ISSUE 34 Real Estate Gazette

FOCUS ON: FOREIGN INVESTMENTS

www.dlapiperrealworld.com

Australia Australia’s foreign investment approval regime Poland Foreign real estate Brazil investment in Poland Foreign investment in Brazil (and in Brazilian farmlands) Portugal Portugal and foreign investors Germany Foreign real estate investments in Singapore Germany — unlimited opportunities? Private education in Southeast Asia — investment plays and regulatory hurdles Morocco Real estate foreign investments in Morocco United Kingdom Taxing non-UK resident Netherlands investors in UK property The 2019 Dutch tax plan — key takeaways for inbound real estate investments

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A note from the Editor

A very warm welcome to all our readers to DLA Piper’s first Real Estate Gazette of the year. In this issue, we focus on foreign investment.

Olaf Schmidt There are many rewards to be that its legal system contains some Co-Chair of the Global Cross- had from investing in real estate unique features, such as perpetual Practice Real Estate Sector overseas, including the opportunity usufruct, which any foreign investor to diversify and the potential for would need to consider (page 22), stable and safe returns, among while our UK article focuses on the others. However, in addition to tax implications for non-UK resident such advantages, prudent investors investors in UK property (page should also be aware of the pitfalls, 32). However, it is not all doom including unfamiliar tax regimes and and gloom. Many of the articles a completely alien legal framework stress the opportunities available governing the purchasing process. for foreign investors, citing, for example, the growth in city dwellers, In our Australian article (page increasing rent levels, and the 6), the authors describe the potential for significant, long-term country’s foreign investment returns. Indeed, as the authors of approval scheme, which regulates our German article (page 14) put foreign persons wanting to acquire it: “What are you waiting for?” an interest in certain Australian land and businesses. They note Other topics discussed in this issue that failure to comply with the include the “Plaza Ban” regulation in regime can result in harsh financial Hungary (page 40); a discussion penalties and even criminal of the status of hotel operators prosecution. Brazil, on the other in Asia and whether it matters if hand, imposes few legal restrictions they are agents or independent on foreign investors generally but contractors (page 52); and the the authors of our Brazilian article growing trend of block leasing in (page 10) highlight particular Sweden (page 56). restrictions on the acquisition and lease of farmland by foreigners. We do hope that you enjoy Our Polish article makes the point reading this issue.

“Foreign investors should be aware of pitfalls, including unfamiliar tax regimes.”

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Foreign investments

AUSTRALIA Australia’s foreign investment approval regime...... 6

BRAZIL Foreign investment in Brazil (and in Brazilian farmlands)...... 10

GERMANY Foreign real estate investments in Germany — unlimited opportunities?...... 14

MOROCCO Real estate foreign investments in Morocco...... 16

NETHERLANDS The 2019 Dutch tax plan — key takeaways for inbound real estate investments...... 20

POLAND Foreign real estate investment in Poland...... 22

PORTUGAL Portugal and foreign investors...... 26

SINGAPORE Private education in Southeast Asia — investment plays and regulatory hurdles...... 28

UK Taxing non-UK resident investors in UK property...... 32

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General

DENMARK Leveraging in Denmark — a unique mortgage system...... 36

HUNGARY The “Plaza Ban” regulation in Hungary...... 40

NETHERLANDS Energy performance regulations and investing in Dutch real estate...... 44 Roadmap for real estate businesses’ second-best investment on earth...... 48

SINGAPORE Is your hotel operator an agent or independent contractor, and should owners in Asia care?...... 52

SWEDEN Block leasing in Sweden — a growing trend...... 56

UK Go big or go homes...... 60

5 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Australia’s foreign investment approval regime

Tim Mathers and Sandra Pepper, Brisbane

Australia has a foreign investment approval regime which regulates foreign persons wanting to acquire an interest in certain Australian land and businesses. This article focuses on foreign acquisitions of Australian land.

The regime is set out in the Foreign Failure to comply with the Act can Who is a foreign Acquisitions and Takeover Act result in harsh financial penalties person? 1975 (Cth) (the Act). Under the Act, and possible criminal prosecution. An entity is a foreign person if they the Treasurer of Australia has the meet one of the following criteria: power to examine proposed foreign When is the • an individual that is not ordinarily acquisitions and decide whether to: requirement to resident in Australia. This includes seek FIRB approval • issue a “no objection notice,” Australian citizens living abroad; triggered? a process commonly known as A foreign investor should assess • a foreign government or foreign granting Foreign Investment the requirement to apply for FIRB government investor. Commercial Review Board (FIRB) approval approval if the acquisition is a investors may also be caught for the acquisition; significant and/or notifiable action under this definition even though • prohibit acquisitions determined to under the Act that meets prescribed they operate independently be contrary to the national interest; monetary thresholds and no of any foreign government, exemptions apply. for example if they have some • order the disposal of an interest form of foreign government already acquired; or The Act defines significant and ownership in their shareholding • impose conditions on the notifiable actions, and generally or structure. Pension funds acquisition, necessary to remove an acquisition of an interest in and sovereign wealth funds national interest concerns. Australian land by a foreign person can also be considered foreign meets the criteria to be considered government investors. Typically, matters that the Treasurer a significant and notifiable action. • a corporation, trustee of a trust, will take into consideration when How the criteria are defined and or general partner of a limited making a decision include the applied is discussed in more partnership in which a foreign impact of the acquisition on the detail below. person holds a substantial Australian economy and community, interest of at least 20 percent; or national security, and the character of the investor.

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• a corporation, trustee of a trust, • Agricultural land: includes land If the land being acquired is mixed or general partner of a limited that is used or could reasonably use (eg, part commercial and part partnership in which two or be used for a primary production agricultural) FIRB will assess the more foreign persons hold an business. This may be for the classification based on factors aggregate substantial interest purposes of cultivating crops, including the current and intended of at least 40 percent. animal rearing, fishing, forestry use of the land, proportions of each or horticulture operations. use and the nature of the land. An acquisition of an • Commercial land: covers land used interest in Australian What are the for a wide variety of commercial land is broadly defined thresholds? purposes and can include land with An acquisition of an interest can The Act prescribes monetary office buildings, shopping malls, take many forms, such as entering thresholds relevant to the warehouses, industrial estates and a contract for the purchase of acquisition which, if exceeded factories. It also includes land with land and buildings, a call option (and unless an exemption applies), residential premises such as hotels to purchase or a lease or permit require the foreign person acquiring and caravan parks, but it does not with an expected term of at least the interest in Australian land include retirement villages, aged five years. Acquiring an interest in to obtain FIRB approval before care facilities or certain student an Australian land corporation or completing the acquisition. accommodation. It can be either Australian land trust, whose land The thresholds vary depending on vacant or developed. Commercial assets comprise more than 50 the type of foreign person and the land is considered vacant if there percent of the entity’s total assets, acquisition, for example: are no buildings on the land is a deemed acquisition of an that can lawfully be occupied by • Is the foreign person a foreign interest in Australian land. people, goods or livestock. Land is government investor? Foreign not vacant if a wind or solar power government investors are For the purposes of the Act, Australian station is located on it. subject to stricter thresholds land is classified into four categories: than other foreign persons • Mining and production • Residential land: includes land on and generally there is a zero tenements: includes mining, oil, which at least one but not more monetary threshold that applies, gas and petroleum production than 10 dwellings are built or so FIRB approval is almost (offshore and onshore) could be built. It can be land that always required. acquisitions, leases and permits. is vacant or it may have new or It does not include exploration established dwellings located on it. and prospecting permits.

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• Is the foreign person (not a foreign government person must be taken into account when investor) from a Free Trade Agreement (FTA) country? assessing the thresholds. FTA countries are the US, New Zealand, Chile, China, • Vacant commercial land has a lower threshold than Japan, South Korea and Singapore. From December developed commercial land, so careful consideration 30, 2018, Canada and Mexico became FTA countries. should be given to the structures that exist on FTA countries have higher thresholds than commercial land. non-FTA countries. • Where an acquisition involves multiple titles with • Is the land classified as sensitive land? If so, it will different uses, notification requirements and have a lower monetary threshold. Sensitive land thresholds will be determined on a title-by-title basis. includes mines and public infrastructure such as an airport or port, and land that houses certain The table below contains the prescribed monetary telecommunications or data facilities. thresholds for acquisitions of interests in land for 2018.* • For agricultural land, the threshold is cumulative These thresholds are indexed annually on January 1 based on a foreign person’s total holding, meaning every year. all Australian agricultural holdings of the foreign

TYPE OF ACTION THRESHOLD IN AUSTRALIAN DOLLARS — FOREIGN PERSON (TYPE OF ACQUISITION) MORE THAN

All types of foreign persons Residential land AU$0

Privately owned foreign persons Agricultural land For Chile, New Zealand and the US, AU$1,134 million from Free Trade Agreement (FTA) countries For China, Japan, South Korea and Singapore AU$15 million (cumulative)

Vacant commercial land AU$0

Developed commercial land AU$1,134 million (regardless of whether the land is sensitive or not)

Mining and production tenements For Chile, New Zealand and the US, AU$1,134 million

Others AU$0

Privately owned foreign persons Agricultural land For Thailand where land is used wholly and exclusively from non-FTA countries for a primary production business AU$50 million (otherwise the land is not agricultural land)

Others AU$15 million

Vacant commercial land AU$0

Developed commercial land AU$261 million

Low threshold land (sensitive land) AU$57 million

Mining and production tenements AU$0

Foreign government investors Any interest in land AU$0

* This table does not contain reference to Canada and Mexico which became FTA countries on December 30, 2018. Readers should contact our Australian offices directly for further information on the relevant thresholds for these countries.

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Despite the seemingly onerous nature of the FIRB approval requirements, the Treasurer will usually only exercise a discretion to prohibit an acquisition in exceptional circumstances.

What are the main exemptions? The Act provides for various exemptions and some of the more regularly applied exemptions include the following:

• An interest in land acquired directly from the Commonwealth, state or a local government body is generally exempt from the need to apply for FIRB approval.

• Residential land in integrated tourist development areas may be exempt from the need to apply for FIRB approval.

• Where an exemption certificate has been granted, the Treasurer may grant exemption certificates to Despite the seemingly onerous nature of the FIRB foreign persons with a high volume of acquisitions, approval requirements, the Treasurer will usually which are not contrary to the national interest, only exercise a discretion to prohibit an acquisition in to ease the regulatory burden. exceptional circumstances. There have been some high- profile and controversial decisions recently; however, in What does this all mean for foreign our experience the vast majority of applications for FIRB investors looking to invest in an approval for proposed acquisitions are accepted and interest in Australian land? approved by the Treasurer. Understanding when and how Australia’s foreign investment regime applies can be a complex and Even for what might be considered a routine application, nuanced process. Given the harsh penalties for it is important to follow the correct process, given the non-compliance and relatively high application fees, potential consequences if FIRB approval is not obtained each proposed foreign acquisition requires careful or applied for when it should. analysis. It is important to assess all the circumstances of the proposed acquisition at an early stage, to identify Our team regularly deals with FIRB across a wide any issues and develop a strategy to manage the factors range of transactions and sectors and are well placed that may cause delay or put the acquisition at risk if the to assist foreign investors in all aspects of their real necessary FIRB approvals are not obtained. estate investment in Australia.

9 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Foreign investment in Brazil (and in Brazilian farmlands)

Marcus Bitencourt and Ivandro Trevelim, São Paulo

In terms of corporate law, foreign investors in Brazil — either legal entities or individuals — do not face a broad range of legal restrictions and, in general terms, are permitted and welcome in the vast majority of economic sectors.

Foreign direct investments, which Notwithstanding the straightforward online retailers need storage units are regulated by Brazilian Law legal framework which allows and delivery facilities. 4,131/62, may be carried out by foreign investors into Brazil, social • Hospitality: recent major sporting investing in an existing company and economic aspects, such as the events in Brazil, such as the World or incorporating a new one. For political environment, high interest Cup and the Olympics in Rio de foreign direct investments, both rates and the expensive debt market, Janeiro, have allowed this sector the Brazilian entity and the foreign may impact the inflow of investments. to continue to develop and attract investor must be registered with the resources. Brazilian Central Bank. Additionally, According to data collected by the every inflow and outflow of money Brazilian Central Bank, during 2017, • Commercial and office resulting from such investment must Brazil received US$540 billion in buildings: vacancy rates have be registered with the Central Bank. direct foreign investment, which been decreasing, particularly in These registrations are simple online represents an increase of 12 percent São Paulo, and there may even procedures and do not require any in comparison with 2016. be untapped demand over the prior review or authorization by the next few years. The return of Brazilian Central Bank. The Brazilian real estate market has investment is already driving also experienced a period of gradual many real estate developers Foreign shareholders, as well as economic recovery. There are a to launch new commercial real Brazilian entities, must also provide number of positive factors creating estate developments. the Brazilian Federal Revenue good investment opportunities in the • Residential: new developments are with information regarding their Brazilian real estate sector, including: taking place for compact and studio respective corporate chains up • Logistics and warehousing: apartments, notably in urban areas, to the individuals deemed their the need for warehouse space such as Brasilia, São Paulo, Rio de “ultimate beneficial owners.” has increased significantly, as Janeiro, and other major cities.

