INSTITUTIONAL INVESTMENT - THE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES IN IRISH REAL ESTATE April 2022
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INSTITUTIONAL INVESTMENT
THE SIGNIFICANT ROLE OF
COLLECTIVE INVESTMENT VEHICLES
IN IRISH REAL ESTATE
April 2022THE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 1
COLLECTIVE INVESTMENT VEHICLES AND The focus of much recent commentary on
the presence of institutional investors in the
PLCS, ARE WELL ESTABLISHED FUNDING
property market has been on the residential
ENTITIES IN IRISH REAL ESTATE, BUT THEIR segment of the market, with a recurring theme
CONTRIBUTION IS OFTEN CHALLENGED. which often misrepresents their tax status.
Without collective
The taxation treatment is investment vehicles, many
REITs/IREFs and PLCs pay proportionate and represents larger projects would never
significant amounts of taxation standard international practice get developed as there are few
to the Exchequer each year and for collective investment funds with individual investors with sufficient
their contribution to the property Irish Institutional Investors deriving capital available at scale, and they
market is valuable, unlocking similar benefits when investing in would not be able to take the risk
development that otherwise may global funds. on one large development.
not happen.THE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 2
IRELAND’S REAL DEVELOPMENT FINANCE
ESTATE MARKETS
RELIANCE ON 2017-2019 (AVERAGE P.A.) FUTURE SCENARIO
THE SUPPLY OF
INTERNATIONAL 22.2% €1.2bn 13.6% €1.5bn
CAPITAL IS WELL
UNDERSTOOD.
International Capital
€5.4 €11
can play a central role BILLION BILLION
in solving the Housing
Crisis. In a baseline case,
international capital 77.8% €4.2bn 86.4% €9.5bn
into Irish residential
development has to grow
INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL
by a factor of 4 from today
DOMESTIC CAPITAL DOMESTIC CAPITAL
to make the government’s
target output. Even if this
“domestic capital stretch”
shown here happened, » Residential Units output 13,000 p.a. » Residential Units output 30,000 p.a. (excluding “one-offs”)
international capital still has » Commercial Real Estate (CRE) + Residential funding » Commercial Real Estate (CRE) + Residential funding
to grow by a factor of 3.5. » Domestic sources provided c.22% of capital requirement » Residential domestic sources providing c.13% of capital,
assuming YoY residential lending growth of 14% over 3
years from domestic sourcesTHE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 3
INTERNATIONAL CAPITAL IS NOT NEW BUT IT IS NOW MORE VISIBLE, HIGHLY
REGULATED AND BACKED BY PROFESSIONAL REAL ESTATE EXPERTISE.
PREVIOUS FINANCIAL CYCLES (2000s) FUTURE FINANCIAL CYCLES
INTERNATIONAL PROPERTY INTERNATIONAL PROPERTY
BANKS
LOANS MARKET CAPITAL MARKET
Individual / Developer Model Collective Investment Vehicles
Development finance, funded primarily by wholesale (EU) Pillar Bank lending is significantly reduced, now
interbank deposits, provided to individuals and property complemented by finance provided via regulated
developers, which proved to be an unsustainable model. collective investment vehicles (REITs, IREFs and PLCs).THE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 4
COLLECTIVE INVESTMENT VEHICLES ARE AN IMPORTANT
PARTICIPANT IN IRELAND’S REAL ESTATE MARKETS
LIMITATIONS OF INDIVIDUAL /
DEVELOPER MODEL
» Individuals have limited capacity to
finance or manage large complex
housing projects
» V
ery often high levels of “risky”
BENEFITS OF COLLECTIVE
debt used to meet project capital
INVESTMENT VEHICLES
requirements, with little capacity to
fund if things go wrong
» L
arger pools of capital = larger
more complex/ambitious projects
» M
ore equity available = no need for
risky levels of debt
POLICY RATIONALE FOR
INTRODUCTION OF REITS » P
rofessional manager typically
employed = better projects
» N
ew sources of non-bank financing » A
bility of investor to sell units
required after the last financial crash and not get locked in and also to
» Banking
sector significantly under- diversify, offering more protection
capitalised. Practical/transparent
aspects of REIT regime clearly
understood in international marketsTHE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 5
INSTITUTIONAL INVESTORS, ON BEHALF OF PENSIONS/SAVERS,
PAY SIGNIFICANT AMOUNTS OF TAXATION TO THE EXCHEQUER EACH YEAR.
