15 20 25 30 35 40 45 50 2013 2012 US$ bn
Source: JLL 18 Current outlook on cross-border deals: JLL
1. Global economy steadily improving – GDP growth, corporate confidence, reduced downside risk, traction in the US
2. Investment markets displaying exceptional liquidity in both equity and debt markets with a huge weight of money chasing commercial property
3. Strong competition for limited stock of core assets is forcing investors up the risk curve – non-core assets in core markets / core assets in non-core markets
4. Pipeline deals point to further growth in global investment activity in 2014
5. Optimistic outlook attributed to: • weight of capital sitting on the sidelines • investor intentions to make fresh commitments • new capital sources constantly emerging • more product coming to market • secondary market growth
Source: JLL 19 China outbound trends
• Significant uptick in money coming out of China for real estate investment (124% increase in 2013: JLL )
• Europe, US, Australia and Singapore all beneficiaries
• Shift into real estate and agribusiness investment, while mining and resources investment reduces
• Broader range of buyers – increasing private buyers, developers, insurers etc. as well as SWFs
• North America, Middle East and Germany still important sources of capital
20 Deal trends: Chinese investments into Australia
“Australia has more work to do to continue attracting Chinese investment from an increasingly competitive global market…”
Source: University of Sydney database
21 Deal trends: Chinese investments into Australia
Source: University of Sydney database
22 Recent cross-border deals: Australia survey Traversing sectors
Office Retail Industrial Residential Hospitality / Data Student Hotels Centres Accomm.
23 23 Recent cross-border deals: Australia survey Traversing transaction types
Public markets Wholesale fund Private trusts Portfolio Single asset Debt investment
. Deal trends: investments into Europe
Inter-regional flows 2013 – Europe at the epicentre once again
11.8 18.5 1.0 4.6 1.1 6.0 10.1 10.0 10.7 4.2 11.7 1.7 33.2 6.8 1.1 2.6 39.6 0 Asia Pacific 5.8 2.1 Americas Europe Middle East Global 4.1
2.5 5.9
Global Sources of Funds: Global groups that raise capital from multiple regions, with less than 70% of the capital from a particular country Source: JLL 25 Deal trends: Chinese investments into Europe
Source: PwC (analysis of Thomson Reuters and China Venture data)
26 Deal trends: real estate investments into Europe
European real estate investment (€bn) - Positive momentum accelerates in second half of 2013
€bn Quarterly Volumes 80
70 Best Q3 Best Q4 since 2007 since 2007 60
50
40 72 66 69 30 60 63 55 53 53 53 20 41 47 38 35 38 30 28 30 28 30 28 25 25 24 23 26 24 27 10 17 20 20 12 13 0 Q1 06 Q1 06 Q2 06 Q3 06 Q4 07 Q1 07 Q2 07 Q3 07 Q4 08 Q1 08 Q2 08 Q3 08 Q4 09 Q1 09 Q2 09 Q3 09 Q4 10 Q1 10 Q2 10 Q3 10 Q4 11 Q1 11 Q2 11 Q3 11 Q4 12 Q1 12 Q2 12 Q3 12 Q4 13 Q1 13 Q2 13 Q3 13 Q4
Source: JLL 27 Recent cross-border deals: Europe survey
Property Date City Type Buyer Price €m Q4 13 London Office China Investment 939.4 Chiswick Park Corp UPP Student Q1 13 UK StudentHousing SAFE 689.4 Housing Ropemaker Q1 13 London Office AXA, SAFE, JV 547.5 Place Silesia City Q3 13 Katowice Retail Allianz, Bank of 412.0 Centre China JV Q2 13 London Office Gaw Capital, on 304.05 The Lloyds behalf of Ping An Building Insurance Q2 13 Brussels Office Hannover 300.0 BelAir Leasing, SAFE JV Q2 13 UK Retail M&G RE, SAFE 279.6 Tesco Retail JV Q4 13 London Dev Site Dalian Wanda n.a. One Nine Elms Group The Ram Q1 14 London Dev Site Greenland Group n.a. Brewery Q4 13 London Office China Overseas 206.5 Centrium Holdings Q4 13 Frankfurt Office Prudential RE 109.9 Gallus Park II Investors, on behalf of SAFE Corn Exchange Q4 13 London Office Reignwood Group 108.3 Lloyds Q3 13 London Office Fosun 75.3 Chambers International Q4 13 Frankfurt Office AE Funding n.a. Solo West Luxembourg 28 Source: Real Capital Analysts Sources of capital
29 Sources of capital: China inbound and outbound
Purchaser flows into Asia Pacific FY 2013
6.0
11.0 2.5 2.5
4.1
1.0 Global Domestic 102.4 12.3 Sources Purchasers of Funds Cross-border Purchasers Global Asia Pacific Americas Europe
Source: JLL China outbound: Financing of acquisitions
Availability vs accessibility of finance “Debt from state banks is relatively easily available for • Funding is more readily available outbound acquisitions. State • State banks are instructed by government to banks have been instructed by make loans available the government to extend • However, regulatory approvals mean financial support to Chinese accessibility can still be a challenge companies that want to make outbound investments. Thus availability of financing is much better than it used to be.”
Source: Mergermarket (2013) 31 China outbound: Sources of capital
SOEs and SWFs Private sector PE funds
• SOEs traditionally • The private sector presents • The PE industry is dominated outbound huge potential for future emerging as a key provider investment, given their outbound investments - of growth capital. large size, market presence has been growing in and ease of access to number and size and • PRC funds are investing cheap financing from state- playing an increasingly minority stakes alongside owned banks. important role in China’s PRC companies in debt- economy. ridden companies in • Across all sectors, the 4 Europe and the US. largest outbound investors • Real estate developers are are CNOOC, Sinopec, CIC “going out” in the face of • Also more leveraged and China Aluminium. CIC, challenging domestic buyouts and PIPES in for example, is a majority conditions, initially to offshore-listed PRC stakeholder in London’s developed markets to learn businesses in various Canary Wharf. market practices. sectors. • It is expected that other • Building contractors (eg. SWFs will join CIC in China State Construction bringing substantial capital Engineering Corporation to deploy into global real and China Railway estate. Construction Corporation) are teaming up with PRC banks to bid for major projects in developed real estate markets and obtain construction financing on attractive terms. 32 Insurance sector opportunities
Regulatory framework • 2007 – Provisional Measures on Overseas Investment Management of Insurance Funds • 2012 – Rules for Implementation of Provisional Measures for the Overseas Investment with Insurance Funds Measures: o specified the qualification requirements for a “Foreign Delegated Person” licence to manage offshore investments of Chinese insurance funds o expanded the permissible investments of Chinese insurance companies, resulting in a significant amount of insurance funds (up to 15% of total AUM) being able to be channelled to offshore markets
Opportunities for the real estate industry • According to CIRC, Chinese insurance companies held over US$1.2 trillion of capital as of Q4 2012 • Fund managers in 45 Designated Jurisdictions (including developed markets such as Australia, UK, France and Hong Kong and emerging markets such as Indonesia and Malaysia) are now able to tap into this large pool of capital • Most significant example in 2013 – Ping An Insurance acquisition of Lloyd’s of London for US$388 million in July 2013 33 Insurance sector opportunities
Permitted offshore investment Investment restrictions products
Commercial and office buildings in main cities of Physical commodities, precious metals, etc. Designated Jurisdictions
REITs listed in Designated Jurisdictions Investments in non-Designated Jurisdictions
Investments in private companies other than PE funds (including funds of funds) selected industries (e.g. healthcare, agriculture, energy)
34 QDII developments
April 2006 April 2006 May and September 2007 2004 formal launch of the QDII bank rules QDII bank investment scope origin of the QDII scheme QDII scheme PBOC, CBRC and The scope of permissible Insurance companies were PBOC issued Circular SAFE issued offshore investments was allowed to invest their foreign No. 5 setting out broad regulations setting out expanded under CBRC currency premiums in policies allowing the regulatory regime circulars . overseas markets. qualified institutions to governing QDII invest offshore. commercial banks.
June 2007 October 2012 QDII insurance June and July 2007 June 2007 rules implementing the 2007 company measures QDII trust company Insurance QDII Measures QDII security company / fund CIRC, PBOC and rules manager rules CIRC issued the implementing SAFE issued QDII CBRC and SAFE rules which expanded the measures setting out issued rules setting out CRSC issued rules setting out scope of permissible offshore the regulatory regime the regulatory regime the regulatory regime investments by insurance governing QDII governing QDII trust governing QDII securities companies. insurance companies. companies. companies / fund managers.