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• A recovery in the retail industry or in the same area. This disrupts Regarding investment in Brazilian sectors has also been noted, the traditional forms of working farmland, in 2010, at the end of the with the return of consumer arrangements. government of former President confidence in purchasing goods Lula, there was a change in the and real estate associated Other ways to set up households position adopted by the Office of with some improvement in the are emerging, with the co-living the General Counsel to the Federal Brazilian economy. concept. Co-living projects already Government (AGU), consisting of the correspond to an important new Opinion1 which re-established • Shopping malls too are trend reflecting the desire for restrictions on the acquisition and now indicating that business co-existence. This sector delivers lease of farmland by foreigners developers have begun to re- individual rooms with common and similar entities (ie, Brazilian open stores that had been closed services and areas of all kinds to subsidiaries of foreign companies, in the recent period of austerity. meet the needs of particular groups, controlled by foreigners in any way). and it is attracting notable interest New technologies also are perceived from older people and students. The intended purpose of this to be responding to the demand Opinion in 2010 was to stop all for a more participatory world, Other areas should also generate investments in Brazilian farmlands developing very attractive real estate new business opportunities in real by foreigners, and this intention products that meet new demands estate, such as the current discussion was achieved, since the change in such as co-working, a flexible on amendments to the new Zoning the interpretation of the legislation working model in which the sharing and Master Plan in the City of São resulted in the classification of of office space and resources takes Paulo which will affect new real all and any externally originated place, bringing together people who estate developments in the city. investment as subject to the do not work for the same employer, Legislation of 1971. This prevents acquisitions and leases without the prior approval of the government/ National Congress, and also makes There are a number of positive factors them subject to other extensive creating good investment opportunities limitations established by the law. In reality, it renders such deals in the Brazilian real estate sector. unviable, adversely affecting all

1 Opinion CGU/AGU LA 01, of August 9, 2010

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and any type of acquisition or lease, disregarding the It would not be the intention to completely eliminate important nuances and the existence of economic restrictions on the acquisition and lease of farmland sectors with their own regulations, such as the energy by foreigners. Several countries, to a greater or lesser generation industry. degree, impose such limits and restrictions, but they are generally supported by rules that are clear and easy Currently, a foreign investor may only hold a minority to implement. The intention would be to make such stake in a Brazilian company holding farmland. This transactions subject to rules that are clear and subject restriction may also prevent the granting of guarantees to penalties for those who fail to comply, thus ensuring and collateral related to the farmland to foreign investment that benefits the nation’s economic growth. investors, which could improve the growth of the agribusiness sector, including the development of New investment could boost Brazil’s economy and new technology. generate growth for Brazilians by creating jobs and income, and also foster competition in agribusiness. However, the recently elected president and the Brazil is currently searching for the right path to take Ministry of Finance are now keen to facilitate foreign between the alternatives presented, namely, continuing investments in order to leverage the Brazilian economy. to preclude foreign investment and its attendant Thus, it may be opportune to reconsider whether the development, or to achieve a balance between foreign political and economic reasons for the restrictions are interests and those of the Brazilian population. still justifiable, or whether the time has come to find a better way to deal with investment in Brazilian farmland Brazil as a whole, and its real estate market in particular, by foreign companies. has been experiencing a gradual but significant period of recovery in growth and investment. As a result, Times have changed, and if the economy is to grow there are many excellent investment opportunities in again, Brazil requires fresh investments. Economists now Brazil and the Brazilian real estate sector that could be agree that this will only happen if foreign investment is attractive to foreign investors. encouraged, especially given the restrictions on credit.

It is important to approach this question afresh, Campos Mello Advogados is an independent law firm examining not only the implications for every sector of working in cooperation with DLA Piper. the economy, avoiding the “catch all situation” set out in the opinion of 2010 which made any deal unfeasible, but also considering a new regulatory framework, one that will achieve a better balance between national security and the country’s economic development.

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REAL ESTATE GAZETTE | ISSUE 34 | 2019 Foreign real estate investments in Germany — unlimited opportunities?

Fabian Mühlen, Frankfurt and Julius Warda, Cologne

The German real estate market continues to be seen Unlike many other countries, Germany does as one of the most stable investment destinations not generally impose limitations on foreign real in Europe. It offers great opportunities for investors estate investments. There is also no difference who are seeking the security of a European economic between ownership by a natural person and a legal powerhouse together with a real estate market that has entity, simplifying investments from foreign states both stable core assets and hidden gems for those who and jurisdictions. have a higher risk profile. Interest rates have remained low and cities such as Munich, Hamburg and Frankfurt Only a few restrictions affect certain purchasers have strong local microeconomic climates that have regardless of their nationality. Due to reasons of national helped ensure stable and — despite declining in recent and governmental interest, acquisition of agricultural years — still attractive yields for investors looking for property, property located in publicly announced land safe-haven investments. reallocation areas or urban improvement areas and transfer of property within the territory of the former But Germany offers more than that. Highly educated German Democratic Republic may be subject to the employees, comprehensive infrastructure, low inflation, requirement for a public permit authorizing the transfer. economic and political stability and the lack of restriction In addition, the local authority or municipality may on foreigners purchasing property make Germany an have a legal right of pre-emption to acquire the land. attractive destination for real estate investors from all However, this right is usually waived. over the world. In summary, there are no country-related restrictions This article highlights the opportunities available for foreign when purchasing property in Germany and the same investors seeking to profit from the real estate market rules apply for every party interested in property in Germany and the legal requirements and procedures acquisition. that must be followed in order for them to do so. Acquisition of ownership No country-related restrictions In Germany there are in principle two ways of acquiring Full ownership is the most complete and comprehensive property. Either the property can be acquired directly right over real estate in Germany. Ownership of the (asset deal) or the legal entity owning the property is property includes ownership of all constituent parts purchased, accompanied by a transfer of the ownership of the property (notwendige Bestandteile), including (share deal). In order to be valid, agreements for the all buildings located there and everything above and transfer of property must generally be in the form beneath the surface of the land (unless the rights have of a notarial deed. The deed must cover all relevant been granted to a third party). Ownership is registered aspects of the acquisition. Any kind of side letter or in the land register and that is proof of ownership agreement that amends the contents of the notarial to everyone with a legitimate interest. deed either orally or in writing may result in the

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purchase agreement being invalid. Additionally, every It is then common practice to authorize the notary who property in Germany is recorded in the land register. notarized the transaction to make all necessary (public) To complete the transfer of ownership, the new owner applications and declarations in order to effect the must be registered in the relevant land register. transfer of the property. Notaries are entitled to be paid The change of ownership is effective from the date pursuant to a legally binding fee order. The law prohibits of registration. any agreement on lower notarial fees; however, fees are capped at a transaction value of €60 million. Notaries As mentioned above, a public permit may be required are regularly investigated to ensure that the fee order is prior to a transfer of property. The permit is usually observed. The declaration of transfer of ownership itself requested by the notary. The notary also applies for must be contained in a notarial deed issued by a public the waiver of the local authority’s pre-emptive right German notary. Transaction costs for the transfer of (also referred to above) and the tax clearance certificate. property to cover registration fees, notarization, etc. can The latter is issued by the tax authorities after the be estimated at 1.5 percent of the purchase price. RETT payment of any real estate transfer tax (RETT) which currently varies between 3.5 percent to 6.5 percent, may be payable on the transfer. depending on the German Federal State. This excludes costs for due diligence and the involvement of lawyers Besides permits and notarial certification, foreign and technical experts. There are ways to avoid RETT; investors assigning a legal representative to act in however, tax reforms are currently being enacted in Germany must bear in mind the legal provisions order to reduce the available tax prevention schemes. regarding power of representation. The document authorizing the representative must be in German Outlook and foreign investors need a certificate evidencing It is clear that the German real estate market is an their corporate status (Existenzbescheinigung) and investment-friendly stronghold located in the heart representation (Vertretungsbescheinigung). These of Europe. Foreign investors are not faced with any documents must be notarially certified in the same particular restrictions but instead enjoy equal rights way as the purchasing contract in order to be valid. and obligations when it comes to acquiring property. In addition, if they are certified by a foreign notary, Due to the growth in the number of city dwellers, an apostille has to be attached to the documents. increasing rent levels and a secure and attractive environment, real estate owners can profit and grow accordingly. In short, the German real estate market is a place for every serious investor to take an active part. What are you waiting for?

15 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Real estate foreign investments in Morocco

Christophe Bachelet and Gaëtan Rogeau, Casablanca and Myriam Mejdoubi, Paris

Morocco is increasingly becoming a strategic target for international investors seeking to diversify real estate investment opportunities.

This is the result of many interacting projects, such as the Marrakech the north of Morocco will host a factors, particularly the fact that it healthcare city and the Saudi new city project dedicated to this is by far the most politically stable German Hospital medical facility project, for which 400 international country in the region, with constant for the new eco-city of Zenata. investors are expected to apply. economic growth, strong positioning • Hospitality: Hospitality has as a gateway to Africa with several This article briefly answers the long been associated with successful free trade zones, an questions most commonly raised Morocco and is driven by the excellent geographical position by those with an interest in foreign major tourist destinations of between Europe and Africa, a legal investments in Morocco. Marrakech and Agadir. Investors framework based on the European civil have continually invested in this legal framework and foreign investor- What type of special area and keep doing so. Many friendly foreign exchange regulations. purpose vehicle or projects have been launched holding company? in the last year, in particular The real estate sector still represents First, Morocco does not generally in Tangier, Marrakech, Rabat, more than 50 percent of Foreign require investors to partner with Casablanca and Agadir. Almost all Direct Investment (FDI) in Morocco local shareholders and any foreign major operators have a presence in recent years according to company is free to incorporate in the country (Hyatt, Radisson, the United Nations Conference on a company in Morocco without Four Seasons, Fairmont, etc.) and Trade and Development. The main restrictions on the percentage of others, such as Hilton or Marriott, foreign investors are Chinese, share capital to be held (except are planning a return to Morocco North American, Emiratis, French, for certain regulated activities). with expansionist strategies. Spanish and German. A prior anti-trust merger clearance • Industrial (plants and logistics process is usually required for any The main areas of real estate units): Many European companies joint venture projects since the foreign investments in Morocco are seeking to develop their notification materiality thresholds are the following: capacity in Morocco in order to are very low. boost their sales through Africa. • Healthcare: Since the 2015 Industrial projects are mainly Limited liability companies healthcare liberalization law, located in the Kénitra and Tangier are commonly used because many foreign investments have tax-free zones. Morocco is also shareholders’ liability exposure been made in this sector. Most of part of the Chinese government is capped to the amount of their them relate to the creation and project, “One Road One Belt,” and contribution to the share capital. development of significant new city

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The real estate sector still represents more than 50 percent of FDI in Morocco in recent years.

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Two main legal entities are used: has a right of renewal of the lease upon expiration. In practice, rents may be subject to a 10 percent • SARL company: in terms of share capital increase every three years. A 2016 law has made requirements, there is no minimum share capital significant changes in the Moroccan commercial requirement, and therefore the share capital can lease regime in order to balance the relationship theoretically be MAD1. Generally shares of companies between the landlord and the tenant. Long-term amount individually to at least MAD100. A SARL leases may give rise to tax constraints, to be company may be formed by only one shareholder assessed on a case-by-case basis. provided that its shareholder is not itself a sole shareholding entity. • Domiciliation agreement: this temporary agreement is often used to incorporate a • SA company: a joint-stock company must have at company and start operations while looking for least five shareholders, who can either be corporate suitable premises. For tax reasons, however, it entities or individuals. It must have a minimum must remain temporary. Reform regarding where fixed share capital of MAD300,000 (MAD3 million companies may be domiciled is pending. to proceed with public offering). Are there controls for funds Many projects are made through investment into and out of Morocco? agreements which provide a detailed outline of the project and which also include a shareholder INFLOW OF FUNDS INTO MOROCCO agreement. This SA corporate form must be privileged The foreign exchange regulations in Morocco for lodging any shareholders’ agreement. have been significantly relaxed over the last few years. Generally, there are no limitations on foreign Additionally, it is essential while structuring a joint- investments, especially for inflow of funds into Morocco, ventured project to ensure that public authorizations irrespective of the type of company, except in some (eg, construction permits) are made in the name of the specific business sectors such as agriculture, fishery, project companies and that they own the real estate insurance or audio-visual. asset or the going concern to secure the financing. The Foreign Exchange Charter provides for regular What type of registered office? reporting obligations from foreign investors and local A registered office may be obtained through one companies with a foreign shareholding. of the following: OUTFLOW OF FUNDS FROM MOROCCO • The purchase of owned property: it is possible for In terms of upstream of funds, the following main foreigners to acquire land or buildings (except those forms of repatriation of funds for the benefit of foreign in the agricultural sector). Land ownership regimes investors are not subject to prior authorization by are very specific in Morocco and it is important to the Foreign Exchange Office (FEO), provided that the obtain professional advice prior to any acquisition, revenues to be upstreamed derived from an initial particularly for properties that are not registered investment financed in foreign currency and other in the land registry. Acquisition of shares is to be formalities have been met (including the effective preferred to asset deals since the former is generally payment of any applicable taxes): subject to a more beneficial tax regime. The split of real estate ownership and operation of the underlying • rental incomes activity may also have tax implications, which should • dividends be considered. In terms of projects on greenfield sites, various legal constraints may apply which can • profits made by Moroccan branches of significantly affect the transaction structure or may foreign companies delay the signing of the contractual documentation • interests on shareholders’ loans (guarantee of a promoter to be obtained, certain initial work to be carried out on the plots of land). • proceeds from sale of shares and assets or liquidation of a Moroccan company • Lease agreement: leases can either be civil, professional or commercial. Rents and charges are Where the form of repatriation is not expressly freely negotiated between the parties. Commercial provided for in the FEO instruction, prior approval leases offers security of tenure since the tenant of the FEO is required.