THIS TAXATION TREATMENT IS PROPORTIONATE AND REPRESENTS
STANDARD INTERNATIONAL PRACTICE FOR COLLECTIVE INVESTMENT FUNDS.
Investment Funds
PRIVATE INDIVIDUAL
COLLECTIVE INVESTMENT VEHICLE REITS IREFs
All distributions are taxed and paid to the Revenue in the / COMPANY
form of withholding tax (IREF Withholding Tax).
DEVELOPMENT | ACQUISITION
The normal tax treatment afforded to most Irish collective
investment funds is that the monies invested are
STAMP DUTY (2% NET) ✔ ✔ ✔
allowed to grow on a tax-free basis within the fund. This
mechanism is known as the “Gross-Roll Up” regime. The
VAT ON ACQUISITION ✔ ✔ ✔
surplus is taxed at the level of the investor upon receipt of
distributions from the fund, rather than at the level of the DEVELOPMENT LEVIES ✔ ✔ ✔
fund and is widely availed of by pensioners and savers.
Real Estate Investment Trusts INCOME (FROM HOLDING ASSET)
All distributions are taxed and paid to the Revenue in the
WITHHOLDING TAX ON DISTRIBUTIONS ✔ ✔ ✔
form of withholding tax (Dividend Withholding Tax)
REITs were designed to remove the double layer of INCREMENTAL (OVERSEAS) TAX ON RENTAL INCOME ✔ ✔ ✔
taxation that otherwise applies to property investment
via corporate vehicles. Subject to meeting a number of CAPITAL GAIN (ON SALE OR EXIT)
criteria*, a REIT may qualify for an exemption from tax on
qualifying income and gains within the REIT. This ensures INVESTOR LEVEL TAX ON GAIN DISTRIBUTED ✔ ✔ ✔
a regular income flow from the REIT to its shareholders,
making REIT investments suitable as a long-term INCREMENTAL (OVERSEAS) TAX ON GAIN ✔ ✔ ✔
investment for pensioners and savers.
* E.g. min of 85% of net income to be distributed p.a. with the balance
reinvested or rolled-up.THE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 6
ILLUSTRATIVE TAX EXAMPLE – in the following 2 pages we outline what taxes
are typically paid by institutional investors for acquiring, holding and ultimately
disposing of assets.
An Apartment Development is constructed by a Developer. Upon completion, it is fully
rented, and sold to an ICAV , i.e. a Build-to-Rent (BTR) asset.
It can be assumed that this type of development would not have happened without a pre-
sale commitment in place from the ICAV. The asset is held by the ICAV for 10 years before it
is sold.
The example seeks to illustrate the total tax contribution paid by an institutional investor as
a result of the acquisition and subsequent investment period, including upfront taxes
(stamp and vat paid on acquisition of the asset) and levies (paid progressively during the
construction period by the original developer, but ultimately financed by the acquiring fund).
The Developer will already have paid significant taxes: stamp on acquisition of land, vat on
construction costs and payroll taxes
There are of course other variants of developer/investor that could be illustrated.