March 2013 August 2013 CSRC issued draft revised rules governing QDII securities SAFE issued new rules companies / fund managers. applying to all types of QDIIs
35 QDII regulation
SAFE • New QDII rules govern proprietary trading of all types of QDII entities • Remittance of RMB funds Regulators • Prohibition of transfer/sale of investment quota • Streamlined regulation on application documents and currency conversion
CBRC CSRC CIRC
Types of QDII Commercial Trust Fund Manager / Insurance institutions Bank Company Securities Company Company
Different requirements on QDII institutions with respect to:
• the channels through which QDIIs may raise funds onshore • the onshore selling activities that QDIIs may undertake • the investment criteria that onshore investors must satisfy
EXCEPTION – QDII insurance companies - only allowed to invest its proprietary funds - not allowed to raise funds onshore by issuing QDII products to onshore investors
36 REITs and Pan-Asian funds – snapshot
China ° Cooling measures have taken REITs off the table for the time being – there is a view that REIT activities will be similar to those that led to the overheating of Hong Kong the residential market ° Investments in China: Spring REIT, ° However, the Government recently announced the which invests in 2 buildings in Beijing’s development of an affordable housing REIT China Central Place, completed a ° Speculation of a launch of a prototype REIT-style US$229m IPO product through a private offering on Shenzhen Stock ° HK still not very active in this space – Exchange’s block trading system. low levels of activity in 2013/14 ° SFC published a consultation paper on amendments to on REIT Code to make REIT market more competitive ° APREA report on REIT benefits
Singapore Australia • Hub for Asian cross-border REITs ° REIT IPOs (but not cross-border focus) • Investments in China: In late 2013, CapitaRetail China Trust ° Significant inbound investment into REITs received approval to acquire Beijing’s Grand Canyon Mall in and spin-off funds a S$367.5m deal • Investments in Australia: In 2013, Singapore-listed Keppel ° REIT M&A markets active (e.g. CPA; CFS REIT gained a 50% investment in $320m E&Y Tower in Retail; Westfield; Australand?) Melbourne and Suntec REIT acquired Leighton skyscraper for $413m
37 Choice of vehicle
Choices • REIT / listed fund or private / wholesale fund or club • Fund formation / listing jurisdiction • Pan-Asian or country-specific REIT / listing jurisdictions • Singapore - cross-border REIT listings: – Mapletree China IPO – Ascendas Hospitality IPO – Dynasty IPO (aborted) – OUE Commercial REIT • Hong Kong - listings of China assets: – Hui Xian REIT – Spring REIT IPO • Australia – ASX – limited appetite for cross-border IPOs • USA – ARC Healthcare Trust and ARC New York Recovery REIT (to be listed in Apr 2014) Private / wholesale fund jurisdictions • more choices but Cayman LP probably the single most commonly used vehicle • increasing use of Singapore fund vehicles in certain contexts 38 REIT issues
• Incremental disclosure / due diligence for IPO – REIT listing process / regulatory review – prospectus / disclosure requirements – due diligence which must meet regulatory / underwriter standards
• Incremental co-ordination / logistics – co-ordination challenge with IPO equity, debt and acquisition closing all occurring simultaneously (SGX / HKSE not having deferred trading) – if portfolio not already owned by sponsor, vendors may need to agree to sale conditional on IPO closing – multi-jurisdictional portfolios – involve additional co-ordination / logistics
• Structure, governance and ongoing obligations of listed entity
39 Key challenges / risks / opportunities
Key challenges / risks
• Market timing risk to successful fund raising • Incremental regulatory / disclosure / diligence burden in listed context • Incremental co-ordination – execution risks • Being a listed entity – ongoing implications
Key opportunities
• Singapore REIT market active esp. for cross-border investments • Foreign investments into Australian REITs or clubs / wholesale funds spun off from Australian REITs • REIT M&A market active in Australia (e.g. CPA / DEXUS / CPPIB; Westfield)
40 Key aspects of transaction process
41 Key aspects of transaction process
Structuring Taxation
Documenta- Regulatory tion & Due Diligence
Financing / Completion fund flows / Execution
42 Structuring, taxation, regulatory issues
Structuring • Tax planning • Regulatory (foreign investment / foreign exchange approvals / licensing / competition clearance etc) • To cater for investment, ongoing operation and exit
Taxation Optimal Investment Structure • Transaction taxes on acquisition and exit (e.g. stamp duty, taxation of indirect transfers) • Treatment of income and capital gains (ongoing and on exit) • Withholding taxes • Permanent establishment issues • Management arrangements
Regulatory Identifying Relevant Approvals / Licences • Foreign investment approvals (outbound and inbound) • Sovereign entities – additional approvals • Anti-monopoly / competition law • Foreign exchange approvals / capital controls • Licensing (e.g. for platform and/or investment vehicles)
43 Tax structuring
Deal structure Asset deal vs Share deal? Win-win?
Transactions taxes? Transaction costs Respective responsibilities of the contracting parties? Withholding tax obligation of the buyer?
Pre-acquisition Pre-acquisition restructuring? Acquisition Structure
Taxation in target Tax system? Tax incentives? Withholding tax planning? jurisdiction
Debt vs equity? Repatriation of cash / profits? Financing structure Capital tax? Thin capitalisation rules?
Direct vs Indirect ownership? Use of intermediate Holding structure holding company? Jurisdiction? Foreign tax credit (“FTC”)? Controlled Foreign Corporation (“CFC”) Rules? Tax position of Profits repatriation? Tax losses? target company 44 Documentation
Documentation Nature of process / documents for relevant market • Sale process – competitive or not • Term sheet / MOU / exclusivity • Sale documents – Representations and warranties – Conditions precedent • Investment structures – Wholly owned – Joint ventures / co-ownership arrangements
45 Due diligence
Due Diligence Nature and Key Issues for Relevant Market • Scope – depth of review – relevance of end user (e.g. private buyer vs listed REIT) • Topics – Title – Environment – Leases – Investment entities – Regulatory/permits/litigation – Tax • Relationship with warranties / risk allocation – see next slides
46 Warranty and indemnity insurance
• Can be initiated by buyer or seller – take up is increasing (especially by buyers) • May create a competitive advantage (e.g. lower warranty cap, cleaner mark-up) • Use when: – the parties’ warranty expectations are difficult to reconcile – seller wants a clean exit – warrantor has significant credit risk and wants to transfer that risk – insolvency situation • Minimal impact on M&A timeline (if any) – insurer due diligence and legal review fits Source: DealTrends 2013, King & Wood Mallesons in with buyer due diligence process • Simplify claims process
47 Risk allocation – M&A deal survey
• Risk allocation via warranties and indemnities • Risk of material changes between signing and completion
Sources: DealTrends 2013, King & Wood Mallesons; 2013 Private Target M&A Deal Points Study for Transactions Completed in 2012, American Bar Association 48 Financing and completion
Financing / Fund Flows investment, ongoing and exit • Equity – Principal investment – External equity – fund/club (e.g. through platform) or JV investment in property (e.g. with local partner) • Debt – onshore; offshore • Hedging – Currency • doubling the daily trading range for the currency: see earlier slide – Interest rate • Repatriation of funds
Completion / Execution • Coordination issues – Portfolio acquisitions – Financing – debt and equity – IPO aspects for listed REITs – regulatory / disclosure / timing • Conditions precedent • Co-investments / parallel funds
49 Special considerations for investing into Australia
50 Structuring – onshore
Structuring – Offshore • Private fund • most major jurisdictions accommodated • Cayman and Singapore presently most common fund jurisdictions • also “direct” investment by SWFs and global pension funds
• REITs – series of recent investments by Singapore REITs
Structuring – onshore – Australia – passive real estate assets • Typically one or more layers of unit trusts • Typically designed to meet managed investment trust / MIT requirements • Commonly a mix of equity and unitholder loans employed • Properties often held in SPV trusts • Other structure for development or operating assets
Structuring – Management - MITs
• Foreign participants often need a “trustee-for-hire” as financial service licence required (for MIT and regulatory purposes) • Substantial proportion of investment management activities must be performed in Australia (which may require a licensed manager) • Interplay of “local” investment management with offshore “control” • For MIT purposes, either the trustee OR the investment manager needs to have an appropriate licence. Most typical is that the trustee has the licence. 51 Example – MIT structure in Australia
Fund Manger Offshore Fund
Offshore SPV Overseas
Australia
Trustee Trustee (1) Trust MIT Fee
Investment (2) Advisory Services Manager
Trustee Trustee (1) Trust SPV Fee
Key tax issues • Stamp Duty Australian real estate • Income and Capital gains • Trusts • MITs (1) Typically external Trustee (as Australian Financial Service Licence required) (2) Sometimes external; sometimes subsidiary of foreign manager
52 Regulatory
• Foreign investment approval required – exemption for developed commercial real estate below AU$54 million
• Approval required for sovereign entities for all land acquisitions regardless of size
• No foreign exchange / capital controls
• Financial services licence required for trustee of Australian trusts
• Separate manager may also require licence (or exemption)
• Registration of Australian trusts is not required if only wholesale investors
53 Foreign investment policy in Australia
Policy and legislative instruments • FATA (Foreign Acquisitions and Takeovers Act) • Foreign Investment Policy of the federal government
FIRB (Foreign Investment Review Board) • Where a proposed acquisition of real estate falls within the scope of FATA or the Foreign Investment Policy, a foreign investor will need to consider whether they must provide prior notification of the acquisition and seek a FIRB approval. • Prior FIRB approval must be obtained where a foreign person proposes to acquire any interest in Australian urban land, in the absence of an exemption. An interest in Australian urban land for the purposes of the FATA includes freehold interests, as well as any interest in a company or trust where more than 50% of the assets of the target are Australian urban land. Also included is leasehold land, where the term of the lease is likely to be more than 5 years (including options for renewal). Rural land has a AUD$248 million threshold. • Trend of increasing scrutiny of rural land acquisitions, in particular mining of rural land. Likely to be a reduction in the threshold this year resulting in a greater number of applications. Sovereign entities already have a $0 threshold • FIRB exemptions (which do not assist sovereign entities) include: (a) non-residential developed commercial real estate (including accommodation facilities) that is valued at less than AUD$54 million and is not vacant land, or heritage listed;
(b) acquisitions of residential real estate “off the plan” where the developer holds a valid FIRB approval in respect to the development; or
(c) acquisitions for a Federal or State, Territory or Local Government. 54 Ownership and title of Australian real estate
Ownership of Australian real estate • Freehold • Leasehold • Strata and community title
How title is established • Registered land – Torrens system of registration – State-based public register – Indefeasibility of title • Unregistered land
55 Documentation and due diligence
Documentation • Sale process remains competitive at the moment (market is hot)
• Documentation balance shifted in favour of vendors in recent years. Scope of warranties, claim limits etc have been reducing
• Key conditions – foreign investment, third party consents (eg, bank, co-owner, lease)
• Co-investment / joint venture structures common - as vendors often seeking partial sell down only
Due diligence • Title and other key matters generally publicly available to search
• Vendors commonly pre-preparing due diligence material / reports in advance of sale (often with purchaser reliance)
• Due diligence is important – material operates as a disclosure and often minimal warranty protection (ie. buyer beware)
• Key topics – title, environment, leases, regulatory/permits, litigation
• Entity due diligence (corporate and tax) often required
• Consultants – legal, tax, accounting, valuation, technical/environmental 56 Financing / fund flows and Completion / execution
Financing / fund flows
• Capital injection / repatriation do not require separate approvals
• Debt commonly provided on-shore (but offshore debt is also possible)
• Hedging – currency; interest rate
Completion / execution
• Process can be relatively fast. Due diligence can often be done quite quickly, especially if vendor is well prepared
• Main parameters are: DD preparation, foreign investment approval, third party consents and in some cases trustee / manager licensing
57 Key challenges / risks / opportunities
Key challenges / risks • Demand presently outstrips supply for quality assets – risks of overpaying or losing in competitive processes
• Most sensitive types of real estate assets are developed residential, rural and heritage. Vacant land is to be developed within certain time frames.