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These new real estate investment schemes are expected to boost the real estate sector further and to create significant portfolios in Morocco.

Can foreign companies file for Development of real estate a building permit? collective investment schemes According to the 2019 ‘Doing Business’ rating, Morocco (OPCI) as the next step for foreign scores very highly (no. 30 out of 160 countries) on its investments procedure, time and costs for obtaining a building permit. Based on the French model, real estate collective investment schemes (OPCI) were recently introduced in As in many countries, a local architect must be Morocco, subject to various laws and regulations. appointed for the filing of the request. The main purpose of these vehicles is the construction Depending on the size of a project and its impact in or acquisition of real estate assets with a view to leasing terms of local jobs and key concerned sectors (such as them to third parties. energy, education or healthcare), a prior agreement may be made with the Kingdom of Morocco in order The setting up of an OPCI is subject to prior agreement to speed up the process for obtaining town planning from the Moroccan Stock Exchange Authority (AMMC), permits and to gain certain tax advantages. However, and the OPCI has to be represented by a portfolio these are subject to compliance with a series of management company (société de gestion) also commitments (quota of local jobs to be met, related approved by the AMMC. infrastructures to be financed and built, etc.). These new real estate investment schemes are expected For most construction projects, several contractors to boost the real estate sector further and to create are involved and it is rare to have only one general significant portfolios in Morocco, which may attract contractor that takes full liability for the entire project. foreign investors in the coming years.

Is there a status that gives tax Although it is fair to say that more needs to be done advantages to foreign companies before Moroccan REITs are fully effective, expectations with subsidiaries in Morocco? are high and there has been significant lobbying for the The Casablanca Finance City status (the CFC Status) 2018 finance law to offer a more attractive tax regime offers various tax benefits. Similarly, Tangier and for investors. Kenitra may offer advantages worth considering, such as custom duties exemptions or payments in Conclusion foreign currencies. Investing in Morocco is, for many real estate foreign investors, the first step in an expansionist strategy towards Africa. The country’s legal framework is adapting fast in order to secure foreign investments and, where gaps do exist, it follows the example of civil law countries. The ongoing reforms in both the securities law and the criminal code look set to strengthen the enforceability of deeds of sale and title ownerships.

19 REAL ESTATE GAZETTE | ISSUE 34 | 2019 The 2019 Dutch tax plan — key takeaways for inbound real estate investments

Sebastiaan Wijsman and Rhys Bane, Amsterdam

2018 was a turbulent year for inbound real estate investments in the Netherlands. The Dutch government announced the possible introduction of a conditional withholding tax on interest and royalty payments to low tax jurisdictions and its plan to abolish the dividend withholding tax. However, due to public pressure, the dividend withholding tax was not abolished in the end. Furthermore, the 2019 Tax Plan contains new interest deduction rules and measures on the depreciation of owner-occupied real estate.

The abolition of the dividend withholding tax in its On October 15, 2018, the Dutch government current form would have had an impact on inbound real announced that it was no longer abolishing the dividend estate investment via fiscal investment institutions (FIIs), withholding tax in its current form but was instead a Dutch collective investment vehicle that, among other going to further lower the Dutch corporate income tax things, functions as the Dutch real estate investment rates, continue to allow direct real estate investments trust (REIT) regime. by FIIs and introduce a number of other measures benefitting companies. This article clarifies the current points of interest from a tax perspective for inbound real estate investments The Dutch REIT regime in the Netherlands. Dutch REITs (and FIIs in general) can take a number of legal forms. REITs can be set up as Dutch public Plans to abolish the dividend limited liability companies (NV), private limited liability withholding tax companies (BV) or open-ended collective investment The coalition parties included the plan to abolish funds (FGR) or any comparable legal form of EU/EEA the Dutch dividend withholding tax in the coalition Member States or tax treaty jurisdictions. REITs must agreement dated October 10, 2017. As Budget Day meet a number of requirements (eg, limited debt- takes place on the third Tuesday of September in the financing (60 percent for real estate assets), specific Netherlands, the legislative proposal was published on types of shareholders, obligation to distribute all of its September 18, 2018. Prior to and after the publication profits within eight months after financial year-end, etc.). of the proposal, various news outlets, opposition parties FIIs may invest in real estate (they may not, however, and lobbying agencies spoke out against the proposed develop any real estate) directly or indirectly (eg, by abolition. After Unilever abandoned its plan to move owning shares in a REIT) and are subject to Dutch its headquarters to the Netherlands on October 4, corporate income tax at a rate of 0 percent (viz. they are 2018, which was a major reason for the abolition of the de facto exempt from Dutch corporate income tax). Dutch dividend withholding tax, the Dutch government announced on October 5, 2018 that it was reconsidering In practice, FIIs have subsidiaries that develop real the proposal it had published on Budget Day 2018. estate, whilst the FIIs own the real estate.

20 Relationship between allowing for the deduction of net specific abusive situations as of the Dutch REIT regime interest expense (the net of interest 2021. A low tax jurisdiction is either and the Dutch dividend income and interest expense) up (i) a jurisdiction listed on the EU list withholding tax to the highest of (i) 30 percent of a of non-cooperative jurisdictions or As Dutch REITs generally only have taxpayer’s earnings before interest, (ii) a jurisdiction without corporate to pay Dutch dividend withholding taxes, depreciation and amortization income tax or where corporate tax, the abolition of the Dutch (EBITDA) or (ii) €1 million, does have income tax is levied at a statutory dividend withholding tax would an impact. This limitation had to be rate of less than 9 percent. mean that Dutch REITs would introduced to comply with EU law, not be subject to tax at all. As therefore every EU Member State This list of low tax jurisdictions such, the proposal to abolish the has a similar rule as of 2019. already exists for controlled foreign Dutch dividend withholding tax company (CFC) rule purposes was accompanied by a proposal The EBITDA and €1 million limit and contains (for 2019): American to abolish the Dutch REIT regime apply per taxpayer. Therefore, it may Samoa, American Virgin Islands, (viz. to disallow direct real estate be more efficient to use a separate Anguilla, Bahamas, Bahrain, Belize, investments by FIIs). The logical company for every real estate Bermuda, British Virgin Islands, consequence of keeping the Dutch investment (and to not apply the Cayman Islands, Guam, Guernsey, dividend withholding tax in its Dutch tax consolidation regime). Isle of Man, Jersey, Kuwait, Qatar, current form was, therefore, to not Samoa, Saudi Arabia, Trinidad & abolish the Dutch REIT regime. As FIIs are subject to a corporate Tobago, Turks and Caicos Islands, income tax rate of 0 percent, the United Arab Emirates and Vanuatu. Recent case law complicated Dutch limitations on concerning the REIT the deductibility of interest are not Conclusion regime relevant for an FII. Although the change of heart over On November 27, 2018, a decision abolishing the Dutch dividend by the Zeeland-West-Brabant court Depreciation of owner- withholding tax is not beneficial was published in which a German occupied real estate for companies listed on a stock REIT, known as an “Immobilien As of 2019, owner-occupied real exchange (where its investors Sondervermögen,” investing in estate may be depreciated to 100 cannot credit the withholding taxes), Dutch real estate, was allowed to percent of the value for Valuation it is a blessing in disguise for Dutch apply the Dutch FII regime. The of Immovable Property Act REITs, as the Dutch REIT regime may effect of this decision is that a purposes. This limitation already have been abolished alongside the foreign REIT applying the Dutch applied to non-owner-occupied (eg, Dutch dividend withholding tax. FII regime is subject to 0 percent investment) real estate. Dutch corporate income tax and is, We will keep you updated on any in principle, not subject to Dutch Conditional further developments concerning dividend withholding tax. As such, withholding tax the Dutch REIT regime. It is highly Dutch real estate investments can In an effort to combat tax likely the Dutch tax authorities be made tax-free. avoidance, the Dutch government have appealed the Zeeland- has announced its plans to West-Brabant court’s decision. Debt financing introduce a conditional withholding The decision has also not gone For inbound real estate investments tax on interest and royalties paid to unnoticed by the Dutch Ministry with a non-REIT structure, the newly creditors/licensors established in of Finance and may lead to future introduced interest deduction rule, “low tax jurisdictions” and in certain changes in the Dutch REIT regime.

21 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Foreign real estate investment in Poland

Michał Pietuszko and Anna Ziemian, Warsaw

Poland is currently considered an excellent market for foreign investment. It was the only economy in the EU that managed to avoid recession during the most recent global financial crisis, and between 2008 and 2016 Polish GDP increased cumulatively by 32.4 percent — the third best result in the EU.

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Poland has become one of the in investing in regional and smaller for Amazon and 130,000 sq.m. major providers of real estate cities, there are still opportunities for for Zalando. The main source of investment assets for investors, foreign investors to enter this sector. demand for new warehouse projects with the participation of foreign is the development of third-party capital in Polish real estate market In addition to investment, we have logistics (3PL), e-commerce and estimated at around 90 percent. also seen significant activity related trade. The logistics sector provides With a yield of 5.25 percent in the to the consolidation of assets. For great opportunities for foreign primary office market and 6.75 example, EPP acquired 19 retail entities that are already active as percent in the warehouse market, projects, becoming the number one developers, investors and tenants Poland is powering ahead of other retail GLA owner in Poland. Major in Poland. Central and Eastern European (CEE) acquisitions have also been made countries and continuing to attract by NEPI Rockcastle (12 projects) and As well as new investments, there more and more investment. Arcona Property Fund (12 projects). has also been significant transaction South African investors have also activity on the warehouse market. In Retail sector made significant acquisitions in the 2018, European Logistic Investment Although the shopping mall market shopping mall market. BV, a company from the Netherlands in Poland is considered by some to co-managed by Griffin Real be already saturated, there have Warehouse sector Estate, confirmed the acquisition been several significant entries In 2016–17, investments in the by Redefine Properties (South- onto the market recently, including warehouse market increased African REIT) of nine logistics parks Vroclavia with 64,000 sq.m. of gross significantly. According to Colliers’ developed by Panattoni Europe. leasable area (GLA) and Forum Market Insights annual report, Gdańsk with 62,000 sq.m. of GLA, the supply of new warehouse Office sector indicating more developments are space in Poland reached over Warsaw is the driving force of still taking place. Market saturation 2.3 million sq.m. in 2017 and the the office space market in Poland has resulted in greater investment total warehouse area exceeded and the main target for investors in smaller, independent retail and 13.5 million sq.m. The report also wanting to increase supply. In 2017, service facilities, which are cheaper predicted the further development 275,000 sq.m. of new office space and less time-consuming for of the market for smaller was handed over for use in the Polish investors and which meet the needs warehouses as well as build-to-suit capital. However, unlike other CEE of consumers. As the retail park (BTS) projects. The most remarkable countries, the Polish office space market continues to develop and be BTS projects in 2018 included market is also strongly developing in stimulated by developers interested 161,000 sq.m. of warehouse space the regions. In 2017, 455,000 sq.m.

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of office space was handed over for use in regional However, some exceptions in the regulations (eg, trade cities, 190,000 sq.m. of which was in Krakow — putting it is possible if the area of a real property is small or if in second place behind Warsaw in the national ranking. it is designated for non-agricultural use in the local zoning plan) mean that the restrictions do not apply to Developers continue to be highly active, with all agricultural real estate. Despite initial concerns, the approximately 880,000 sq.m. of office space planned regulations have not had a significant effect on the real for handover in 2018. This activity is driven by new estate market. Moreover, it appears there are plans to companies, including foreign investors, who are — in relax the restrictions on trading in agricultural real estate. increasing numbers — setting up operations in Poland, as well as companies already present on the Polish Another feature of the Polish legal system is the market who are expanding their operations. Transactions institution of perpetual usufruct, that is, the right to on the office space market are also on the rise — in use and take benefit from another person’s property, Warsaw alone the total value of transactions in the first which is similar to full ownership. The right of perpetual three quarters of 2018 amounted to €1.14 billion. usufruct is established on real properties owned by the State Treasury or local government units. The right is Legal framework transferable and mortgageable. The basis of Polish civil and administrative law is similar to that of Germany and Austria. However, its regulations Summary are not as strict or detailed as in those two countries, Despite several unique features that need to be taken making them more flexible. The Polish system also has into account, the legal framework of the Polish real estate some unique features. market is flexible and accessible to foreign investors.

