REIT’s can also invest in offices and malls

  • ECO News
  • 15 January 2019

Real estate investment and management societies, commonly known as Real Estate Investment Trusts (REIT), can now invest in construction projects in the rehabilitation of residential real estate.

The real estate and management societies (SIGI), commonly known as Real Estate Investment Trusts (REIT), will now be allowed to invest in properties used for long-term renting. According to the new legislation approved last week at the Council of Ministers, which regulates the constitution of such societies, the SIGI’s are also allowed to invest in properties which will be used for other economic use, such as malls and offices.

“SIGIs assets’ must be constituted by specific property rights which envision renting and other ways of long term economic use”, the legislation showed. The regulation will be put into force in the month after its publication in Diário da República.

This regulation highlights that in terms of “other economic use”, several projects of construction and rehabilitation of properties will be accepted, together with “projects for new shops and malls, or offices”.

This means that the REIT’s are not limited to the long term rentals of residential real estate, in the centre of the cities, or even limited to offer accessible rents, as some market players feared. The freedom they have, is much bigger. Ricardo Reis, from Deloitte, talked to ECO, and explained that “this factor will help boost this initiative, for the context they’re inserted in is the key for that success”. The sector estimates that with the REIT’s there will be over €10 to €15 million in investment in real estate.

Properties should weigh a minimum 75%. Indebtedness level is limited

Although the context of the application of the regulation has been widened, there is still some criteria which will limit SIGI’s. The legislation defines that the value of the properties destined for “rentals and other sorts of economic use should represent at least 75% of the total assets of each SIFI”. And the property rights value on these assets, “should represent at least 80% of the total value of the asset”.

“These requirements”, the legislation shows, “should be verified all the time, the year following the formation of the SIGI”. Besides, these participation and property rights “should be held for a minimum of three years after the transaction that led to the purchase of the property”, a restriction which envisions to stop the real estate speculation.

SIGI’s have lighter regulatory requirements, but they are still surrounded by many limitations, as for example in terms of indebtedness. “SIGI’s indebtedness level can’t ever correspond to more than 60% of the total value of the asset”, the regulation shows.

ECO also noted last Friday that, in terms of taxes, the SIGI’s would benefit from “a fiscal framework which is applied to all real estate investment societies”, as “previewed in articles 22 and 22A of the Fiscal Benefits Charter” — an option which has made it possible for the decree to avoid passing through the Parliament’s scrutiny. These societies are now exempt from paying the state and municipal taxes, and they will pay a 21% corporate income tax (with exception to the income from capital, property and capital gains).