• Market is very vendor friendly and local REITs have re-emerged as buyers etc
• Tax risks if structure not properly established or operated, as Australia is a high tax jurisdiction.
• Softening fundamentals in some sectors (eg. office tenant demand weak and incentives high)
Key opportunities • Australian assets (transparent market) well suited to offshore REITs (e.g. Singapore) and SWFs
• Australian assets offering strong yield – well suited to offshore pension funds
• Increased Chinese interest – both institutional and individual (e.g. SIV regime, Chinese developer activity eg. Greenland, Country Garden)
• Broader asset classes (eg infrastructure and agribusiness) 58 General Taxing Principles – Australia
General taxing principles
• Stamp duty is payable by the purchaser on property acquisition and certain dealings in land holding trusts • Income from Australian real property is taxable • Capital gains on disposal of Australian real property are taxable • Capital gains on disposal of interest in land rich entities (Australian or foreign) are taxable where the investor held 10% or more of the total interest at the time of disposal or a 12 month period in the 24 months prior to the disposal.
Double tax treaties
• Treaties do not protect non-residents from taxation of real estate income and capital gains on the disposal of direct or indirect interest. • Distribution of unfranked dividends is subject to withholding tax (note that distributions from a trust are not dividends). • Interest paid to non-residents is generally deductible against the income derived (subject to thin capitalisation restrictions and transfer pricing guidelines) and is normally subject to withholding tax at a rate of 10% (depends on whether payer is Australian resident or has Australian PE).
59 General Taxing Principles – Australia
Trusts • Most property investments are structured through trusts in Australia • Taxable trust distributions are taxed under ordinary trust provisions or the MIT provisions • Tax deferred distributions (i.e. cash distributions sheltered from tax by capital allowance deductions) are not subject to withholding tax (whether MIT or not) but reduce the capital gains tax base in the units in the Trust held by investors
Ordinary Trust Provisions • Taxable distributions out of (non-MIT) trusts are subject to a non-final trustee withholding tax at a rate dependent on the nature of the foreign investor (corporate: 30%) • Non-resident investor can lodge an Australian income tax return and claim deductible expenses incurred to derive the taxable trust distribution, thereby potentially obtaining a refund of the non-final trustee withholding tax
MIT Provisions • Where the trust qualifies as a MIT, taxable income of the trust paid to non-residents is subject to a final MIT withholding tax (not including dividend, interest or royalty component of the distribution) • The rate of MIT withholding tax depends on whether the investor is resident in an EOI country (generally 15%) or not (30%)
60 Australia – MIT Requirements
61 Australia – EOI Countries
Information of exchange countries currently included in regulations • Anguilla • Guernsey • Papua New Guinea • Antigua and Barbuda • Hungary • Poland • Argentina • India • Republic of Korea • Aruba • Indonesia • Romania • Bahamas • Ireland • Russia • Belgium • Isle of Man • The Republic of San Marino • Belize • Italy • The Republic of Singapore • Bermuda • Japan • Saint Kitts and Nevis • British Virgin Islands • Jersey • Saint Vincent and the Grenadines • Canada • Kiribati • Slovakia • Cayman Islands • Macau • South Africa • China • Malaysia • Spain • Cook Islands • Malta • Sri Lanka • Czech Republic • Mauritius • Sweden • Denmark • Mexico • Taipei • Fiji • Monaco • Thailand • Finland • Netherlands • Turks and Caicos islands • France • Netherlands Antilles • United Kingdom • Germany • New Zealand • United States of America • Gibraltar • Norway • Vietnam
Information of exchange countries not yet included in regulations • Andorra • Grenada • Saint Lucia • Bahrain • Liberia • Samoa • Chile • Liechtenstein • Turkey • Costa Rica • Marshall Islands • Vanuatu • Dominica • Montserrat Note that major financial or fund centres such as Luxembourg and Hong Kong are not on the current lists. 62 General Taxing Principles – Australia
‘Passive’ investment: direct holding
• Net rental income Foreign • Tax deferred • Financing • Capital gain
63 General Taxing Principles – Australia
‘Passive’ investment: Australian company
Foreign • Tax deferred • Capital gain (asset/shareholding)
Aust Co General Taxing Principles – Australia
‘Passive’ investment: Non-MIT Trust (ungeared)
Foreign • Net rental income • Tax deferred • Financing Aust Trust • Capital gain (asset/unitholding)
Net Rent $100 Interest $0 Cash $100 Depreciation ($25)
Taxable $75 Tax @ 30% ($23) Net Cash $78
Effective tax rate 23% General Taxing Principles – Australia
‘Passive’ investment: Non-MIT Trust (geared)
Foreign • Net rental income
•Debt • Tax deferred • Financing Aust Trust • Capital gain (asset/unitholding)
Net Rent $100 Interest ($50) Cash $50 Depreciation ($25)
Taxable $25 Tax @ 30%/10% ($13) Net Cash $88
Effective tax rate 13% General Taxing Principles – Australia
‘Passive’ investment: MIT (ungeared)
Foreign • Net rental income • Tax deferred • Financing Aust Trust • Capital gain (asset/unitholding) • ‘Green’ MIT
Net Rent $100 Interest $0 Cash $100 Depreciation ($25)
Taxable $75 Tax @ 15% ($11) Net Cash $89
Effective tax rate 11% General Taxing Principles – Australia
‘Passive’ investment: MIT (geared)
Foreign • Net rental income
Debt • Tax deferred • Financing Aust • Trust Capital gain (asset/unitholding) • ‘Green’ MIT
Net Rent $100 Interest ($50) Cash $50 Depreciation ($25)
Taxable $25 Tax @ 15%/10% ($9) Net Cash $91
Effective tax rate 9% Australia – conceptual fund structure
EOI Non-EOI SG retail investors /QI ** investors AUS retail
SG company Investment management agreement
SG fund management SG Trust Investmen t company # Singapore management agreement
Australia MIT
# requires a •** QI such Capital as Markets Australian pension * Managed Services real estate funds, by an licence to sovereign Australia manage retail wealth funds, FMC funds REIT, etc Special considerations for investing into Europe
70 Key considerations for investing into Europe
• Regulatory requirements
o vary by country, each is different
o trading approvals
o national/EU competition law hurdles
o AIFMD
• Structuring and tax
• Ownership, title and acquisition process
• Other costs
71 Structuring and tax – UK
• The UK tax framework for non-resident investors in commercial real estate is well established and relatively favourable, particularly as regards: - Stamp taxes on acquisition - Taxation of rental income and relevant deductions - Taxation of capital gains on exit - Use of debt financing • Non-residents engaged in “trading” in real estate or involved in the residential sector can however be faced with additional complexity.
72 Asset or share acquisition
Asset purchase Share purchase
Stamp duty • Commercial property up to 4% (VAT inclusive, if • 0.5% stamp on shares of a UK company land tax / applicable) • 0% stamp (in certain jurisdictions) on the acquisition of stamp duty • Residential property up to 7% (0% up to £125k, 1% shares of an offshore company (e.g. Jersey. Guernsey) up to £250k, 3% up to £500k, 4% up to £1m, 5% up • 15% SDLT on residential property subject to ATED to £2m, 7% over to £2m)
Due diligence • None (except VAT, Capital allowances- see below) • Financial, tax and legal due diligence of the company’s affairs
VAT on • Potential transfer of going concern (‘TOGC’) • No VAT on acquisition acquisition or • VAT due diligence required for certain types of • VAT historic issues should be considered potential claw properties, e.g. student dormitories – specific VAT back reliefs, potential claw back under the capital good scheme
Capital • Vendor and purchaser enter into a joint election to • Inherit existing position allowances transfer capital allowances between £1 and historic cost (i.e. may differ from tax written down value)
Indebtedness • Flexibility (transfer pricing restrictions to be • Restrictions on indebtedness, re-structuring may be considered) required (transfer pricing restrictions to be considered)
Structuring • Flexibility to establish preferred structure • Existing SPV may restrict structure options • No step up of the tax base cost • Possible post acquisition re-structuring
73 UK tax rates overview (non-residential property)
Acquisition phase
• Stamp duty land tax • up to 4% of the (VAT-inclusive, if applicable) purchase price (0%/0.5% stamp on entity deals) • VAT at asset acquisition • 0%/20% (on purchase price; to extent VAT-opted unless TOGC)
Holding phase
• Tax on income • 20% (income tax) v 21% (corporation tax, reducing to 20% by 1 April 2015) • Withholding taxes (rent) • nil (subject to advance clearance for non-residents) • Withholding taxes (other) • nil/20% on interest subject to sourcing rules/exemptions/treaties, nil on non-REIT UK dividends • Thin-cap/TP restrictions • arm’s length test (amount of debt and rate of interest), debt cap rules for corporation tax only • Property tax rates • generally borne by tenants • Use of losses • indefinite loss carry-forward provided rental business continues • Tax depreciation • capital allowances regime (plant & machinery main rate 18%, special rate 8%) • Value added tax • 0%/20% (option to tax)
Exit phase
• Tax rate on asset sale • nil CGT for non-residents v up to 21% for residents (corporation tax, 20% from 1 April 2015) • proposal to tax non-UK residents on capital gains realised on residential properties
74 Structure for holding commercial UK real estate
Typical offshore structures • 20% UK tax on rents, net of interest, other expenses and tax depreciation (“capital allowances”). Investors • Nil UK tax on capital gains (asset or entity sale). • No UK withholding taxes (on rents - subject to clearance; on shareholder interest - structured as non-UK source; or on dividends) . Singapore • Shareholder debt subject to transfer pricing rule (debt amount and HoldCo interest rate). • 4% stamp duty land tax (“SDLT”) levied on purchaser of commercial Singapore real estate (or partnership interest), but currently no stamp taxes on Offshore offshore entity purchase (market acceptable). Equity • Special considerations to structuring apply if “trading” not “investing”. & Debt • Vital that offshore entities not centrally managed & controlled in the UK . Property Compared to onshore structure SPV • 21% tax on all profits (including rents, capital gains and trading profits), although being reduced to 20% from 1 April 2015. Offshore • Withholding tax exemptions on shareholder interest potentially more UK difficult, and prescriptive thin cap and other anti-avoidance rules . • Stamp duty at 0.5% on UK incorporated company purchase. Notes: UK commercial • More complex rules on certain residential property (see later slide) investment property • Investors need to factor in any applicable “home country” tax rules 75 Shareholder and third party debt
Shareholder debt • Typically a key feature of structure, although can be dependent on home country taxation rules. • Under transfer pricing rules, for interest to be deductible against rental income, the amount of debt and rate of interest needs to respect an arm’s length standard. • Documentary evidence needs to be prepared and retained to support the arm’s length standard and tax filing position taken. • The test is not just what “could” be borrowed, but also what “would” be borrowed, and market evidence needs to be applied to the specific metrics of the particular transaction contemplated. • Advance rulings can be obtained from HMRC. • Connected party guarantees on third party debt can also bring such debt within the transfer pricing rules. • Subject to all the relevant circumstances, interest will generally not be UK source and so will not be subject to UK interest WHT.