First, there are restrictions related to the acquisition Investors have faced a number of practical problems of real estate by foreigners. Foreign investors usually recently, including lack of skilled workers in the conduct their activity in Poland through their own SPVs construction sector, wage inflation and increasing registered in Poland or in other EU member states, costs of materials. Nevertheless, with its increasing which means they can buy and sell real estate in Poland investment needs and opportunities, Poland remains freely. However, in the case of investors from outside an attractive prospect. the EU, the EEA and Switzerland, the purchase of real estate is conditional on prior approval from the Minister According to a survey conducted in 2017 by of Administration and Internal Affairs. This approval may the Polish Agency of Investments and Trade, be refused if an objection is raised by the Minister of Grant Thornton and HSBC, 92 percent of foreign Defense or — in the case of agricultural land — by the investors who have invested in Poland consider Minister of Agriculture and Rural Development. it a good decision and would invest again. With its investment climate rated as 3.7 on a scale of Recent restrictions on trade in private and public 0–5, Poland offers foreign investors a friendly and agricultural real estate, which also apply to foreign stable macroeconomic environment. investors, are of particular significance to the warehouse market. These restrictions limit the sale of public agricultural real estate, define who may — and who may not — purchase such real estate, and give the National Agriculture Support Institution pre-emption rights to agricultural real estate or to shares in commercial companies that own agricultural real estate.

24 Despite several unique features that need to be taken into account, the legal framework of the Polish real estate market is flexible and accessible to foreign investors. REAL ESTATE GAZETTE | ISSUE 34 | 2019 Portugal and foreign investors

Filipa Arrobas Silva, Lisbon

Portugal is currently considered by many to be the most attractive country in Europe for foreign investment. But what is so special about Portugal? This article argues that Portugal is not only a dream travel destination but also a dream country in which to invest, both in terms of business ventures or real estate. Factors like its environment, friendly people, great weather, democratic government as well as the prevalence of English as the language of business, all combine to support Portugal’s international reputation, and its claim to be an excellent location for foreign investors.

Portugal has taken great strides of Portugal’s appeal to foreign in recent years to boost growth by investors a priority, introducing increasing its competitiveness and measures like non-discrimination simplifying the process of investing between domestic and foreign and doing business. It has now investors (when establishing a become much easier to invest business) and by introducing in Portugal thanks to reforms in incentives for investors (eg, financial competition law, the employment incentives for development business market, and the tax system — all put in Portugal, tax benefits, etc.). in place to further drive economic recovery. The country is currently After a financial crisis that seemed in the enviable position of having interminable, the Portuguese world-class infrastructure, a highly economy is now on the rise and qualified and young workforce, a safe looking better than ever. An and stable environment and a high increase in tourism and growth in standard of investment protection. foreign investment in Portuguese companies and real estate have A legal framework beneficial to gone a long way to ensuring foreign investors has been created Portugal’s financial stability. as legislation has been adapted to better suit the common rules Foreign investors have been and practices of a liberal foreign showing a growing interest in investment system. Government real estate; in 2018 alone, foreign policies have made the promotion investors were responsible for

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almost the entire volume of for new buildings to satisfy the While Lisbon has recently received investment in Portugal in this sector. recent increase in tourist numbers, several high-profile awards (Ninthly Indeed, 2018 was a year for records which has been the driving force for Europe’s Best Tourist Destination, across the board; in investment investors to acquire real estate in Cruise Destination and City Break transactions, and also in office real order to meet this growing demand at the World Travel Awards) and it is estate, retail activity, as well as in for tourist accommodation. one of the world’s top 10 cities for the level of profitability rates. More corporate events, it remains slightly than €2.8 billion was traded in With the tourism sector’s sudden overlooked as one of Europe’s commercial real estate assets, which growth since 2012, it is not only must-see capitals. It is a growing represents an increase of around 33 hotels which have felt the benefit low-cost and cruise destination, percent over the previous year. of increased bookings. Short- but it still doesn’t attract major term rental companies like Airbnb markets beyond the British, Spanish, In recent years, urban redevelopment are now generally fully booked French and Italians. It receives and regeneration has been on the throughout the year. This has made very few Asian visitors, and despite rise in Portugal, due to a shortage properties seem very appealing its proximity to the US, American of supply and the increasing by safe investment standards. tourism to the city has only now attractiveness of the national Residents too have started to begun to reach significant levels. real estate sector worldwide. convert their residential properties Lisbon’s future is largely secured Among the most important urban into short-term rental apartments by tourism, as the city now receives redevelopment and regeneration when they discovered the low more visitors than the Algarve. projects is the “Golden” portfolio, of taxation regime applicable to such In short, if there is one smart which approximately 70 percent is short-term rentals. However, the investment in Lisbon, it’s in tourism, estimated to be assets for residential high-income rentals are even more particularly in accommodation and purposes, as well the sale of the “Feira appealing as an additional source of downtown cultural activities and in Popular” land and the acquisition of stable income. the city’s historic districts. the “Quarteirão de Suiça.” For the second time in history, the The potential for high returns In particular, growth in Lisbon’s hotel sector has become the third on investment in Portugal is real estate sector is not likely to most attractive commercial real evident. Furthermore, the rules slow down in 2019. Lisbon is the estate segment, attracting 8 percent on investing in the country are first destination for real estate of total investment. fairly simple, although of course, investment and forecasts remain seeking legal advice before optimistic that 2019 will certainly Lisbon hasn’t yet reached its full making any investments is be another very positive year, with potential as a tourist destination, recommended. the investors looking for “alternative meaning that it will continue to be assets.” These include student a tourist hotspot for years to come. accommodation and co-living space, and the evolution of serviced apartments and hotels looks set to be the great trend for 2019. Additionally, investors are looking for guaranteed income across the European real estate industry and they are currently showing interest not only in high returns but also for investment security, which Portugal can offer.

Tourism plays a significant role in the Portuguese economy, with Portugal becoming an increasingly attractive destination worldwide. However, the country was not prepared to meet the high demand

27 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Private education in Southeast Asia — investment plays and regulatory hurdles

Jonathan Lynch, Singapore

Asia’s future is bright. The Asian Development Bank (ADB) projects Asia’s collective GDP to increase more than 1,000 percent over the first half of the 21st century. Its resulting US$174 trillion (at market exchange rates) is to account for half of global GDP by 2050, equivalent to its share of the global population. China and India are championed as the drivers of this macroeconomic shift, but it would be shortsighted to overlook the role that the Southeast Asia nations will play.

Indonesia, the Philippines, Vietnam, Malaysia and The upside to investment in Southeast Asia’s private Thailand are expected to be among the world’s education sector is high, but it is not without risk and top 25 economies by the half-century mark. challenges. Consequently, a diligent investor must The unprecedented growth in these nations should understand the available investment plays and potential usher hundreds of millions of households into the regulatory hurdles (and the likely government policies middle class, and they will, in turn, become major to alleviate these hurdles) before settling on the consumers with growing disposable incomes. In the investment structure best suited for its risk appetite long term, a significant amount of this newly created and expectation on returns. wealth is expected to be directed towards private education. The short term, however, requires expedited The sale and leaseback play maturation of the private education market to One play for investing in the region’s private remedy lagging education standards and ensure the education sector is through acquisition and leaseback creation of workforces capable of achieving the ADB’s of land and property assets. This investment play lofty projections. offers the seller access to capital in non-core assets for expansion or return on equity, while also keeping Private equity and other investors should be reading the operations seamless, a priority for campuses being tea leaves, and seeking to capitalize on this necessary showcased as flagships for future expansion under an market maturation by targeting one or more of the asset light model. This play offers the buyer predictable region’s private education subsectors: (i) education cash flow as well as the opportunity to recoup capital delivery (eg, pre-K education, K-12 education, vocational investment upon asset disposal. With initial yields in education and higher education); (ii) education the region currently hovering around 7–10 percent, services (eg, test preparation, curriculum development, this lower-risk investment strategy is more suitable student tutoring); (iii) education support services for the education delivery subsector, specifically (eg, housing, textbook distribution, catering); and (iv) plays for institutes with healthy balance sheets education infrastructure (eg, property maintenance and and proven track records. information, communications and technology networks).

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Western businesses and investors To attract additional financing, some the Guidelines on the Acquisition have long relied on the sale and operators are even sweetening of Properties issued by the leaseback play to expand education the pot by including operational Economic Planning Unit. businesses and generate fixed revenues as a percentage of rental. returns. In recent years, this Investments into Indonesia and strategy has gained traction in For investors (particularly foreign the Philippines — jurisdictions less the Middle East, where GEMS investors) seeking to capitalize on friendly to foreign land ownership Education sold and then leased any such tightening of lenders’ but more aggressive in promoting back two campuses in Dubai, and purse strings, this play requires private education — may require Promoseven sold-leased back a thorough analysis of the target a joint venture and lobbying the British School of Bahrain. countries land ownership laws with the relevant authorities to The verdict is out as to whether and most efficient means to retain demonstrate how the investment this strategy will gain traction in ownership of the real estate. strategy ties to nation-building Southeast Asia, but early indications via educational investment. are promising. In 2017, Alpha REIT, Investments into Thailand, for a Malaysia-based unlisted REIT, example, may require certain When seeking to undertake a entered into a sale and leaseback “value add” upgrades to the sale and leaseback in emerging with Paramount Corp Bhd, the property in order to qualify for Southeast Asia, the only constant operator of two international Board of Investment promotion seems to be that no two real schools, in a transaction valued at (and preferential tax treatment), estate investments are alike. US$38.5 million. and thereafter allow the land to be held outright by the foreigner The greenfield play For operators, growth of the sale investor; otherwise, a local joint A second play for investing in and leaseback play within Southeast venture partner may be required the region’s private education Asia’s private education space in light of Thailand’s onerous laws sector is through acquisition largely depends on the availability on foreign land ownership. of land and development of a of traditional forms of financing. bespoke campus for an operator. Family conglomerates tend to be Investments into Malaysia, Upon completion, the developer the dominant regional players in where foreign ownership of land may either sell the property real estate and education, but are is relatively unrestricted, may or lease the property and often overleveraged. Coupled with require consents from the state receive stable returns. If the urbanization and rising land costs, authorities, and confirmation former, the land ownership this overleveraging often leads to that the land acquisition and restrictions set out in respect a restrictive lending environment business satisfies the purchase to the sale and leaseback play where a sale and leaseback may be price and zoning requirements will need to be considered. a more palatable financing option. under the National Land Code and

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When these laws are passed, Indonesia’s higher education sector will go from 0 percent to 100 percent foreign ownership.

Investors looking at greenfield plays are advised to to be higher on the risk/return ladder as the investment look out for the supply-demand gaps and government goes direct to the operating company, often with no initiatives rolled out to fill those gaps. For example, in real estate to serve as collateral. 2016, Indonesia implemented reforms that required Ministries and governors to improve and establish While regulations on private education in Southeast more vocational high schools, while issuing directives Asia tend to be friendly towards foreign investment, to encourage educational investment in tourism, there are possible barriers through growth-focused maritime programs, food security, creative industries, acquisition plays. This is particularly true in Thailand, construction and energy. Similarly, in 2018, Malaysia’s the Philippines and Indonesia, in none of which is education Ministry pledged to make technical and foreign majority ownership of the operating entity vocational education and training students’ first permitted. There are regulations on school fee study choice by 2023. Coupled with the local human caps in certain countries, such as Malaysia and the capital requirements of China’s One Belt One Road Philippines, that would also need to be considered. initiatives, these reforms provide entrepreneurial Furthermore, for operators that may have prospects investors with the opportunity to capitalize on the of listing on a regulated exchange, investors should region’s need for a highly skilled workforce. be wary of whether listing would cause the operator to lose tax benefits, currently a hot button topic in Not limited to vocational schools, higher education is Thailand following the 2018 listing of SISB Co Ltd, the also the subject of less protectionist reforms. Indonesia, operator of Singapore International School of Bangkok, for example, acknowledged in 2018 that legislation is on Thailand’s Market for Alternative Investment. being drafted to open up the university sector, and allow overseas institutions to open campuses. When these Against this regulatory landscape, investors in a growth- laws are passed, Indonesia’s higher education sector will focused acquisition play should carefully review the local go from 0 percent to 100 percent foreign ownership, regulations on foreign educational investment to gauge presenting unique opportunities to first mover foreign their potential impact on investment returns. operators and investors under a greenfield play. Conclusion Growth-focused acquisition play As the economies of Southeast Asia continue to grow, The third, and the least real-estate focused play for investors will continue to explore opportunities in investing in the region’s education is through debt private education. But the extent to which investors or equity investment in a single school operator put hard money into the region’s education space or, more often, a platform that operates multiple will depend largely on local governments creating a institutions schools. Some of the recent high-profile legal and regulatory environment that is transparent, transactions have included Barings Private Equity less restrictive and offers incentives. Fortunately, local Asia and Canadian Pension Plan Investment Board’s governments have recently shown a willingness to acquisition of Hong Kong-based Nord Anglia, and create such an environment, which bodes well for Temasek Holding acquiring 30 percent of Singaporean Southeast Asia reaching its full potential. It is widely Mindchamps Preschool Fund. These investments tend expected that this trend will continue.

31 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Taxing non-UK resident investors in UK property

Richard Woolich and Matt Davies, London

In the Autumn Budget 2017, the UK government announced substantial changes to the taxation of capital gains made by non-UK residents investing directly or indirectly in UK property.