Depending on the developer or investor model used the actual quantum/calculation may
vary, but the number in the example is illustrative of the typical quantum of tax paid.THE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 7
DEVELOPMENT +
INVESTMENT MODEL TAXATION
DEVELOP ASSET + SELL
COMPLETED BUILDING TO DEVELOPMENT | ACQUISITION DEVELOPMENT | ACQUISITION
INSTITUTIONAL INVESTOR LAND
DEVELOPMENT
€7M
€53M
STAMP DUTY (2% NET)
VAT INCURRED ON
€1.2M
€11.7M
ACQUISITION
€8.1M (UPFRONT)
SALE / ACQUISITION €60M
DEVELOPMENT LEVIES €2.4M
INSTITUTIONAL
INVESTOR HOLDS THE INCOME (HOLD ASSET 10 YRS) DEPENDING ON INVESTOR
ASSETS FOR 10 YEARS IN UP TO
» Irish Tax on rental income
€8.6M
RENT (ANNUAL) €2.1M
AN ICAV » Investor Level Tax on Rental Income
RENT (10 YEARS) €21M
» Incremental overseas tax on (LIFETIME)
YIELD (FULL OCCUPANCY) 3.5%
rental income
ICAV SELLS ASSET AFTER
10 YEARS CAPITAL GROWTH CAPITAL GAIN (SALE OR EXIT)
UP TO
€4.1M
HOLD 10 YEARS » CGT on disposal of property
» Investor Level Tax on gain distributed
UPDATED VALUATION €70M
» Incremental overseas tax on gain (LIFETIME)
GAIN / UPLIFT €10M
NOTE: Capital gains earned by an investor within an ICAV/REIT do not benefit from the lower rate of capital gains tax of 33% that would apply if the asset was
held directly. The investor must pay both withholding tax and the additional marginal “top up” on the full distribution.THE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 8
STRUCTURE OF ENTITY (OR INDIVIDUAL) AND DOMICILE (COMPARABLE FRENCH *
INVESTOR USED FOR ILLUSTRATIVE PURPOSES) WILL IMPACT TAXATION
€60M PRS DEVELOPMENT HELD FOR 10 YEARS DEVELOPMENT INCOME EXIT/GAINS TOTAL TAXATION
KEY FINANCIALS € € € € € € €
CAPITAL EXPENDITURE 60,000,000
NET RENTAL INCOME (X10 YEARS) 21,000,000
NET GAIN ON SALE OF ASSET (IN YEAR 10) 10,000,000
ALL SCENARIOS IRISH INVESTOR FRENCH INVESTOR IRISH INVESTOR FRENCH INVESTOR IRISH INVESTOR FRENCH INVESTOR
TAXATION PAYABLE UPFRONT
STAMP DUTY ON ACQUISITION (2% NET) 1,200,000 1,200,000 1,200,000
VAT INCURRED ON ACQUISITION(13.5%) 8,100,000 8,100,000 8,100,000
DEVELOPMENT LEVIES (€48M @ 5%) 2,400,000 2,400,000 2,400,000
ONGOING: 10 YEAR HOLDING PERIOD
EXIT TAX (41% ON €21M) 8,610,000 8,610,000
IREF WITHOLDING TAX (20%/15% TREATY RELIEF) 4,200,000 4,200,000
BALANCE OF INCOME TAX PAYABLE LESS CREDIT
4,410,000 4,410,000
FOR DWT IN HOME JURISDICTION
11,700,000 8,610,000 8,610,000 - - 20,310,000 20,310,000
EXIT/DISTRIBUTION
IRISH IUT ON GAIN ARISING (41%) 4,100,000 4,100,000
IREF WITHOLDING TAX ON DISPOSAL OF SHARES 3,400,000 3,400,000
TOTAL TAXATION 11,700,000 8,610,000 8,610,000 4,100,000 3,400,000 24,410,000 23,710,000
INVESTOR TAXATION AS % INCOME/GAINS 41% 41% 41% 34% 41% 39%
TOTAL TAXATION 24,410,000 23,710,000
* We have chosen a French Investor as a comparison, comparatives for other jurisdictions, for example UK or Germany, would be marginally different.THE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 9
IRISH PENSIONERS BENEFIT HUGELY FROM SIMILAR TAX
TREATMENT OF FUNDS INVESTED OVERSEAS
90%+ €2.8bn
€124.9bn* OF FUNDS INVESTED
ESTIMATE OF APPROX.