Third party debt • Some banks have withdrawn from lending on commercial real estate. • Alternative finance providers, including debt funds and broader real estate opportunistic funds. • 20% WHT on UK source yearly interest, subject to certain exemptions and treaty relief. • No WHT on non-UK source interest, or on quoted Eurobonds. • Treaty relief requires care over “beneficial ownership”.
76 UK real estate development
Overview of UK tax system • Net profits from the development business are chargeable to UK corporation tax at the prevailing rate. The current rate is Investors 21% (reduce to 20% from 1/4/2015). • Interest on shareholder loans is deductible subject to arm’s length principles on the quantum and the coupon of the loan (UK transfer pricing rules). There are other restrictions on Singapore Singapore interest deductions, e.g. world wide debt cap rules. HoldCo ServiceCo • Development management fees and advisory fees (on arm’s length basis) should be deductible for tax purposes, where Advisory wholly and exclusively for the purposes of the development. Equity Dividend Agreement & Debt Interest Singapore • Under domestic law UK source interest paid to non-residents is subject to withholding tax at a rate of 20%. This rate is UK reduced to 5% under the UK / Singapore DTT. • There is no withholding tax on dividend distributions or fees. UK Development Co UK Property Co Repatriation of profits to Singapore Development • Foreign sourced dividend income if remitted to Singapore will Management Agreement be exempted from tax if conditions under S13(8) of the Singapore Income Tax Act are met:- - income tax must have been paid in the foreign jurisdiction (rom which the foreign-sourced income is remitted/ deemed remitted; UK Property development 77 UK real estate development
Repatriation of profits to Singapore (Cont’d…) - at the time the foreign-sourced income is remitted/ deemed remitted in Singapore, the headline tax Investors rate of is not less than 15%; and - the Comptroller of Income Tax is satisfied that the tax exemption would be beneficial to the person resident in Singapore. Singapore Singapore • If the conditions under S13(8) are not met, exemptions HoldCo ServiceCo may be available under S13(12).
• Interest income is subject to Singapore tax at 17% when Advisory remitted to Singapore. Sing Hold Co can claim foreign tax Equity Dividend Agreement credit on 5% UK WHT hence incremental tax of 12%. & Debt Interest Singapore • There could be tax planning opportunities that can be UK adopted to eliminate or reduce the Singapore tax on interest income but can be complex. UK Development Co UK Property Co
Development Management Agreement
UK Property development 78 UK real estate development
Other structures
• It is possible, with the right fact pattern, to establish a structure which will mitigate the tax leakage and withholding tax during the development. Investors • Such structures are complex and require careful implementation. For instance, an offshore structure, using an offshore company in a jurisdiction with an appropriate double tax treaty can be used to undertake the property development Singapore Singapore and one can argue that the development profits are not subject HoldCo ServiceCo to UK tax.
• This type of structure is subject to scrutiny by HMRC (the UK Advisory Equity Dividend / Agreement tax authority). & Debt Interest Singapore
Offshore Offshore Property Co
Offshore
UK UK Development Development Co Management Agreement
UK Property development 79 UK real estate re-development
Re-development / refurbishment
• Where are UK commercial property has been acquired in offshore company it is possible, with the right fact pattern, to establish a structure which will mitigate tax leakage on the Investors redevelopment of the site.
• In this example, Singapore Holdco has acquired a UK commercial property through the acquisition of shares in Offshore Co. Planning permission for the site is obtained Singapore Singapore whilst the property is held offshore. Once planning permission HoldCo ServiceCo is granted the property is transferred to the UK to be development. Advisory • Such structures are complex and require careful Agreement implementation. For instance, specific UK anti-avoidance Singapore legalisation , General anti-abuse rules (‘GAAR’) and SDLT Equity Offshore provisions would have to be considered in detail. & Debt Offshore Co • This type of structure is subject to scrutiny by HMRC (the UK tax authority). Offshore
UK Property UK Co Development Co
Development Management Agreement
Property transferred 80 High value UK residential property
Annual Tax on Enveloped Dwellings (ATED)
• The “Annual Tax on Enveloped Dwellings”, or “ATED” on residential properties valued over £2 million owned by certain non-natural persons (broadly companies, partnerships including companies and collective investment schemes) was brought into effect from 1 April 2013. Currently the annual charge ranges from £15k to £144k. Various exemptions including, importantly, where the property is let to a third party on a commercial basis or is held for a property development or trading business.
• The annual charge has been extended and will apply to properties over £1 million from 1 April 2015 and over £500,000 from 1 April 2016.
• Compared to the 4% maximum rate for non-residential property, SDLT applies at 5% on residential transactions over £1m, and at 7% on transactions in excess of £2m. A 15% SDLT (rather than 7%) rate applies on acquisitions over £500,000 made by entities of the type subject to ATED (and broadly with the same exemptions as ATED).
Proposal to tax non-UK residents on capital gains realised on residential properties
• It is proposed that from April 2015, capital gains tax (at a rate of 28%) will apply to non-UK residents on the disposal of UK residential property. A consultation document was issued by HMRC at the end of March 2014 which is due to close on 20 June 2014. The introduction makes it clear that the proposals are aimed at achieving fairness as between UK and non-UK resident owners of residential property.
81 UK REITs
• The biggest listed UK real companies are REITs eg Land Securities, British Land, Hammerson. Currently, in approximate numbers, 30 REITs with a value of £30bn. • Exemption from UK corporation tax on qualifying rental income and on gains on disposal of UK investment properties (subject to minimum distribution and other detailed requirements). • Dividend payments consist of two components: a Property Income Distribution (“PID”) from REIT qualifying activities and a dividend distribution from the non-qualifying activities (“non-PID”). • Apart from payments to certain classes of UK investor, PIDs are paid net of 20% WHT, non-PIDs are not subject to WHT. • Some non-residents may be able to claim treaty refunds of WHT, generally at best down to 15% (although, for example, PRC is 10%), and sovereign immune investors may get full refunds. • Recent relaxations in the rules means that REITs are no longer merely of interest in the large corporate sector, but have also been seen as vehicles for major joint venture transactions undertaken by institutional investors. • Nevertheless the complexity of listing and tax rules for REITs implies that for now at least this wider use is likely to be confined to specific transaction and investor circumstances. • For more comprehensive details, refer to the separate hand-out “Key features of a UK REIT”. 82 Indicative structures for German investment
Typical Luxembourg “no PE” structure • Very common for inbound investment into German real estate • 15.825% German corporate income tax (including solidarity surcharge) on rents, net of interest, other expenses and depreciation
• No trade tax (otherwise at 7% to 17% approx depending on Fund/Investor municipality) ; but vital that Sarl does not have a trade tax permanent establishment (“PE”) in Germany • Same rates of German tax on capital gains (asset sale)
• No corporate income tax or trade tax on gain on Sarl share sale exit Debt Treaty platform DebtDebt Instruments • No German withholding taxes on shareholder interest or on dividends (Luxembourg) • Shareholder debt subject to arm’s length and interest capping rules • Loss limitation rules • German RETT (3.5% to 6.5%, with increases proposed) on asset deals or 95% or more share deals
Lux Sarl German GmbH Compared to GmbH structure • All profits subject to German corporate income tax and trade tax, combined rate between 23% and 33% depending on municipality, subject to any trade tax exemptions (eg “extended trade tax
deduction”) German German • Dividend withholding tax of 26.375% (including solidarity charge) Property Property difficult to mitigate due to stringent substance etc requirements required by Germany of the treaty platform 83 Indicative structures for French investment
SCI (tax transparent) structure • Has been a common structure but now uncertain due to proposed Lux/France treaty changes (SCI sale becomes taxable in France) • 34.43% (generally) French CIT on rents, net of interest, other expenses and depreciation • 34.43% (generally) French CIT on capital gains on an asset sale, but no tax on sale Fund/Investor of SCI and possibilities to avoid price discount for latent tax liability • “Statutory interest” rules ease cash repatriation and thus mitigate cash traps • No French withholding taxes Treaty platform DebtDebtDebt • Shareholder debt subject to complex rules limiting deductibility of interest (Luxembourg) Instruments • French 3% tax obligations up the chain to manage, sovereign immunity considerations subject to tax authority ruling • French transfer tax (5.09%) v VAT on asset deals, 5% transfer tax on FMV of share deals Compared to SAS (tax opaque) structure French SAS or SCI French OPCI • Similarly impacted by proposed Lux/France treaty changes • In event of a share sale, likely to suffer price discount for latent tax liability • Less flexible in terms of cash repatriation, dividend withholding tax to manage