From April 2019, non-UK resident property owners will pay UK tax on any gains made on the disposal of:

• all commercial and residential property (direct disposals); and

• shares in “property-rich” companies (broadly, companies that derive 75 percent or more of their gross asset value from UK property) where the seller owns (or has owned) 25 percent or more of the shares (indirect disposals).

A special regime will apply to collective investment vehicles (see below). In addition, the ATED-related capital gains tax will be abolished.

What is the current position? Non-UK resident property owners only pay UK tax on gains made on certain direct disposals of residential property.

No UK tax is payable by non-UK residents on gains made on direct disposals of commercial property, nor on disposals of “property-rich” companies.

Separate rules already impose UK tax on non-UK resident property traders.

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When will these What is the treatment Furthermore, existing reliefs and changes take effect? of indirect disposals? exemptions will apply as they do The new rules will apply to disposals Investors that own or have, in the for UK tax residents. This would taking place from April 6, 2019. previous two years, owned 25 include the no gain/no loss intra- percent of the shares in “property- group transfer provisions and However, property and interests in rich” companies will be subject to the substantial shareholdings vehicles will be “rebased” in April UK tax on a disposal of those shares, exemption that may assist 2019, so that where capital gains though any shareholding that only “qualifying institutional investors” tax does not already apply, only temporarily exceeded 25 percent making indirect disposals. gains accruing after this date will be can be ignored if it was held for an subject to tax. However, it is possible insignificant time. In determining It is also worth noting that treaty to use the original acquisition cost whether an investor holds 25 relief may be available to investors to calculate the gain if that would percent of the shares, shares held making an indirect disposal. Certain produce a fairer result (although this by certain connected persons treaties (notably Luxembourg) do cannot produce an allowable loss on are aggregated. not currently allow the UK to tax an indirect disposal). indirect disposals. However, the Importantly, no tax is payable UK is seeking to renegotiate these Why are these changes on disposals of “property-rich” treaties (and is in the process of being made? companies where the property is renegotiating the Luxembourg The government wants to align the used to carry on trading activities. treaty) so this benefit may not last tax treatment of UK and non-UK This could potentially mean that long. Furthermore, the new rules resident investors and to discourage companies that operate as retailers, contain an anti-avoidance rule which the creation of complex offshore hotel-operators or self-storage prevents investors from “treaty structures to hold UK property, operators fall outside the new charge. shopping” to take advantage of which the government believes favorable treaties. can facilitate tax avoidance. Are there any exemptions? What is the special In many ways, the UK is simply Other than the trading company regime for collective catching up with comparable exemption referred to above, there investment vehicles? jurisdictions, many of which are no specific reliefs or exemptions The special regime for collective already tax direct and indirect that will apply to the new rules. investment vehicles (CIVs) will apply to disposals in this way. collective investment schemes, AIFs, However, any person that is not REITs and non-UK resident companies What is the treatment subject to UK tax for reasons that are equivalent to REITs. of direct disposals? other than their residence (such as Any direct disposal of UK property — charities, sovereign wealth funds By default, offshore CIVs will be whether residential or commercial and pension schemes) will continue treated as companies and their — by a non-UK resident investor will to be exempt. investors will be treated as holding potentially be subject to UK tax. shares. Consequently, offshore CIVs will be subject to UK corporation tax on any gains made on the disposal of UK property, and disposals of interests in offshore CIVs by investors will also be subject to UK tax.

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This could potentially add layers of direct tax, without trigger regular disposals of other investors’ interests the CIV being able to benefit from any exemptions of the in the underlying assets, giving rise to dry tax charges. investors. However, the legislation offers two (optional) The election effectively places the investors in the same elections allowing (a) tax transparency and/or (b) an position as they would have been in had they invested exemption, if certain conditions are met, to mitigate directly in the UK property, although the election has no the effects of the new rules (see below). impact on other taxes (such as SDLT).

This treatment does not apply to offshore CIVs that What is the exemption election? are partnerships, which will continue to be transparent CIVs (and companies that are not CIVs) that meet certain for tax purposes. conditions may make an exemption election so that they are exempt from tax on gains made on direct or indirect Non-resident investors in onshore or offshore CIVs will disposals of UK property, but their investors are instead not benefit from the 25 percent threshold that applies subject to tax on a disposal of an interest in the CIV. This to other investors selling shares in “property-rich” election will mean that the CIV is treated in a similar way companies, so these investors will be subject to UK to a REIT. tax regardless of the extent of interest they hold in the CIV. Investors that are exempt from UK tax for reasons The conditions for, and implications of, making an unrelated to tax residence will continue to be exempt. exemption election are complex. Broadly speaking, an offshore CIV that is a “property-rich” company (or What is the transparency election? treated as one by the new rules) may make the election Offshore CIVs that are transparent for income tax if it is one of the following: purposes (such as JPUTs) can make an irrevocable • a collective investment scheme, and interests in election to be treated as a partnership for capital gains the scheme are marketed and made available purposes, and therefore be transparent for capital to sufficiently wide categories of investor; gains too. Consequently, the CIV will not be subject to tax under the new rules, but the investors will be subject • a “non-close” company with shares traded on to tax on any gains made on the disposal of UK property a recognized stock exchange; or by the CIV. • a “non-close” CIV and the CIV’s manager reasonably believes that, should all of the assets of the CIV be It is expected that this election will be most suitable liquidated and the proceeds returned to investors, for smaller, joint-venture arrangements where the no more than 25 percent would not be subject to investors are predominantly or wholly exempt from UK tax because of the allocation of taxing rights UK tax. It is likely to be unsuitable for CIVs that have under tax treaties. regular changes of investors, as these changes may

34 The election must be accompanied by information It is expected that this election will be most suitable for about disposals made by investors in the two years widely held funds with large structures, particularly where prior to the making of the election. the investors are exempt and wish to prevent tax charges in the fund that will impact on their returns. It is likely to If, after the election is made, the CIV fails to meet be unsuitable for smaller, joint-venture arrangements. the conditions set out above, it will trigger a deemed disposal and reacquisition of the investors’ interests in Are there any changes to the CIV. In some circumstances, any resultant gains will the REIT regime? be subject to tax immediately, whilst in others the tax Yes. In particular, REITs will no longer be taxed on charge may be delayed. disposals of “property-rich” companies.

The election applies to the CIV and any entities in which What are the next steps? the CIV has at least a 40 percent interest, and it continues All investors, particularly joint-venture and collective to have effect provided that the CIV provides certain investment vehicles, will need to consider the impact of information about the CIV, its investors and entities in the proposed changes on their investment structures, the CIV’s structure to HMRC on an annual basis. and the advantages and disadvantages of making the transparency and exemption elections. The election can be revoked by the CIV’s manager, or by HMRC if the CIV has not complied with its If you have any questions about the proposed information obligations to HMRC, or if HMRC considers changes or you would like to discuss how these may it appropriate to safeguard the public revenue. impact your existing business, please get in touch.

35 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Leveraging in Denmark — a unique mortgage system

Emilie Møller, Copenhagen

The Danish mortgage system is one of the best in the world for real estate financing, with its unique features making it a highly attractive way to leverage property investments. The system goes back more than two centuries and the Danish covered bond market is today the largest market in the world compared with GDP, and the largest in Europe in absolute terms.

The Danish system is unique, as The mortgage system is generally In addition to the property value, there is a direct match between the based on a match-funding principle, the borrower’s creditworthiness mortgage loan and the covered under which mortgage loans are is individually assessed as part of bonds issued to fund the loan. This funded by the issuance and sale the credit approval process and provides for a high level of financial of covered bonds with matching the mortgage security will often stability and forms the basis for payment terms. The market value be combined with other types of transparent competitive loan costs of the underlying bonds at time of security in the form of change of and a flexible early repayment system sale determines the mortgage loan control, negative pledge, limitations found nowhere else in the world. rate, thereby ensuring a high level of on dividend distribution and, transparency based on market pricing. depending on the circumstances, How does the mortgage pledge over the shares in the system work? The loans are secured through borrowing company or suretyship. The acquisition of real estate in a mortgage on the borrower’s Denmark is typically financed by property, and all loans are limited mortgage credit institutions, which to the statutory maximum loan-to- are dedicated financial institutions value ratio based on the assessed permitted only to grant loans value of the property; 60 percent for against mortgages on real estate commercial properties and 80 percent funded by covered bonds. for residential rental properties.

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Key advantages of the Danish mortgage system

The Danish mortgage system offers several advantages due to the unique features of the match-funding principle and the high level of security, including:

• Competitive loan costs

• Transparent market-based pricing

• Flexible early repayment options with currently up to ten years, at which the mortgage credit institutions. no penalty time the underlying bonds are The interest rate of a mortgage redeemed and replaced with new loan and the repayment price is • Long credit facilities (up to 30 years) bonds. The yield of the new bonds directly reflected in the price of the • Possibility for interest-only financing will then determine the interest mortgage bonds funding the loan. rate of the mortgage loan until The interest rate is therefore based • Mortgage credit institutions cannot terminate the next adjustment time. The on the chosen loan type and the the loans except in the event of default adjustable-rate loans are cash loans, market price and is not subject to and any loss or profit on the sale of individual negotiation. the underlying bonds is therefore reflected in the interest rate. According to the European Mortgage Loan types Federation (EMF), Denmark has one Danish mortgage credit institutions The interest rate on floating-rate of the lowest interest rates in Europe. offer three main types of mortgage loans is adjusted at more frequent For foreign investors, it should be loans, namely: fixed-rate loans, intervals, generally every three noted that Denmark conducts a adjustable-rate loans and floating- to six months, and the interest fixed exchange rate policy, keeping rate loans (with or without interest- rate is typically based on a the value of the Danish krone stable rate caps), which are all standard reference interest rate, usually the against the euro. loans. Almost all loans may be Copenhagen Interbank Offered combined with interest-only periods Rate (CIBOR) or the Copenhagen The margin charged by the for up to ten years, subject to Interbank Tomorrow/Next Average mortgage credit institutions is a individual credit approval. (CITA), plus a premium. A floating- percentage of the debt outstanding rate loan may be combined with an and corresponds to the interest Fixed-rate loans are typically long- interest-rate cap. margin of a universal bank; however, term loans with a term of up to 30 the rate is generally lower. The years, providing for a high degree Whereas adjustable-rate and margin percentage is subject to of security as the interest payments floating-rate loans provide a lower individual negotiation and may be are known throughout the term of interest rate, fixed-rate loans provide adjusted during the term of the the loan. A fixed-rate loan can be for equity-value protection in a loan, unless otherwise agreed. either a cash loan or a bond loan, market with increasing interest rates, where the main difference is that as the market value of the fixed-rate In addition to the recurring loan any capital loss on the sale of the loans will decrease when interest costs, there will be initial costs such underlying bonds is reflected in rates increase, making it possible to as commitment fees, brokerage the interest rate on the cash loan repay the loan at a lower amount. and costs for registration of the instead of in the proceeds, as is the mortgage in the Danish Land case with bond loans. Any capital Competitive loan costs Register. The registration fee loss on cash loans is therefore tax The liquidity of the mortgage bond amounts to 1.5 percent of the deductible, as the loss is converted market and the attractiveness of the mortgage debt plus a low fixed-fee into interest. bonds due to the high level of security amount. However, the borrower ensure low and competitive prices. may, under certain circumstances, With adjustable-rate loans, the be able to reuse registration fees interest rate is adjusted throughout The recurring loan costs consist on mortgages already registered the term of the loan at certain of interest and principal payments on the property. intervals from one year and as well as a margin charged by

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Denmark has one of the lowest interest rates in Europe.

Flexible early It is therefore possible to repay all repayment options loan types without negotiation or A common feature of mortgage penalties, but, in case of repayment loans is an early repayment option, by delivery of the underlying bonds, providing for a high degree of the price will be based on the flexibility for the borrowers in terms market price for the bonds at time of exit and mortgage refinancing of purchase. in a changing market. These repayment options depend on No termination the loan type. without cause A final main characteristic of Fixed-rate loans are based on mortgage loans is the borrower’s callable bonds and can always be security against termination without terminated for early repayment cause. Mortgage loans are non- at par value. In addition, the loan terminable in that mortgage credit may be repaid by purchasing and institutions are not entitled to delivering the same type of bonds terminate a mortgage loan except in as those used to fund the loan. the event of default, and the loans are not subject to renegotiation every Adjustable-rate loans are based on year as is the case with bank loans. non-callable bonds and can only be repaid at par value in the two-month period prior to the interest-rate At DLA Piper, we assist our clients adjustment. However, the loan may, throughout the entire lifecycle at any time during the remaining of their real estate investments, periods, be repaid by delivery of the including the financing process in underlying bonds. The repayment connection with the acquisition options for floating-rate loans of real estate, subsequent depend on whether the loan is based refinancing or early repayment on callable or non-callable bonds. in connection with a sale.

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39 REAL ESTATE GAZETTE | ISSUE 34 | 2019 The “Plaza Ban” regulation in Hungary

Attila Remes and Mátyás Rada, Budapest

In August 2018, the Hungarian government adopted Government Decree No. 143/2018 (VIII. 13) on the detailed rules applicable to the change of designated purpose procedure, which further strengthened the regulation known as the “Plaza Ban.” In particular, it extended the scope of the strict rules prohibiting shops and shopping malls (referred to collectively here as “retail buildings”) with a gross floor area of over 400 sq.m.