IRISH PRIVATE INCOME EARNED
OVERSEAS FOR FROM INTERNATIONAL
PENSION DIVERSIFICATION
FUND VALUE ASSETS BUT TAXED
PURPOSES IN IRELAND
* Estimated figures for 2021
NOTE: Certain widely held pension & insurance funds domiciled in the EU can claim a tax credit on the income and growth in capital, but are required to pay all the up front taxes. Irish pension & insurance fund holders
benefit from reciprocal arrangements in other EU countries. However the policy holders ultimately pay full tax locally once they receive the income benefit.THE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 10
T / TOW
R IC N
ST
DI
CE
NEW
NTRE
URBAN REG
LE
LA R GE - S CA
EN
S E DE
D -U VE
XE
E R A T I ON
INSTITUTIONAL CAPITAL IS
I
LO
L A RGE M
PM E N T
ENABLING ADDITIONAL
COMPLEX, LARGE-SCALE E
PR
S DEVELO
PM
G
L E H OUS I N
DEVELOPMENT THAT
L AR
EN T
CA
G
-S
WOULD OTHERWISE NOT
ES
L AR GE
MM E R C I A L
CO
TATE
DE
SECURE FUNDING.
E CU L A T I V E
VE L
O P ME
SP
NT
OF AP ART M
This development delivers significant HOUS CK
Z ED IN
SI
EN
BLO
upfront revenue (stamp duty, VAT,
TS
-
G
MED I UM
EST
levies) to the Exchequer that would
ATE
otherwise not occur.
- O F F H OUS
NE
ES
OTHE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 11
INSTITUTIONAL CAPITAL OWNS A
MODEST AMOUNT OF INVESTMENT
PROPERTY IN IRELAND
Composition of Purchasers of New Homes in Ireland 2015 - 2021
33%
4,500
4,250
FIRST TIME BUYERS
34%
33%
4,000 29% 31%
3,750
37% 36%
3,500
3,250 34%
No. of properties purchased
26% 26%
3,000
42%
20%
OTHER OWNER OCCUPIERS
2,750
23%
2,500 22%
43%
2,250
2,000 LOCAL AUTHORITIES,
32% 31% 15%
1,750 CHARITIES, APPROVED
1,500 11% 11% HOUSING BODIES, HOUSING
10%
1,250 12% 9% AGENCY & SOCIAL HOUSING
1,000 15% 9%
8%
750 10% 9%
8% 8% PENSION FUNDS,
7% 10%
500 6% INSTITUTIONS
7%
250
3%
0
2015 2016 2017 2018 2019 2020 2021(e) MICELLANEOUS/OTHER
YEAR
Source: Hooke MacDonald ResearchTHE SIGNIFICANT ROLE OF COLLECTIVE INVESTMENT VEHICLES 12
KEY TERMS AND ASSUMPTIONS
A Collective Investment Vehicle is essentially a fund where different investors’
money is pooled to invest in different securities, commonly for the purposes of
investment in real estate.
Irish Real Estate Fund (IREF)* – where 25% or more of the value of the fund
assets is derived from IREF assets e.g. land or shares in a REIT
An IREF can be structured in various ways: unit trust, investment company or as an
ICAV (Irish Collective Asset-management Vehicle), the most commonly used
structure for collective investment in real estate.
Real Estate Investment Trust (REIT)* - a quoted company, used as a collective
investment vehicle to hold income-generating property.
Public Limited Companies (PLCs) – whilst not technically collective investment
vehicles, aggregate investor capital and are the preferred structure for a number of
Ireland’s most successful residential developers.
* Source: Real Estate Investment Trusts, Irish Real Estate Funds and Section 110 Companies as they invest in the Irish Property Market.
Tax Strategy Group – 19/02 July 2019. Department of Finance.You can also read