OPCI option French French • French OPCI - SPICCAV “RFA” - a captive REIT, significant regulatory regime Property Property • Full CIT exemption on rents and gains subject to distribution requirements • 5% withholding tax on dividends, unless sovereign exemption (without Luxembourg “blocking” vehicles), subject to tax authority ruling 84 AIFMD
AIFMD basics • Alternative Investment Fund Managers Directive (Directive 2011/61/EU) • Aims – to ensure that all AIFM are subject to appropriate authorization and registration requirements – to provide a framework for the enhanced monitoring of macro-prudential risks – to improve risk management and organizational safeguards to mitigate micro-prudential risks – to improve public accountability for AIF holding controlling stakes in companies – to address G20 goal of global regulatory standards to monitor systemic risk in financial system – to introduce harmonised EU regulatory regime for alternative fund managers • Highly controversial and political measures – extensive additional regulatory requirements for EU managers – criticised for “one-size fits all” approach to a diverse industry – most of the UK-based asset managers think that the AIFMD could reduce the competitiveness because of the additional compliance requirements the regulations impose on the industry
Publication and deadline • The AIFMD entered into force on 22 July 2011 and EU Member States had 24 months to transpose the Directive into national law. The deadline for this was 22 July 2013, the date that the AIFMD was due to take effect in national law across the European Union (though many EU jurisdictions have not yet fully implemented). • An EEA-based AIFM will need to submit an application for authorisation under the AIFMD no later than one year after the transposition date (i.e. by 22 July 2014). On 22 July 2014, it must comply in all other respects with the Directive’s requirements. 85 Effect of AIFMD on Non-EU managers
Extra-territorial effect • Although an EU measure, Directive’s extremely wide definitions of “AIF” and “AIFM” also capture non-EU managers and non-EU funds – AIF is any • collective investment undertaking (including sub-funds) • which raises capital from a number of investors • with a view to investing it in accordance with a defined investment policy • for the benefit of those investors • regardless of whether open-ended/closed-ended • regardless of legal structure and investment strategy – AIFM is a legal person whose regular business is managing one or more AIFs • “managing AIFs” means performing at least the investment management functions of portfolio management or risk management for one or more AIFs
Application • EU AIFMs which manage AIFs, regardless of the AIF domicile (e.g. London manager of Cayman fund) are subject to the Directive’s requirements on management. • Non-EU AIFMs which market AIFs to EU investors, regardless of the AIF domicile (e.g. Hong Kong manager of Cayman/Hong Kong fund) are subject to certain requirements of the Directive (primarily around reporting to investors and regulators) and required to make “private placement” filings to EU regulators before marketing in EU jurisdictions. • In certain jurisdictions this is a simple filing (eg UK), in others a detailed application to market (eg Germany). 86 Effect of AIFMD on investment in the EU
Impact on investment in the EU • Although the broad definitions capture non-EU AIFMs and AIF where they are marketed to EU investors, the Directive does not regulate investment into the EU. • Providing transactions do not involve acquisition vehicles that could be considered AIF, the Directive will not apply. • A single investor acquisition vehicle should not be an AIF with careful drafting. • An acquisition vehicle with multiple investors could be considered an AIF. • There is an exemption for “joint ventures” – but no clear definition of “joint venture”. • If the acquisition vehicle is an AIF, consider using non-EU AIF with non-EU AIFM to fall outside the Directive’s requirements as to management of AIF. • Although the Directive regulates marketing of non-EU AIF it may be possible to structure a vehicle for a consortium of investors without marketing the vehicle - if it is the underlying transaction that is marketed, with the structure following the investors’ requirements.
Recommendations • Avoid structuring acquisition vehicles in a way that may be AIF. • If creation of an AIF is unavoidable, structure AIF and AIFM offshore. • Avoid marketing pre-existing AIF (as distinct from investment opportunities) to EU investors.
87 Key challenges/risks/opportunities in UK
Key challenges/risk – Hot hot hot market, especially London – Both local and global competition for assets – so readiness to deal is an issue – Political uncertainty on the horizon – Scotland, General Election, EU – AIFMD risks if co-investing with or marketing to EU investors; care needed – Present currency benefits may reduce over time
Key opportunities in UK ° Typically longer lease terms (although now 10-15 years not 25) ° Improving economy ° Lower tax rates apply (although non-resident benefits may be under threat) ° REITS rules being relaxed
88 Key challenges in the EU
Key challenges – Lingering Eurozone issues – north/south divide – Each EU country is different – Political uncertainty/anti-business in France – Germany strong but no world cities – Knowledge of local markets vital – No Euro REIT and tax rules vary – Ireland and Spain past the worst – Fundamentally wealthy (although low growth)
89 Singapore tax issues: Outbound investments
90 Singapore Taxation Issues
Tax consideration during acquisition, holding and exit – Acquisition: Invest directly or via SG SPV and capital structure? – Taxability of investment income e.g. dividend, interest, etc and availability of exemptions – Tax concessions and incentives to minimise Singapore tax e.g. REIT and private funds enjoy certain tax concessions – Exit taxes – depending on how sale takes place? Asset or share sale depends on nature of income flowing up to Singapore. Any safe harbour/participation exemption rules?
91 Singapore Taxation Issues
Acquisition – Not much unless you are acquiring a Singapore company that indirectly owns foreign assets. 0.2% stamp duty but REITs are exempted under a remission (sunset clause applies) – If a Singapore SPV is used to hold the investments in Prop Co, one should consider its capital structure from a cash repatriation perspective – As a general rule of thumb, nominal ordinary shares and max interest-free loans. Interest free loans are generally allowed for domestic entities – Equity could include Redeemable Preference Shares. RPS redemption can be used to repatriate trapped cash without any adverse tax consequences. RPS can be used as a means of structuring carried interests too.
92 Singapore Taxation Issues
Holding – Foreign sourced income taxed only when remitted to Singapore within the meaning of the Income Tax Act – Physical and constructive remittance but the latter generally not relevant for investment holding vehicle – Foreign dividend income may be exempted either under S13(8) or S13(12) – S 13(8) – subject to tax condition and 15% headline tax rate conditions – S13(12) – extension of S13(12) and covers also dividend paid out of capital gains but application required before income remittance – No exemption for interest income but can claim foreign tax credit on foreign withholding tax – Foreign Tax Credit pooling system applies e.g. we can elect dividend to tax and excess credit (including tax paid on underlying tax) can be used to set off against tax payable on interest – Foreign trust distributions taxed on remittance basis too but no exemption available except under certain circumstances but ruling required.
93 Singapore Taxation Issues
Holding – REITs listed on the Singapore Stock Exchange and its wholly owned subsidiary enjoy exemption on foreign sourced interest income, dividend income and trust distributions from overseas investment, subject to meeting certain conditions. Take note of sunset clause next March 2015. – Singapore domiciled funds can apply for tax exemption, under which interest, dividend, trust distributions, etc can be exempted from tax where conditions are met. This can be rather effective because real estate investment managers need not be regulated in Singapore but yet the funds they manage can enjoy tax exemption.
94 Singapore Taxation Issues
Exit – If exit is via sale of asset/prop co not held directly by the investor, gain will be repatriated via dividend generally – same comments as dividend income above. – Singapore does not tax capital gains but you need to prove that it is capital gain. Documentation such as board meetings, director’s resolutions, feasibility would be critical. However, gains deriving from the sale of ordinary shares in an investee company will be exempted from tax if min 20% shareholding is met for a min holding period of 24 months prior to disposal. What about sale of preference shares? – Singapore domiciled funds can apply for tax exemption, under which disposal gains can be exempted from tax where conditions are met.