As a consequence, the owners of retail buildings with a Legislative background gross floor area of over 400 sq.m. face a new permitting The rules of the construction, alteration and expansion procedure in case of those (minor) alteration works of retail buildings with a gross floor area of over 400 which were previously not subject to any permits. sq.m. and the change in the designated purpose Additionally, owners are not allowed to change the procedure known as the “Plaza Ban” law are contained designated purpose of office buildings, storage or other in the laws listed below: premises with the intention of expanding the area of • Chapter No. IV/A of Act LXXVIII of 1997 on the their retail buildings, without seeking a permit from Formation and Protection of the Built Environment the competent authority. (the Act) (last amended in August 2018).

• Government Decree No. 143/2018 (VIII. 13) on the detailed rules applicable in the change of designated purpose procedure (the Government Decree), which came into force in August 2018.

• Government Decree No. 5/2015 (I. 29).

Before the recent amendment of the Act and the adoption of the Government Decrees, only the construction, alteration and expansion works carried out in retail buildings with a gross floor area of over 400 sq.m were subject to the “Plaza Ban” rules. As from August 2018, however, there are further restrictions on the owners of larger retail buildings, such as, for example, the requirement of government approval for even minor alteration works.

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As from August 2018 […] there are further restrictions on the owners of larger retail buildings.

The rules of the “Plaza Within this time limit, it is obliged Ban” where a building to obtain prior approval from the permit is required government office, which must As noted above, the affected consider any detrimental impact of properties are retail buildings the retail building in terms of the with a gross floor area of over 400 local environment, transportation sq.m., where the owner intends to and urban development, and conduct construction, alteration or must decide whether that impact expansion works. outweighs the potential advantages of the construction, expansion or The Act defines retail buildings as alteration of the retail building. shops and shopping malls, and refers to Act CLXIV of 2005 on Before making its decision on the Trade, which provides more details. approval, the government office is Under the Act on Trade, “shops” obliged to discuss its assessment are such buildings, independent with a committee made up of sections of buildings, or areas delegates from the competent constructed or used for trading ministries. The committee’s opinion activities where trading activities must be taken into consideration, are pursued. Shopping malls are although it is not binding on the multi-purpose buildings or multiple government office. buildings consisting of a complex of commercial units, mostly shops, Before submitting an application for which represent permanently a building permit, the owner has the established merchandisers of opportunity to ask for prior approval different types and offer various of the government office by types of entertainment and leisure contacting the office directly. If such services to visitors. prior consent is granted, the owner may initiate the building permit Owners of retail buildings submit procedure, and the local building their application for a building authority will not have to obtain the permit to the local building approval of the government office. authority. The local building The owner has one year to make authority has 75 days to grant the use of the prior approval once it building permit to the applicant. has been granted.

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Changes in designated Government Decree No. 253/1997 (XII. 20) on the purpose procedure national settlement planning and construction The activities which are subject to the new permitting requirements provides the definition of “alteration procedure are as follows: works.” These are defined as construction works carried out in order to alter the floor plan or external a) Changing the function of buildings with a gross appearance of an existing building (or part of a floor area of at least 400 sq.m. to retail purposes. building) without expanding the internal volume. b) Minor alteration of a retail building — where a building permit is not required — where The rules of the change in designated purpose the alteration expands the gross floor area procedure apply, for example, if the owner intends to of the building to exceed 400 sq.m. erect, or take down an internal partition wall or change the location of a fitting room inside a retail unit. c) Minor alteration of a retail building with a gross floor area of over 400 sq.m. — where a building permit is Under the Government Decree, the owner (prior to not required. starting any of the above activities) must submit its application for a permit to the local government. In relation to point (a), it is no longer possible, The notary will forward the application to the without the approval of the government office, government office, which has 60 days to grant its to build retail units in buildings with a gross floor approval. Unlike the building procedure, the local area of 400 sq.m. by changing the function of notary does not decide whether the permit should the existing building for retail purposes. So if, for be issued or not, as this falls within the competence example, the owner of an office building (with a of the government office. However, the same gross floor area of over 400 sq.m.) wishes to covert administrative deadline applies (75 days from receiving that into a retail building, they must now initiate the the application) and the notary has to obtain the change in the designated purpose procedure. government office’s approval within this period.

The change in the designated purpose procedure As noted above, the change in designated purpose also governs situations where a retail building is procedure covers activities which were not previously expanded so that its gross floor area will exceed subject to any permitting rules. Under the Government 400 sq.m. (point (b)). Decree, if any of these activities are undertaken without a permit, the owner of the building may be fined or In relation to point (c), it should be noted that a prohibited from using the premises as a retail building. retail unit of a shopping mall does not constitute an independent retail building, thus any minor alteration works carried out in a retail unit will result in the shopping mall being required to initiate the change in designated purpose procedure.

43 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Energy performance regulations and investing in Dutch real estate

Arjen de Snoo, Jaap Lameijer and Ernst Haverkamp, Amsterdam

Introduction Energy performance stricter decree with regard to Following high-profile litigation label the energy performance of office contesting its lackluster approach To ensure the energy efficiency buildings in the Netherlands to meeting its own goals on characteristics of buildings is (Besluit inhoudende wijziging sustainability, the Dutch State is clear for (prospective) owners and van het Bouwbesluit 2012, dated now faced with a court order that users (as well as other parties), the November 2, 2018). In addition to requires it to expedite its efforts to European Energy Performance of the EPB requirements, this decree reduce CO2 emissions and ensure Buildings Directive 2002/91/EC (EPB) specifically requires that each “office a more sustainable society. The real introduced the energy performance building” (defined as buildings estate sector is key in meeting these label, which is valid for ten years. which are used for office purposes) requirements and subsequently, is The EPB required Member States to should have an energy performance faced with ever tightening regulations. adopt legislation stipulating that an label “C” or higher (this is equal energy performance label quoting to an Energy Efficiency Index of These regulations increasingly the building’s Energy Efficiency at least 1.3) as of January 1, 2023; influence the value and costs Index is provided in case of the additionally, the decree requires of Dutch real estate and are construction, sale and/or lease of that, as of January 1, 2030, all office therefore becoming of significant the (new) building. The EPB was buildings should have an “A” class importance when it comes to updated by the European Directive energy performance label. investment decisions and due 2010/31, which sets additional diligence with regard to Dutch ambitious goals with regard to While the decree does provide real estate for all those involved energy efficiency (eg, achieving 20 a number of exemptions for, for in the real estate sector. percent energy efficiency by 2020 example, monuments and limited and an (almost) energy neutral floor area office buildings as well as In this article, we outline the key building environment by 2050). a hardship clause, these are limited legislative developments on energy since most commercial office real efficiency and provide insight into NEW DUTCH REGULATIONS ON estate constructed in the last 30 what may become the key questions ENERGY PERFORMANCE LABELS years will be fully subject to the facing real estate sector players in In November 2018, the Dutch new rules. Additionally, given ever- the light of these developments. government adopted a new (much) tightening regulations, it is likely

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Most commercial that due to the stricter regulations will be obliged to take additional office real estate (obtaining an “A” class energy measures and make additional performance label) transformation investments to meet this requirement, constructed in the of (office) properties to non-office or repurpose their assets. last 30 years will use will be required. In addition, the Dutch government be fully subject to As a consequence of the regulations, does not currently reimburse or the new rules. an office building without the provide additional funds/subsidies required energy performance for the required works (with the label can no longer be used as exemption of some tax benefits). As such unless the required label “C” a consequence, owning or buying/ in 2023 and label “A” in 2030 are investing in an office building obtained. The primary responsibility which does not have at least an to meet this obligation lies with the energy performance label “C” or owner/lessor of the office building. can otherwise meet the applicable The risks associated with non- regulations by January 1, 2023, may compliance are quite severe, as they be considered a financial liability. may entail the competent authority taking administrative enforcement The aforementioned obligation measures, such as the closure of should be taken into account when the office building. investing in Dutch real estate, especially where it concerns office POINTS TO NOTE space. It is also important to take It is estimated that approximately this into account in relation to 15,000 office buildings in the reviewing and/or concluding lease Netherlands do not currently comply agreements, especially with regard with the new requirements and to costs and the fact that closure have an energy label of “C” or lower. of an office building could lead to a Therefore, it is expected that many material defect and/or breach under owners/lessors of office buildings the lease agreement.

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Government use of buildings inform the competent authority of the measures taken In addition to the energy label requirements, specifically and progress made from July 1, 2019. Such reports with regard to buildings used by government, as of are to be submitted electronically to the competent January 1, 2019 the (entire) government will only use authority once every four years. The draft regulation newly (constructed) buildings in its capacity as an owner provides that non-compliance or fraud in relation to the and/or lessee which are almost energy neutral. It should reporting obligations is subject to administrative law be stressed that these requirements will also be relevant enforcement, as well as criminal for false reporting. to project developers or lessors catering to Dutch government bodies. Key observations for sector players In our view, the new regulations will have serious Obligation to take (sufficient) ramifications for the real estate sector and all sector energy saving measures players. While the regulations impose clear obligations As well as the above mentioned requirements, which on more or less specific parties which affect them apply to offices in particular, there is also a more directly, the indirect effects of the obligations may general requirement in relation to Dutch (commercial) be even more significant. properties with regard to taking (sufficient) energy saving measures. Dutch environmental legislation LENDERS (Activiteitenbesluit milieubeheer, Activities Decree) For lenders financing assets and asset portfolios, requires that any operator (drijver) of an establishment key questions are whether the owners meet their (inrichting) which uses over 50 KWh of electricity or energy performance labels, as non-compliance may 25,000 m3 of natural gas must take all energy saving put debt service at risk; additionally, non-compliant measures which can be (financially) recovered within five assets will likely decrease (substantially) in value. years. Some operators are exempt as they are involved Lenders may consider developing products that cater in sector-wide government approved plans (eg, green to redevelopment or upgrading of non-compliant houses) or participate in the EU ETS. real estate.

Note that the definition of an “establishment” is very DEVELOPERS broad and applies to almost all (commercial) real estate Developers will be faced with the requirements for new properties, including offices. The operator is defined as the developments with Dutch government contracts being party who could end a violation of a specific rule (in this even more specific on energy neutral developments. case: not taking the required energy saving measures). The new rules on energy performance labels are expected to prompt numerous redevelopment The operator of an establishment is free to choose issues both to ensure compliance for office use the kind and type of energy saving measures but has and — especially in urban areas — transformation to demonstrate that the measures taken meet the developments. Lenders may well have more appetite legislative requirements. To aid operators in efficiently for, or be willing to invest only in, energy neutral (new) taking measures, the government has included a list with developments which developers may cater to. “recognized measures” per sector (Erkende Maatregelen), which are included in appendix 10 to the Activities OWNERS Decree. Taking the measures set out in the appendix Property owners should have a full overview of their means that the property/operator (automatically) portfolio energy performance labels and the costs complies with legal requirements. This list is regularly associated with energy efficiency measures ensuring updated, most recently on January 1, 2019. the energy label is up to the required level or with transforming the real estate to another use. Asset As noted, the operator is free to take any energy value effects of non-compliance vis-à-vis compliance efficiency measures; however, any measures not included as well as running costs should also be factored into in appendix 10 should be approved and assessed by the the decision to take measures or not. competent authority. The competent authority will then assess whether such measures are sufficient. Additionally, key points for non-compliant assets are whether the lease agreements give the lessee Non-compliance with these obligations is subject to termination rights in case of statutory non- administrative penalties (including fines of €10,000 per compliance of the property. Where new leases infringement) and potential criminal prosecution. Every are entered into, lessees can be expected to operator of an establishment is required to report to and have specific requirements in this respect.

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LESSEES required to operate a building For lessees, the key points are can go into debt service. Lenders whether the leased real estate will play a key role in facilitating meets the statutory requirements more energy-neutral buildings. and whether the landlord is taking measures to address any LESSOR/LESSEE DISPUTES ON non-compliances; continued ENERGY EFFICIENCY MEASURES non-compliance risks (and related A key legal question in relation to costs) of having to relocate. Also, responsibility allocation lies in the lease termination options in case “operator” identification. As set out of statutory non-compliance of the above, both owners and lessees may property should be considered. at times be considered the operator. It is suggested that additional Given the new regulations, disputes arrangements should be made with may be more likely between owners regard to the energy performance and lessees on energy efficiency label for offices to include, for measures to ensure compliance example, a break-option in the lease with both the energy efficiency agreement in case the competent obligations and the energy authority closes the office building performance label requirements. after January 1, 2023.