95 Recent cross-border deals into Australia and Europe: Part II
96 Chinese cross-border investments, 2003-2013
LONDON US$4.8bn
NEW YORK HONG KONG US$4.2bn US$5.4bn
SINGAPORE SYDNEY US$2.7 bn US$1.2bn
Source: JLL 97 Chinese cross-border investments, 2003-2013
+ 12 MONTHS
Frankfurt LONDON US$4.8bn
San Francisco NEW Poland Los Angeles Manchester YORK HONG KONG US$4.2bn US$5.4bn
Taipei
SYDNEY SINGAPORE US$1.2bn US$2.7 bn Gold Coast
Melbourne
Source: JLL 98 Recent cross-border deal 1: Australia
Acquisition of Commonwealth Property Office Fund by DEXUS and CPPIB
• Acquisition by consortium comprised of Australian fund, DEXUS Property Group, and Canada Pension Plan Investment Board of Commonwealth Property Office Fund (“ CPA ”)
• CPA listed on ASX and owned a portfolio of 25 properties in Australian CBD’s and major suburban markets with an asset value of AUD3.8bn
99 Recent cross-border deal 1: Australia
Deal timeline
Date Event
Late June 2013 Acquisition of 14.9% stake by DEXUS
Mid-October DEXUS announces it has entered into consortium 2013 with CPPIB and a proposal by that consortium for CPA Mid-November Consortium announces agreed proposal with CPA 2013 Late November Rival bidder announces takeover bid 2013 December 2013 Consortium announces higher bid
January 2014 Consortium agrees to sell assets to rival bidder
February 2014 – Consortium acquires 90% of CPA and proceeds to April 2014 compulsory acquisition Source: Various public releases 100 Recent cross-border deal 1: Australia
Deal Structure
CPPIB DEXUS Property 100% Group
100% (direct and 100% 100% indirect)
Trustee DEXUS Trustee DEXUS CPPIB CPPIB Sub- Trustee Subtrust trustee trust
50% 50%
trustee
DEXUS Office Trust Australia
100% (direct and indirect)
trustee
CPA Source: Bidder’s Statement 101 Recent cross-border deal 1: Australia
Themes • Portfolio deal – 25 office assets • Foreign pension fund capital • Quality local partners (property and development manager) • Consortium / JV elements • M&A transaction – strategic switch to takeover bid (less common than scheme) • Asset sales to underbidder and pre-emptive rights exercised • Institutional manager (ie. bank) exiting property management as catalyst • DXS 14.9% Forward – innovative stake-building
102 Recent cross-border deal 2: Europe
Acquisition of Ropemaker Place, London EC2
• Asset o Trophy office building in the City of London o Fully let o Major tenants include Macquarie Group, the Bank of Tokyo - Mitsubishi and Liberum Capital o Passing rent £24 million per annum • Seller: The British Land Company plc • Buyer: Frasia Holdings S.A. (Axa + SAFE + Hanwha Life) • Price: £472 million
103 Recent cross-border deal 2: Europe
Purchase structure – purchase of all units in a Jersey Property Unit Trust • Units not asset – Why? o Pre-existing structure o SDLT saving (4% of £472m) o VAT considerations o Rights against design and construction team • Downsides for buyer o CGT base cost o Future unwinding o Future administration costs/logistics
Reasons for structuring the deal as a UK private REIT, incorporated in Luxemburg and listed on the Channel Islands Stock Exchange • Liquidity • Tax efficiency o Offshore for CGT o Transparent for income tax (as long as 90% distributions) o No VAT or third party issues o Potential to hive up from JPUT free of SDLT o Ownership distinct from management of asset 104 Recent cross-border deal 2: Europe
Purchase structure – simplified
Hanwha Life SAFE Investor AXA
Safe Nominees Marsheg AXA Investor (BVI) (AXA Shareholder) Hanwha Life Investor
50% 50%
50% 50% English GP Limited (UK) Partnership 66.66% 33.33%
REITCo (Lux / UK)
MidCo (Lux)
UnitCo (Lux)
UnitCo Sub (Lux) 105 Joint ventures with Chinese counterparts
106 PRC regulatory uncertainty
It is increasingly important to secure all necessary approvals ahead of making a cross border offer…
NDRC Outbound investment project National Development and Reform verification regime Commission
MOFCOM Approval of outbound investments Ministry of Commerce Competition regulator
Outbound investment foreign exchange SAFE registration State Administration of Foreign Exchange Remittance of upfront fee for outbound investment
SASAC Filing and approval of material State Assets Supervision and outbound investment by certain SOEs Administration Commission 107 PRC regulatory uncertainty – new developments
Catalogue of Investment Projects Subject to Governmental Verifications (2013)
• Promotes the “reduction and decentralisation… of verification powers to truly implement the investment decision-making powers of enterprises.” • Certain projects no longer required to be verified by NDRC and MOFCOM – this has been replaced by a simpler post-filing requirement • Tsinghua Unigroup case shows the immediate impact of this relaxation of outbound investment regulations in China, but uncertainty remains around the NDRC “road pass” policy
1. NDRC Preliminary Review / 2. NDRC Project Approval 3. MOFCOM Verification Road Pass Distinguishes “special projects” Follows NDRC verification, and Current market view is that from “general projects”: depends on the investment size, NDRC only issues one “road destination and asset (industry) • Special projects or projects over type: pass” after under-taking $1 bn must be verified preliminary review for each deal, • All other investments by • Projects involving “sensitive to avoid competition for same countries/regions” and “sensitive assets. CASOEs and provincial SOEs between $300 m to $1bn only industries” must be verified Unclear if any changes result subject to after-the-event filing • Other projects subject to filing from the 2013 Catalogue. requirement regime
108 Case study: Tsinghua Unigroup
12 November 2013 •Tsinghua Unigroup enters into a merger agreement with RDA Microelectronics, despite NDRC having already granted preliminary approval to Shanghai Pudong Science & Technology Investment in September 2013 •Tsinghua Unigroup commits to pay a $70m reverse break fee
2 December 2013 •NDRC releases Catalogue of Investment Projects Subject to Governmental Verifications (2013)
20 December 2013 •Tsinghua Unigroup and RDA amend their deal to be flexible enough in case the NDRC approval condition to the deal is no longer required, in light of the release of the 2013 Catalogue
27 December 2013 •RDA approves the merger with Tsinghua Unigroup in EGM •NDRC approval or landing on the issue is still pending… PRC regulatory approval procedures
# Filing/Approval Authority Timing
1 NDRC Project Information Report NDRC Confirmation letter (usually dubbed as “road pass”) to be issued (Preliminary Review) within 7 business days after receipt of the Report.
2 SASAC Sign-off Applicable provincial SASAC No clear statutory timelines.
3 MOFCOM and SAFE Outbound MOFCOM and SAFE Process completed upon filing the stamped statutory form – no Merger & Acquisition Project confirmation required. Preliminary Report 4 NDRC Outbound Investment Project NDRC Decision to be made within 20 business days after acceptance Verification of application; another 10 business days may be needed if decision cannot be made within 20 business days.
5 Approval for Early Use of Foreign Local SAFE No clear statutory timelines. Exchange (usually security deposit or guarantee, not exceeding 15% of total investment) 6 MOFCOM Outbound Investment MOFCOM Provisional MOFCOM shall verify the application within 10 Approval working days; Decision of MOFCOM as to whether to accept application to be made within 5 business days after receipt of application from provisional MOFCOM, and approval decision to be made within 15 business days after acceptance of application (not including time for requesting comments from commercial department of local diplomatic and consular missions, who need to respond to such request within 10 business days).
7 SASAC Approval Applicable provincial SASAC Generally takes 10 business days.
8 SAFE Outbound Direct Investment Local SAFE No clear statutory timelines. Foreign Exchange Registration In our experience, this generally takes no more than 20 business days. PRC Tax – Holding Structure
Objectives
• Increase the commercial flexibility for investment, divestment and re-investment • Mitigate foreign taxes paid on profits repatriation and gains on exit • Defer Chinese CIT liabilities on foreign profits • Maximise foreign tax credits (“FTC”)
Direct vs Indirect ownership? Considerations:
China Co ‰ Access to FTC China ‰ Inflexible / prior approval for future Offshore investment ‰‰‰ Use of funds in China
Co in Co in Co in Co in ‰‰‰ Limited tax planning opportunity
Direct ownership Direct Country A Country B Country C Country D
China Co ‰‰‰ More flexibility for future investment
China Offshore investment ‰‰‰ Potential tax benefits under favourable platform DTA Offshore ‰‰‰ Deferral of Chinese CIT subject to Intermediate Co CFC rules and FTC considerations ‰‰‰ More flexibility for divestment Co in Co In Indirect ownership Indirect Co in Co in Country A Country B Country C Country D 111 PRC Tax – Choice of offshore investment platform
China Co Structural issues
• Local tax, legal and financial systems • Double tax treaty network and benefits Dividend • Mitigation of possible tax leakages on repatriation of funds at different phases of the investment • Flexible and tax efficient structure for future divestment (e.g. Exit, IPO, etc) • Substance, general anti-avoidance rules (GAAR) Offshore Investment Platform Funding arrangements
• Ease of cash / profits repatriation • Mitigation of tax in target jurisdiction • Thin capitalisation rules in the target jurisdictions Dividend • Transfer pricing considerations Equity Debt Interest
Target Co
112 Other issues when transacting with Chinese counterparts
Documentation
• Governing law – transaction documents in outbound investment deals are often governed by foreign law
• Bilingual transaction documents?
Financing / fund flows
• Traditionally one of the most significant challenges for Chinese outbound investment
• SAFE notice in August 2012 to relax the procedures for foreign exchange administration in respect of fund remittance and offshore loans may boost private outbound investment
• There are limited precedents for outbound debt financing - Will policy based lending continue and will it extend to the property sector?
Completion / execution
• Execution hurdles are not uncommon in outbound transactions 113 Investment treaty protection
• China has now entered into more bilateral investment treaties than any other country other than Germany. It has entered into over 80 bilateral investment treaties to date.
• This is indicative of increasing flows of capital and resources from China abroad and the Chinese government intention to provide additional protection to its nationals’ foreign investments.
• Bilateral investment treaties may be used by investors seeking to bring a claim against the government of a foreign country in which they invest before a neutral tribunal of international arbitrators.
Examples
• July 2011 – a PRC investor, “Mr Tza”, successfully made a claim against the Government of Peru in the first known investment treaty case involving China.
• September 2012 – Ping An (Insurance) Group commenced a claim against the Government of Belgium following the state-organised break up of Belgium’s Fortis Bank and the writing off of an investment in the bank held by Ping An to the value of RMB 22.8 billion.
114 Key challenges / risks / opportunities
Key challenges / risks
• NDRC “road pass”
• Other regulatory approvals
Key opportunities
• Chinese demand foreign assets is not abating, although there has been a shift in balance away from the resources sector
• Recent uptick in Chinese interest in Australian and European real estate and agribusiness in appropriate jurisdictions
115 Thank You!
Asia Pacific Real Estate Association Limited 58 Tras Street #02-01 Singapore 078997 Tel +65 6438 1110 Fax +65 6438 5550 www.aprea.asia 116 4 Supplement 1: China inbound investment
117 Historical view of land system in China – in transition
118 Overview of China property law
Development of system • 1988 Constitutional Amendment • Distinction between (1) ownership of land, and (2) right to use land • Lacunae • A comprehensive national property law?
(1) Ownership of land
State Owned Land Collectively Owned Land
° Urban land and other land ° Rural land and suburban land ° Two types of land use right: granted and ° May be expropriated by State allocated ° Different land use right system 119 Overview of China property law (cont’d)
(2) Land use rights State Owned Land
Allocated Land Use Rights Granted Land Use Rights
° Lesser allocation fee ° Payment of grant fee ° No fixed duration ° Fixed duration ° May not be privately held ° May be held by private bodies ° May not be sold, may be exchanged ° May be sold, leased, ° No compensation on expropriation mortgaged, transferred ° Compensation on expropriation ° Distinct building ownership
A land use right may run up to: – 70 years for residential use; – 50 years for industrial and public uses; – 40 years for commercial (which includes wholesale and retail), tourism and entertainment uses; and – 50 years for all other uses (which include office and warehouse uses).
120 China property law – certainty of title
Registration issues • Registration system still developing • Possibility that: – land is not contained on the register – boundaries of land are uncertain – certificate inconsistent with register / inconsistent rights are maintained on the register • No typical settlement procedure
Expropriation • State may terminate land use rights at any time for a public purpose and with payment of compensation • Potential issues – compensation may not be adequate, subject to evaluation – unlikely to be able to enforce requirement of public purpose
Renewal of rights • Unless rights are renewed (with payment of new grant fee), all rights revert back to the State
Third party rights
• Tenant’s right of first refusal 121 China property law – other issues
Restrictions on foreign investment and cooling measures • Circular No. 171 and Circular No. 50 – "project existing" principle: land use rights and properties obtained, or a preliminary agreement for transfer or purchase of land use rights or properties signed – “entity existing” principle: the foreign investor must set up a real estate FIE to invest and purchase the property not for its own use. – Filing with commercial administration and prohibition on borrowing shareholder’s loan by the real estate FIE • Government remains committed to curb residential property speculation – e.g. continued restrictions on multiple home ownership • New spate of restrictions announced on 1 March 2013 aimed to cool the real estate sector – 20% CGT on sale of property – increased down payments and mortgage rates Other • Land appreciation tax • Openness of grant process • Maintenance of arable land • Anger at dispossession
122 Example structure – general structuring
123 Example structure – onshore acquisition
Offshore Fund Key issues • Timing and process for establishing FIE
Intermediary Holding Company (BVI)
Offshore SPV (Hong Kong or Singapore) Overseas
PRC FIE Vendor Purchase agreement
Property Property
124 Tax
China :
• Transaction and property taxes, turnover taxes, Corporate Income Tax (CIT) (refer to earlier slides) • Withholding tax on dividends at 10% – reduced PRC withholding taxes at 5% • Circular 698
Hong Kong :
• Dividends from FIE exempted • Capital / offshore gains on disposal of FIE exempted under general principles... • No withholding tax on dividends • Property tax of 15% and profits tax of 16.5% on SPV property holding (but not property held outside of Hong Kong)
Singapore :
• Dividends from FIE exempted • Capital gains on disposal of FIE exempted under applicable fund regime or general principles... • No withholding tax on dividends
125 Regulatory
Hong Kong :
• Manager licensing + additional requirements for REITs • Securities & Futures Ordinance + REIT Code + Trust Deed + SEHK + Listing Rules (Authorised Collective Investment Schemes)
Singapore :
• Manager licensing + additional requirements for REITs • Securities and Futures Act + MAS Code on Collective Investment Schemes (and the Property Funds Guidelines) + Singapore Exchange listing requirements + Code of Corporate Governance
Other :
• Cayman / US / EU requirements – depending on platform and investor base • PRC – see next slide
126 PRC regulatory framework
General laws Special Foreign on foreign requirements investment investment on rules in real • FIE laws* acquisition estate (including EJV • Anti-trust law industry and CJV laws) • National security • Circular 171 • Company Law review • Circular 50
* Note: The FIE laws are currently being reviewed (consultation process started on 9 December 2013) and amendments may soon follow. PRC regulatory framework: Shanghai Free Trade Zone (“Shanghai FTZ”)
Background • First Hong Kong-like free trade area in mainland China • First announced by the government in July 2013 • Premier Li Keqiang: “a snapshot of how China can upgrade its economic structure”.
Policies • Taxation (Caishui [2013] No. 91) – defer corporate income tax payment for enterprises in the FTZ – preferential policy – record-filling procedure • Financing (Operational Guide by PBOC on 21 Feb, 2014) – allow companies based in FTZ to conduct offshore yuan borrowing • Foreign Exchange (Operational Guide by SAFE on 28 Feb 2014) – easing controls on foreign currency conversions for foreign direct investment while attracting multinational companies to establish foreign exchange asset pools inside the FTZ
Issues • Regulation delay? – only 38 out of 1,400 companies registered to set up in FTZ are overseas companies – overseas lenders are left with little to do pending more details of government reforms 128 Documentation and due diligence
Documentation
• Mostly trade sales – not many competitive processes • Documentation balance shifted in favour of vendors in recent years. Scope of warranties, indemnities, claim limits etc. have been reducing • Co-investment / joint venture structures are common • Bilingual transaction documents? • Hong Kong as governing law jurisdiction? Consider difficulties of enforcing other foreign court judgements in PRC. Arbitration outside of PRC is often advisable.
Due diligence
• Low transparency of PRC assets means that due diligence is critical • Key topics = title, permits • Offshore regulatory requirements if buyer is REIT (e.g. due diligence and disclosure)
129 Documentation and due diligence (cont’d)
Common PRC due diligence issues
• Title o No title documents o Title document incorrect • Non-compliance during construction process • Litigation • Missing approvals • Property Manager has incorrect Property Service (Management) Qualification • Strata title – no or inapplicable Deed of Mutual Covenant / Owners convention • Under payment of tax • Fraud
130 Documentation and due diligence (cont’d)
Conditions precedent
• MOFCOM approval o Required for PRC inbound deals (but not for purely PRC domestic deals) • Third party consents • Rectification of key due diligence issues • Circular 698 filing • Material adverse change • No breach of warranties
131 Financing / fund flows and Completion / execution
Financing / fund flows
• Foreign capital injection, profit repatriation and other cross-border transactions with China are subject to the control and supervision of SAFE
• Onshore; offshore debt arrangements (see later slide)
• Hedging – currency; interest rate
• Gearing limit for REITS: - HK - 45% of gross asset value of REIT - Singapore - 35% of deposited property (unless fall within exception)
Completion / execution
• Typically long deal process to completion. Rhythm of process can be irregular
132 Structure – Debt
Key issues: • Tax Fund / Corporation • Cross-border lending • Security that WFOE can grant • Scope of security package • Currency • Fixed and floating charge • Share Mortgage International Holding Company (BVI) Bank $
Offshore SPV (Hong Kong or Singapore)
$ WFOE Bank
Mortgage
133 Case study – Gateway property
Due diligence conducted initially for RREEF CCT • review of original Lease Agreements by PRC legal advisers and accountants; • tenant interviews and written confirmations; • financial due diligence; • valuation of the building on a tenant occupied basis; • comparison of rentals against an independent market survey; and • background / litigation checks on the Vendor.
Findings of fraud in 2007 • There was a “complex fraud perpetrated by members of the Vendor’s team, which had the effect of concealing the true lower value of rentals payable by tenants of the building”. The fraud involved: o the generation of false lease agreements which were introduced covertly into the due diligence process. It does not appear to have involved undisclosed side-letters or side-agreements with tenants. In particular, the Vendor’s team surreptitiously intercepted tenant confirmations provided in response to due diligence questionnaires and altered the documents before they were returned to those conducting the due diligence; and o the falsifying of accounts, tenant invoices and original bank documents. • The fraud was of a degree of sophistication that meant that it was not detected by any of the Manager, the Joint Global Co-ordinators of RREEF CCT’s IPO, their respective legal advisers or the Reporting Accountants, despite what the Board sub-committee considered to have been robust due diligence for the purposes of RREEF CCT’s IPO (at or at least consistent with industry standards)
Impact on value • As a result of the findings of fraud by the Vendor of the Gateway property, net assets attributable to unit holders of RREEF CCT was valued at HK$70 million lower as at 30 September 2007. The valuation as at that date was HK$3.7 billion • In March 2010, the Gateway property was sold to Mapletree India China Fund for HK$ 1.9 billion (excl adjustments).134 Case study – Gateway property (cont’d)
Title to property • The Board of RREEF CCT also obtained a new PRC legal opinion as to the validity of property title of the Gateway property. The PRC legal opinion concludes that HK Gateway Plaza Company Limited, which is ultimately entirely beneficially owned by RREEF CCT, did have legal title to the Property.