Where new leases are entered DLA PIPER AMSTERDAM into, the above is equally, if not As a truly international firm but more, relevant. with strong Dutch roots, DLA Piper Amsterdam’s Real Estate sector Expectations team has over a century of Apart from the above specific points, experience and is well equipped the new regulations on the energy to take on any matters relating performance label raise a number to Dutch real estate. Our cross- of pending questions which may or border and cross-practice group may not have been fully appreciated approach ensures we have the at the time the regulations were experience to advise and counsel drafted. We therefore expect there your company on developments, to be a number of developments in investments as well as lease the market, including the following. matters. Should you have any questions on energy performance ENERGY PERFORMANCE LABEL labels and energy efficiency AND ENERGY EFFICIENCY measures, please do not hesitate MEASURES INTERPLAY to get in touch with the authors As set out above, there is a clear of this article. interplay between the energy performance label requirements and the energy efficiency measures requirements. Key market effects in our view may include a shift from the “recovery” model for the energy efficiency measures, focusing on recovery of financial investments through reduced costs for, for example, energy, towards a model focusing on asset valuation effects of measures and the corresponding energy performance label; any financial assets not

47 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Roadmap for real estate businesses’ second-best investment on earth

Ton van Doremalen, Dubai and Wouter Kolkman, Amsterdam

“The best investment on earth is earth.”

This quote promoting real estate value is preserved in that shares in a real estate subsidiary investments above all others is investment’s lifetime. The most to CGT. In order to prevent double often attributed to the 20th-century notable levies in this respect are taxation, tax treaties are routinely real estate investor Louis Glickman. corporate income tax (CIT) and concluded between jurisdictions The second-best investment for capital gains tax (CGT). to solidify this principle and to a real estate business, however, allocate taxing rights. A tax treaty may well be a good tax advisor Local CIT may be levied on the may dictate that only one of the to consider and mitigate the profits generated with the real countries may levy CGT. Some tax numerous taxes associated with estate, generally the operating treaties for example stipulate that real estate investments. This article earnings minus the deductible a jurisdiction is not allowed to levy serves as a high-level roadmap, expenses. Important aspects to tax on the sale of shares in a real setting out different types of consider include the CIT rate(s), estate (rich) company, established taxes that should be taken into depreciation rules as well as in that jurisdiction. Spearheaded consideration when setting up and potential deduction restrictions. by the Organisation for Economic growing a real estate business. Co-operation and Development In most countries, CGT is levied on (OECD) with its anti-Base erosion Setting up the capital gains (profits) made on and profit shifting (BEPS) project, the sale of an asset that increased the international community is PROPERTY OWNERSHIP in value, such as real estate or a in an ongoing process to avoid The owner of real estate would shareholding in a local (real estate) exploitation of gaps and mismatches generally be qualified by tax subsidiary. As a general rule of between jurisdictions, including with authorities as the (principal) thumb, capital gains derived respect to the (improper) use of the taxpayer, although users of the from real estate are taxed in the tax treaties. In some cases, this also real estate (eg, tenant or usufruct country where the asset is located concerns CGT on the alienation of holder) may also be qualified (known as the situs principle). real estate rich company’s shares. as such. The development of a Many jurisdictions have (domestic) tax-efficient property ownership rules which also subject the sale of structure ensures that significant

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While technically not a tax topic, rule” (or “thin cap rule” for short). rates depending on the type of bilateral investment treaties can Such a thin cap rule may for real estate (eg, a lower tax rate also be important for international example result in interest on debt for residential real estate). investors. In broad terms, the in excess of four times the equity to nationalization or expropriation of be non-deductible. The restriction of The acquisition of real estate may investments is typically prohibited deductions would result in a higher also be subject to value added tax under the BITs, unless such CIT taxable base. (VAT) which may, or may not, be measures are taken in the public recoverable. In certain jurisdictions, interest and the host state pays Deductibility of interest expenses a special VAT exception applies in prompt, adequate and effective can also be (further) restricted by case the acquired real estate is compensation to the investor. As formal transfer pricing rules and/or considered to be (part of) a business such, particular attention should the general at arm’s length principle. (the “transfer of going concern”), in be paid to these treaties when This principle requires related which case the transaction would envisaging investing in certain parties to conclude transactions normally not be liable to VAT. high-risk source countries. on an independent basis, ideally

FUNDING AND TREASURY resulting in fair market prices. Some Some countries may provide In addition to the ownership jurisdictions have formal transfer tax credits, capital allowances structure, the financing structure pricing rules in place, which may (similar to a tax credit) or certain can be equally important. Payments require detailed reports to be kept environmentally driven depreciations/ of dividend and interest may substantiating that transactions with incentives. Depending on the target be subject to withholding taxes related parties are in line with the at jurisdictions, all three categories (WHT). As with the CGT, tax treaties arm’s length principle. might be considered and could result may provide mitigation of WHT in a lower domestic CIT basis. by allocating taxing rights to the LOCAL TAX PLANNING investor and/or source country. Different tax aspects and incentives INTELLECTUAL PROPERTY of the target source country PLANNING Returns from your target should be closely reviewed. Certain types of real estate, such as investment may also impacted by The acquisition of real estate hotels and restaurants, require a interest expenses deduction rules. (entities) may be subject to real particular brand or formula in order Deduction of interest expenses may estate (transfer) tax and/or stamp to operate. For tax purposes, such a be restricted to a certain percentage duties. Some jurisdictions apply brand or formula is typically referred by means of the “thin capitalization different real estate (transfer) tax to as intellectual property (IP). It is

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“The more predictable the business, the more valuable it is.”

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not uncommon to assign IP rights to a designated COMPLIANCE AND REPORTING special purpose vehicle which sole purpose would be to Operating real estate often triggers registration and license the IP to the real estate operator/owner. IP rights filing obligations on both a national level (eg, CIT and may provide for tax efficient structuring possibilities. VAT) and on a local level (eg, municipality tax). These various obligations may involve time-consuming and Countries may have transfer pricing and/or at arm’s complex exercises, in particular for real estate investors length rules in place requiring licensing fees paid by active in multiple jurisdictions. Tax reporting policies group entities to reflect the fair market value. In order and/or models should therefore be set up and ongoing to ensure an appropriate allocation of the returns from compliance should be monitored. the exploitation of IP, and also the costs related to the IP, it is a globally acknowledged principle to look at the ACQUISITIONS AND EXITS functions of the entities involved, the assets used and Assets and businesses may be acquired by means the risks assumed in the “development, enhancement, of an asset deal and/or share deal. The chosen route maintenance, protection and exploitation” (DEMPE) generally depends on a mix of commercial, legal and tax functions of the IP. IP, being a relatively easy transferred considerations. In any scenario, due diligence should be asset across borders, is one of the OECD’s main focus conducted to determine historic tax risks and liabilities. areas. The OECD introduced the DEMPE functions for Such risks and liabilities, and the integration of newly IP as part of its BEPS project. acquired assets and businesses in existing structures, need appropriate attention. Sustainability and growth Based on the location of the target asset and/or the CASH MANAGEMENT target entity, analysis should be undertaken to determine Once the ownership, financing and/or IP structure is the most tax efficient acquisition structure, also taking in place, it is important that the day-to-day operations into consideration a potential future exit. A proper exit are optimally managed, also from a tax perspective. from an investment should always ensure that tax does Taking into account liquidity requirements and internal not wipe out significant returns on investment. fund flows, certain arrangements can be designed to achieve full tax efficiency in cash management. This is Concluding remarks particularly important for the avoidance of any trapped From the acquisition up to the sale of real estate, cash, local expense deduction restriction rules and WHT. a myriad of taxes may be applicable to “earth’s best investment.” All real estate transactions should VAT exposure is often hidden in organizations, but can therefore be carefully examined and planned, including have a major impact on the cash flow, particularly when from a tax perspective to ensure tax efficiency. unrecoverable. It is not uncommon for countries to have long-term revision rules for, among others, real estate. Such revision rules may require taxpayers to keep track of the use of the real estate and, under particular circumstances, repay previously recovered VAT.

Furthermore, some countries may have special incentive schemes for sustainable energy production, environmental investment rebates or arbitrary (or accelerated) depreciation of environmental investments.

51 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Is your hotel operator an agent or independent contractor, and should owners in Asia care?

Jonathan Lynch and Teerin Vanikieti, Singapore

Hotel development in Asia Pacific is witnessing an impressive rise. The region’s hotel construction pipeline (excluding China) has grown over 300 percent over the past decade. Currently, there are over 1,000 hotels under construction, with Indonesia, India, Japan, Thailand and Malaysia home to the lion’s share.

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With no slowdown in sight, hotel owners are rushing to owed to the principal. Considering these two concerns, lock in their preferred hotel brand and operator, often operators began self-designating as “independent before breaking ground. But with term commitments contractors” who are providing a service to owners. of up to 25 years, the modern hotel management arrangement is akin to (an ideal) marriage, and owners Concurrently, operators began expressly disclaiming an need to set aside romantic ideals, and — for posterity “agency” relationship and, correspondingly, its implied purposes — carefully review and negotiate the fine print duties of loyalty, due care and diligence. In this way, before rushing to the altar. In doing so, they’ll come operators sought to protect against any allegations of across two seemingly innocuous but significant options “self-dealing,” a worry for operators seeking to purchase for contractual designation of their betrothed: “agent” goods and services on arguably less than an arm’s or “independent contractor.” length basis. In addition, operators expressly carved out limitations of liability owed to owners with the exception of The chosen designation defines the relationship acts committed ultra vires. Operators, through the courts, between the parties and, depending on the contract’s effectively transformed the contractual relationship norm governing law, plays a vital role in determining a host to that of independent contractor, while creating market of legal issues, including liability, termination rights, standard language for significantly disclaiming any liability damages and the purchase of goods and services and fiduciary duties owed to owners. from third-party suppliers. The agent vs. independent contractor debate has been hotly contested and But whether “independent contractor” or “agent,” adjudicated in the US; the same cannot yet be said for operators have been unable to compel specific Asia. Accordingly, to understand the importance of performance of a hotel management agreement. this designation to Asia’s budding hotel management Rather, courts across various US jurisdictions have landscape, it is necessary to look at how this designation almost universally held that a management contract has evolved in the US, since the modern management is terminable at the will of the owner, even when contract is often drafted from a US-centric perspective. unlawful, and that in such instances the operator’s remedy is to seek damages. However, like everything The evolution of the agent and in life, there are exceptions to the rule, and in the hotel independent contractor designations management context, the most common exception is For years, operators preferred to self-designate as when the relationship is an “agency coupled with an “agents” of the owner. As agents, operators were able to interest.” In the hotel management context, such an limit potential liability only to those acts committed ultra agency would be most likely to arise when the operator vires on behalf of the owner, as principal. This designation manages the hotel and also has equity in the owning presented its own problems to operators because an company or some other interest in property subject agency relationship can usually be terminated by a to the hotel management agreement. In these cases, principal at any time. It also gives rise to fiduciary duties the agency may be irrevocable.

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Owners are […] recommended to be vigilant when negotiating the management agreement and clearly and expressly spell out any fiduciary duties that are owed.

The relationship status between an owner and operator By way of example, under Thai law, substance supersedes is complicated in the US and needs to be carefully form, and Thai courts will look at the body of the hotel considered against the backdrop of the relevant court management agreement when assessing the nature of precedents and governing laws. For example, the the relationship. Therefore, even if the contract dictates laws of the State of Maryland state provide that (i) that the operator is an independent contractor and when conflict exists between the express terms and disclaims an “agency” relationship, if the owner exerts a conditions of a hotel management agreement and certain degree of command and control over the operator the terms and conditions implied by law governing an and the management of the hotel, then the relationship agency relationship, the express terms and conditions is more likely to be deemed an agency relationship. of the agreement prevail; and further that (ii) a court may grant specific performance, (ie, an injunction) for As an agent, the operator would owe certain duties an anticipatory or actual breach or attempted or actual to the owner under the law of Thailand, which — as a termination of a hotel management agreement. An civil law country — has numerous principal-agency owner would be well advised not to agree to Maryland laws acknowledging certain features of fiduciary law in its hotel management agreements as a result. duties. By being a principal, the owner in turn would become liable to the third party for any acts which the The question here is whether the designation of agent operator, as the agent, performed within the scope or independent contractor requires the same level of of the authority. An owner is advised to negotiate attention in hotel management agreements in Asia. operator indemnification provisions hard as a result. The answer is yes. In practice, most operators will have a great deal of The effect of this designation independent control over the management of hotels on the hotel management in Thailand. This control will deem the relationship agreement in Asia independent contractor in nature, regardless of what We are not aware of any jurisdiction in Asia where language in the agreement may state. Owners are the agent/independent contractor issue has been therefore recommended to be vigilant when negotiating as hotly contested as in the US. However, this does the management agreement and clearly and expressly not make the designation irrelevant. The opposite spell out any fiduciary duties that are owed. is true in fact, as with less court precedent to rely upon, courts of first instance are more inclined (The above analysis is specific to Thailand, and a to look at the four corners of the contract in similar analysis would need to be undertaken for determining whether the operator is acting as agent each Asian jurisdiction.) or independent contractor, and consequently, how the designation impacts related issues in the contract, inter alia, fiduciary duties and termination rights.

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Conclusion The agent vs. independent contractor issue is more often negotiated in the West, but that does not mean it is less important to hotel management agreements in the East. In this ever more digital world, where privacy and cybersecurity are key concerns, and where operator consolidation is resulting in less and less attention to individual owners, there will be more and more examples of operators failing to act in owners’ best interests, negligently, or in contravention of law. Owners across Asia need to consider carefully how their relationship to the operator is defined legally in order to know whether assertion of any contractual rights is better made against its agent or an independent contractor.

55 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Block leasing in Sweden — a growing trend

Jan Råssjö and Mats Eriksson, Stockholm

In the Swedish housing market, there has been an increasing trend for companies, municipalities and others subleasing dwellings to let to, for example, employees, students, asylum seekers and other groups. This is often done though block leasing. During the first six months of 2018, the Rent Tribunals (Sw. Hyresnämnderna) in Stockholm, Gothenburg and Malmö together received twice as many applications as they did in the first six months of 2016. This increase can be partly explained by the increased demand from asylum seekers. Another explanation is the general housing shortage in urban areas, which has resulted in more companies entering into block leasing agreements in order to offer accommodation to their employees. There has also been increased interest in what are known as long-stay hotels, that is, apartment hotels renting out rooms or apartments monthly or for a longer period of time.

So what is block leasing? Block shall apply. The provisions of the Consequently, since both landlord leasing means that one landlord Rent Act grants residential tenants and tenant enjoy a higher degree rents out a number of separate particularly strong protection, of freedom of contract, a block dwellings within the frame of but when entering into a block lease agreement resembles a lease one lease agreement, known as lease agreement, both landlord agreement over premises more than a “block,” instead of entering into and tenant are allowed to make a lease agreement over dwellings. a separate lease agreement for exceptions regarding some of each dwelling. When entering these provisions (see below). A prerequisite when determining into a block lease agreement, the However, in relation to the premises, that block leasing, in accordance presumption is that the provisions the conditions of a block lease with the provisions of the Rent of the Rent Act (Sw. hyreslagen) agreement may not conflict with the Act, is applicable is that the lease regarding residential apartments provisions stipulated in the Rent Act. agreement covers at least three

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The block lease tenant may have to keep the apartments in better condition than the landlord has to.

residential apartments, which the However, it must be highlighted that to a higher degree of wear and first tenant shall sublet individually the potential to agree on a lower tear, since tenants tend move or on a cooperative basis. If these standard only applies to agreements in and out of these apartments prerequisites are met, the landlord between the landlord and the more frequently, compared to and the first tenant shall agree on block lease tenant. In the next typical residential apartments. the conditions that conflict with the step, that is, when the block lease Even in this case, for the benefit Rent Act’s provisions for block lease tenant enter into agreements with of the residents, the block lease agreements. The most common each resident, the principle of the tenant is obliged to meet the exceptions include: lowest acceptable standard applies, Rent Act’s provisions regarding meaning that the block lease tenant maintenance of the apartments. • the condition of the apartments; may have to keep the apartments in • maintenance of the apartments; better condition than the landlord The determination of rent on has to. However, there has been residential apartments is based on • determination of rent; no decisive case law in this area, what is known as the utility value • indexation of rent; and and it is difficult to predict what will principle (Sw. bruksvärdesprincipen), constitute “acceptable condition of according to which, apartments of • terms of termination. the apartment” in relation to the an equal standard shall be subject Regarding the condition and main principle of lowest acceptable to the same rent. In practice, when maintenance, it may be possible, standard. The landlord should negotiating in accordance with this depending on the nature of therefore exercise caution when principle, the landlord negotiates the apartment, to agree on a applying this exception. with the tenant associations and the lower standard than that of the parties compare different housing main principle of law governing Regarding the maintenance of objects with each other before they residential apartments. Under the apartments, in a block lease enter into an agreement regarding main principle, each apartment shall agreement the landlord is able a suitable rent level based on the be fully fit for purpose, meaning to transfer a bigger part of the rent of the objects of comparison. that there is a lowest acceptable responsibility to the block lease Instead of having a fixed rent standard, and that standard tenant. This possibility is mainly specified, in a block leasing depends on the standard of similar motivated by the fact that these agreement, which covers a term of apartments in the same city. apartments are often subject more than three years, the landlord

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may apply the Rent Act’s provisions regarding other constitutes a serious need, since these premises are rent calculation methods. However, the presumption often leased through a block lease agreement with the that rent should be determined in accordance with the state (normally through the migration Authority (Sw. utility value principle remains, whilst the landlord may Migrationsverket) as the block lease tenant. charge a supplement for, for example, indexation of the rent and high levels of wear and tear to the apartment. Exceptions from the Rent Act’s regulations regarding Nevertheless, the rent calculation method must be residential tenancy must be approved by the Rent stated clearly and accurately in the lease agreement, or Tribunal because the legislator wants to avoid a the provision is invalid. situation where less serious property owners try to circumvent the mandatory regulations governing Finally, the parties often agree on a longer term of residential leases. termination than three months, which is standard for lease agreements regarding residents. However, it is not necessary to obtain the Rent Tribunal’s approval if the landlord is the state, a municipality, It is a common misconception that the Rent Tribunal a county council or a similar public entity. This latter must accept all kinds of block leasing agreements. provision is unclear since, when it comes to block The decisions of the Rent Tribunal do not cover an leasing, the property owner and the block lease tenant entire block lease agreement as such. Instead, only the are landlords. From the preparatory work though, it is conditions the parties may have agreed on and that apparent that the exception only applies when the state, deviate from the Rent Act’s provisions are subject to the etc. owns the property. Thus, if the state, etc. is tenant, Rent Tribunal’s decisions. Accordingly, a landlord and a the Rent Tribunal must approve conditions that are in tenant may always enter into a block lease agreement, conflict with the Rent Act. as long as the content of the agreement is not in conflict with the Rent Act’s provisions regarding rent of There are examples of decisions where the Rent Tribunal residential objects. The Rent Tribunal’s acceptance of the has approved the complete block leasing agreement deviating conditions are not necessary when it comes to instead of just the conditions that are in conflict with the this kind of block lease agreement. Rent Act. However, we recommend, when it comes to applying to the Rent Tribunal, that it is clearly stated for However, conditions that are in conflict with the Rent which conditions (ie, the exceptions from the residential Act’s provisions regarding residential apartments lease provisions) the approval of the Rent Tribunal must be approved by the Rent Tribunal in order to be is being sought. Where the Rent Tribunal does not valid. Furthermore, before reaching a decision, the approve the exceptions, it is worth noting that there is Rent Tribunal must consider whether there is a real no right of appeal. Finally, by way of warning, it should need for the block leasing, which would motivate the be noted that there is a risk that the tenants of the block exceptions from the regulations regarding residential lease tenant may request a customary review of the apartments. The latter requirement does not follow from rent in accordance with the principle of utility value. If the wording in the Act itself, rather it follows from the such a review proves that the tenant pays a higher rent preparatory work. In the preparatory work it is stated than they would have done if the principle of utility value that “serious need” includes an educational institution’s had been applied, a situation may arise where the block need to offer student housing or an employer’s need to lease tenant subsidizes the rent of the resident, since offer housing to its employees. Recent decisions from the block lease tenant is unable to charge rent which the Rent Tribunal make it clear that asylum housing corresponds to the amount paid to the property owner.

59 REAL ESTATE GAZETTE | ISSUE 34 | 2019 Go big or go homes…

Hayley Russell-White and Jonathan Northey, London

The burgeoning UK build-to-rent (BTR) market has been more than just a topic of conversation for some time now. It is widely reported that the number of UK residents renting privately has doubled over the past decade due to a change in mindset in relation to home ownership and the rising cost and poor supply of new homes. Into this fast growing gap between social housing and home ownership, the BTR model has given property developers a lucrative opportunity and has attracted billions in investment, and it is forecast to grow further as the market matures and diversifies.

In this article we address the by small-scale landlords (often The potential sale arose just as current state of the market and individuals). BTR is also attractive residential property in London how we think we are now coming to the government and planning came under pressure, with house close to a split in the BTR sector authorities as they see that it prices falling at the end of 2017 for between those trading/investing offers a way to generate long-term the first time since 2009. This was and those genuinely concentrating income for developers and investors due to the uncertainty of Brexit on building/developing. whilst still meeting housing and low pay increases and it was targets and needs. The units can an almost unique opportunity to The BTR model allows property be delivered faster than housing buy directly into a brand with an investors to achieve consistent for sale because there is less risk operational development business long-term investment returns as of market saturation and bigger and enormous pipeline. Lone they have the capital to develop schemes are capable of being Star’s decision to put Wembley bespoke blocks of apartments, built, as can be seen at Wembley on the market partway through which can be let out and managed Park where Quintain is currently development shows two things: that long term by a single company delivering 5,000 units as part of we are still not quite at the point of rather than being sold to individual London’s largest development. having constructed and stabilized landlords. However, until now stock at scale in the market and that there has been pretty much no Examples of those investing in foreign investment is very keen on built and trading portfolios of BTR schemes have received much buying big ticket BTR schemes. purpose-built BTR accommodation. publicity in recent years, but the This has led to many investors potential sale of the business (to Having schemes like Wembley on becoming reluctant developers. include Tipi, the rented homes the market also demonstrates brand) of the Wembley Park one of the noticeable trends from We have also seen the benefit to development indicates that there is foreign investment over the last five tenants of this model, as it gives a real appetite for foreign investors years. Namely that London provides them more choice and offers better in purchasing BTR units on a large an opportunity for investors to property management and security scale, despite Lone Star’s recent pick up enormous single asset than those services currently offered withdrawal from the sale. deals. This enables them to move

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quickly into a new market and homes in Bristol, Salford and with securing debt and persuading concentrate their efforts on one Walthamstow. Gatehouse (a Kuwaiti- their boards to accept longer risk decision. This opportunity doesn’t owned investment bank) has at least profiles. In addition to these long- occur elsewhere, other than in a few two BTR funds, with more than 1,600 term cash flow issues, it is also markets in North America and the homes having been built in projects significant that when a BTR scheme Far East (New York, Tokyo, etc.). worth a combined total of c. £250 is valued upon completion, it will million. The high-quality homes are generally be valued lower than an BTR is not only concentrated in in the Midlands and North West unencumbered identical property London, as house prices are also of England and are designed for which can be sold on the open increasing in the East and South family use. market. But as more stock starts to East of England. Areas such as complete and trade, and confidence Cambridge are also facing major It is fair to say that the funding and data improves, it is likely we development constraints coupled pipeline is still evolving, but trends will move towards a new balance with intense housing demand. so far indicate that developers have between development, investment Manchester, Liverpool and Bristol largely followed a forward fund and operational aspects. It is likely are also considered to be hotspots model where the developer builds we will then finally see a clearer for rental-focused development. the asset, but the investor lets and split between the development and manages it. This can often lead to a investment markets, allowing an Examples of those investors discount to stabilized market value emergence of trading sales rather investing outside of London include where the investor is taking some than forward funds. Wembley Legal & General, which has set up a element of development risk and showed the appetite for structural fund with Dutch pension fund PGGM a blurring of the development and changes within the market, but until with the potential for the fund to funding roles. Developers are keen shifts in funding and more assets expand once initial developments to develop through to stabilization become stabilized, we will still not are built. The fund will start with in the BTR sector where sites are see the clear demarcation seen developments of a total of 650 viable, but they face challenges in other asset classes.

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Contributors — Issue 34

Tim Mathers Anna Ziemian Arjen de Snoo Brisbane Warsaw Amsterdam +61 7 3246 4203 +48 22 540 78 06 +31 (0) 20 5419 268 [email protected] [email protected] [email protected]

Sandra Pepper Filipa Arrobas Silva Jaap Lameijer Brisbane Lisbon Amsterdam +61 7 3246 4236 +351 213 583 620 +31 (0)20 5419 848 [email protected] [email protected] [email protected]

Fabian Mühlen Jonathan Lynch Ernst Haverkamp Frankfurt Singapore Amsterdam +49 69 271 33 321 +65 6512 9556 +31 (0) 20 5419 351 [email protected] [email protected] [email protected]

Julius Warda Richard Woolich Ton van Doremalen Cologne London Dubai +49 221 277 277 259 +44 207 153 7336 +971 (0)4 438 6127 [email protected] [email protected] [email protected]

Christophe Bachelet Matt Davies Wouter Kolkman Casablanca London Amsterdam +212 52 042 7829 +44 207 796 6423 +31 (0) 20 5419 337 [email protected] [email protected] [email protected]

Gaëtan Rogeau Marcus Bitencourt Teerin Vanikieti Casablanca Rio de Janeiro, São Paulo Singapore + 212 52 042 7835 +55 21 3262 3008 +65 6512 6047 [email protected] [email protected] [email protected]

Myriam Mejdoubi Ivandro Trevelim Jan Råssjö Paris São Paulo Stockholm +33 1 40 15 24 96 +55 11 3077 3561 +46 8701 78 88 [email protected] [email protected] [email protected]

Sebastiaan Wijsman Emilie Møller Mats Eriksson Amsterdam Copenhagen Stockholm +31 20 5419 273 +45 33 34 01 42 +46 8 701 78 49 [email protected] [email protected] [email protected]

Rhys Bane Attila Remes Hayley Russell-White Amsterdam Budapest London +31 20 541 9392 +36 1 510 1118 +44 20 7153 7535 [email protected] [email protected] [email protected]

Michał Pietuszko Mátyás Rada Jonathan Northey Warsaw Budapest London +48 22 540 7481 +36 1 510 1138 +44 20 7796 6152 [email protected] [email protected] [email protected]

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