135 Key challenges / risks / opportunities
Key challenges / risks
• Offshore fund investment time consuming due to regulatory approvals • Regulatory uncertainty in China e.g. tax and currency control regulations • Tax risks if structure not properly established or operated • Due diligence – title, fraud and similar risks higher than more developed markets • Presently PRC structures not well developed. Local partnering may require complex parallel offshore / onshore structures
Key opportunities
• China real estate portfolios allowed in both HK and Singapore REITs • Onshore tightening of credit may provide opportunities for foreign capital
136 Appendix 1 – US FATCA
Background • Enacted in 2010, FATCA aims to combat tax evasion by US citizens • IGA and TIEA between Cayman Islands and the US entered on 29 November 2013 • Registration portal now open and operational – deadline for getting a “GIIN” effectively 1 January 2015 for reporting model 1 FFIs • 20 February 2014 – IRS and US Treasury Dept. issued the last substantial package of regulations necessary to implement FATCA. Over 50 discrete amendments and clarifications aimed at reducing compliance burdens Scope of IGA • ‘Investment entity’ – catch all Cayman Islands domiciled investment funds & domiciled investment managers – regardless of their legal structure or investment approach • “preliminary account analysis requirements” – extend to any fund that receives US sourced income – e.g. interest, dividends, proceeds of sale of US securities) even if such fund does not, on the face of its offering, solicit investment from US persons Requirements • Determine whether or not they are a ‘reporting financial institution’ – If yes, identity whether any interests in the fund are held by certain ‘specified US persons’ (Annex I) • Report information in relation to US reportable accounts Other key considerations for on-going of a fund • Enhanced due diligence requirements • Constitutional documents • Subscription documents • Administrator’s capacity 137 Appendix 1 – FATCA IGA Timeline
30 June 2016 1 July 2014 Deadline to On-boarding 31 March complete account 1 January 25 April procedures 2015 verification for pre- 2017 2014 for new First reporting existing individual Full reporting Deadline to accounts on US accounts between including gross register for need to be accounts for $50k to $1m and proceeds ‘GIIN’ in place 2014 entity accounts phased in
1 January 2014 1 July 2014 30 June 2015 31 May 2016 1 January 2017 Financial Withholding Deadline to Report on Non Withholding begins Institutions to begins on complete Participating on gross proceeds finalise US FDAP account Financial and principal registration income verification for Institutions to payments information and pre-existing HMRC. More Withholding on submit such account of detailed reporting passthru payments information as > $1m on US accounts to not before this date final HMRC
Registration Due diligence Withholding Reporting
138 Appendix 2 – general taxing principles – Hong Kong
REIT • REIT authorised by the SFC as a collective investment scheme is exempt from HK profits tax. However, rental income from HK real Unitholders property held by REIT directly is subject to HK property tax. Distribution • Where REIT holds HK real property indirectly Management Trustee via SPVs, the SPVs will be subject to HK fee fees profits tax. Manager REIT Trustee • Income from non-HK real property and capital Provides Holds gains are generally exempt from HK property management assets of tax and profits tax. services REIT on trust for the Unitholders Unitholders • Distributions not subject to HK profits tax. Properties • Gains on disposal of units - Subject to HK profits tax if considered onshore trading profit from carrying on business in Hong Kong; exempt if capital gain - Non-resident investors may be exempt from HK profits tax under the Offshore Funds Exemption provisions, subject to certain conditions 139 Appendix 2 – general taxing principles – Singapore
• A listed property fund in Singapore can be structured as a REIT; Business Trust and Company that applies for Enhanced Tier Fund Status • REITs and companies that have Enhanced Tier Fund Status enjoy special tax concessions • Subject to obtaining a tax ruling from IRAS, REIT can enjoy tax transparency treatment for taxable income distributed to its unitholders • A REIT can enjoy tax exemption for foreign dividend, interest income or trust distributions, subject to certain conditions • Distributions by a REIT out of foreign sourced income are not subject to tax • Distributions out of taxable income (e.g. Singapore rentals) to: • Individual investors – exempt • Resident corporate investors – taxable • Non-resident corporate investors – 10% final withholding tax • Gains on sale of REIT units by: • Foreign investors - generally not subject to Singapore tax • Resident investors - subject to Singapore tax if considered trading gains
• REIT enjoys stamp duty remission when it acquires assets and GST concessions
• REIT managers are taxed at prevailing Singapore corporate tax rate
140 Appendix 2 – general taxing principles – China
Transaction Type of taxes Taxation basis
Acquisition of Stamp Duty 0.05%on transaction value real property Deed Tax 3% to 5%on value of land use right or real properties
Leasing of real Stamp Duty 0.1%on gross rental property Business Tax 5%on gross rental income (local authorities may impose minor local levies based on Business Tax payable)
Real EstateTax 12%on rental income; or 1.2% on cost x (1 – deduction rate ranging from 10% to 30%)
Corporate Income Tax 25% on taxable income
Land Use Tax RMB0.6 to RMB30 per square meter of land occupied
141 Appendix 2 – general taxing principles – China (cont’d)
Exitstrategy Typeof taxes Taxation basis
Disposal of real Stamp Duty 0.05% on transaction value property Business Tax 5% on sales proceeds (developer) / gain on disposal (non-developer investor) (local authorities may impose minor local levies based on Business Tax payable)
Land Appreciation Tax 30% to 60% on appreciation in value realised on the transfer of land, buildings and associated structures
Corporate Income Tax 25% on taxable income
Disposal of equity Stamp Duty 0.05% on transaction value interest in FIE Corporate Income Tax 10% WHT on net gain (assume no China PE)
Disposal of Corporate Income Tax Nil or 10% on gains where FIE is considered to be shares in offshore indirectly transferred through the abusive use of SPV or holding any corporate structure which does not serve any companies of the commercial purpose but for avoiding China tax SPV liabilities
*Seller may be required to report the transaction under Circular 698 142 Supplement 2: RMB internationalisation
143 RMB internationalisation
• RMB is now the world’s 8th most traded currency trade and on the way to becoming an investment currency
• Not freely convertible – remittance in and out of PRC is subject to controls imposed by PRC government – but significant relaxations of those controls over recent years
• All current account items can be settled in RMB (or foreign currencies) without need for any approvals
• There is now effectively a single and fungible pool of offshore RMB
• Liberalisation of capital account controls and other ongoing regulatory charges – e.g. QFII, RQFII and pilot scheme for select MNC’s to do cross-border FX cash sweeping
• Multiple offshore RMB centres – Hong Kong, Singapore, Macau, London… and maybe Sydney?
144 RMB internationalisation
QDII programme A long way gone, and to go… launched allowing A drop of the dollar peg domestic institutions to informally reinstated in invest overseas 2008; Further QFII programme appreciation of currency allows foreigners to buy mainland- First Panda Current account listed securities bonds – non- Shanghai and four convertibility Chinese issuers southern cities allowed to FULL in RMB settle international trade CONVERTIBILITY ? using RMB on pilot basis
1994 1996 2002 2004 2005 2006 2007 2008 2009 2010 2010 onwards 2020
Hong Kong Daily fluctuation China unifies opens RMB range widened RMB exchange business to Greater circulation of rate and RMB individuals RMB outside mainland; conditional Stronger and deeper convertibility domestic capital People’s Bank of China markets; More currency under current Peg abandoned for Begins to relax started bilateral swap agreements; account managed float restrictions on currency swap Stronger monitoring against reference residents purchasing agreements with mechanisms; Market- basket, with daily foreign exchange, and countries eg Korea, based exchange rates fluctuation range enterprises opening Malaysia, Hong Kong foreign currency and Indonesia accounts
145 RMB internationalisation: cross-border funds flow
Capital Account Current Account “The SWIFT RMB Tracker shows that RMB is now Trade Settlement the 8th most traded currency in the world with Equity • FDI • Outbound • Trade in Goods a 1.49% market share in Investment August 2013, up from • Service Trade position #11 and 0.92% Debt • Inbound Loan • Outbound market share in January Loan 2012. In that period, RMB • Offshore Bond FX trading value increased Issues by 113% and the Chinese Renminbi overtook the • Cross-border Swedish Krona, Korean Credit Support Won and Russian Rouble.”
SWIFT, 8 October 2013
Restricted Convertibility Free Convertibility
146 RMB internationalisation: Free trade zone accounts?
$ ¢ Free transfer between FTA and Offshore offshore accounts Onshore Free Trade Zone Account ¢ Limited channels between FTA and other Chinese companies or FTZ companies ordinary account of the FTZ $ $ company – deemed as cross- Ordinary account CSFTZ border transactions Mainland China ¢ Free transfer between ordinary $ Chinese companies Chinese companies account and other Chinese companies
147 RMB internationalisation: Doubling of daily trading band
• Effective from 17 March 2014, the RMB daily trading band increased from 1% to 2% • This means that the exchange rate can rise or fall 2% from a daily midpoint rate set each morning
Commentary
“The authorities are trying to increase uncertainty around the yuan outlook…”
“The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks…”
“With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion”
148 Supplement 3: REITs and Pan-Asian funds
149 Investment Considerations
Scale and Liquidity High Quality Assets
Compelling Growth Stable Yield Story
Investor considerations Experienced Structural Management Team Simplicity
Strong Corporate Reasonable Governance Management Fees
150 TR/GPR/APREA Composite REIT Index in 2013
Source: APREA (2013)
151 Historical Return Composition
Source: APREA (2013) Historical Return Composition
Source: APREA (2013)
153 Appendix – REITs – comparison of Pan-Asian funds
Regulatory Requirements Hong Kong Singapore Australia
First REIT listed 2005 2002 1971
Manager External or Internal External External or Internal
Manager licensing requirements PPP
Trustee requirement PP Responsible entity acts as both manager and trustee
Requirement for listing Mandatory Must be listed to be eligible Optional but easier to for tax concessions. qualify as a managed investment trust if listed
Leverage Capped at 45% of gross Over 35% of total assets Thin-capitalisation rules* asset value permitted with disclosed apply if the REIT is either credit rating (capped at 60%) foreign controlled or the REIT controls a foreign entity
Distribution requirements At least 90% of annual net At least 90% so as to enjoy No minimum distribution income after tax exemption from paying requirements but taxable corporate tax income that is not distributed to unit holders is taxed (at 46.5%) in the hands of the trustee/responsible entity 154 Appendix – REITs – comparison of Pan-Asian funds
Regulatory Requirements Hong Kong Singapore Australia
Geographical restrictions No No No
Property development Prohibited, but H-REITs Property developments Public unit trusts can only may acquire uncompleted and investments in undertake development activity units comprising less than uncompleted projects to ‘primarily derive rental 10% NAV should not exceed 10% income’ and/or certain other eligible activities. Otherwise, the development will be deemed a “trading business” such that the trust will not be eligible for flow through tax treatment, but will be treated as a company for tax purposes. Hence, the adoption of stapled security structures
Tax Tax at 16.5% Exempt if payout ratio is If undertaking predominantly 90% or more passive property holdings activities, generally, taxed as a flow through vehicle. Otherwise, taxable as a domestic company*
155 Appendix – REITs – comparison of European funds
Regulatory requirements UK France (SllC) Germany (REIT-AG)
First REIT listed 1 January 2007 1 January 2003 1 January 2007
Manager Internal or External Internal Internal or External
Manager licensing No (subject to AIFMD) No (subject to AIFMD) No (subject to AIFMD) requirements Requirement for listing VVV Leverage Must be “market” and profits No cap 55% max must exceed financing costs by 25% Distribution requirements At least 90% of “exempt” 95% of income, At least 90% of net income income 60% of capital gains Geographical restrictions No (in theory!) No No (but no pre 2007 residential) Property development Yes, subject to 90% Yes subject to 20% cap Yes, but only as distribution auxiliary business Tax No income tax on exempt 19% upon election for SIIC No income tax or trade tax income regime. Withholding tax applies Income tax on non-exempt No income tax. income 30% withholding tax applies. No capital gains tax Withholding tax applies to exempt income
156 Disclaimer & Copyright
DISCLAIMER • These materials are issued by the APREA Institute on the understanding that: • (1) APREA Institute and individual contributors are not responsible for the results of any action taken on the basis of information in these materials, nor for any errors or omissions; and • (2) APREA Institute and individual contributors expressly disclaim all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by such a person in reliance, whether whole or partial, upon the whole or any part of the contents of these materials; and • (3) APREA Institute and individual contributors do not purport to provide legal or other expert advice in these materials and if legal or other expert advice is required, the services of a competent professional person should be sought. • The views expressed by presenters delivering course material by lecture or workshop may not necessarily be those of the APREA Institute.
COPYRIGHT • ©APREA Institute, 2014. All rights strictly reserved. No part of these materials covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, taping or information retrieval systems) without the written permission of the APREA Institute. • APREA Institute makes every effort to contact copyright owners and request permission for all copyright material reproduced. However, despite our best efforts, there may be instances where we have been unable to trace or contact copyright holders. If noticed, APREA Institute will ensure acknowledgement of the use of copyright material.
157