6. The role of the REIT and IREF regimes in the Irish property market

Introduction

Investment in the Irish property market can take many forms, either through direct ownership of land and buildings or indirectly via Irish and foreign company structures, partnerships, trusts, pension funds, Exempt Unit Trusts^[42], Real Estate Investment Trusts (REITs) and investment funds.

The property market in Ireland is funded primarily by institutional investment, domestic and foreign, often using investment funds. The scale of investment required to fund the property market, both debt and equity, is not available domestically and, as a result, international capital is required.  Private capital coming from well-established investors, such as pension funds, is a normal facet of the property market in many of European countries.

Pension funds have always played a role in the property sector in Ireland. However, institutional investment in Irish property through the use of various collective investment structures grew considerably following the financial crisis. In a 2019 Financial Stability Note the Central Bank estimated that €17.7 billion of the investable commercial real estate market (CRE) in Ireland was owned by Irish authorised investment funds, €4.1 billion by insurance corporations, €3.8 billion by REITs and €3.1 billion by pension funds.^[43]

With regard to residential property, the Department of Finance has estimated that €13.5 billion of development funding per annum, comprising both debt and equity, will be required to develop the 'Housing for All' target of an average of 33,000 homes per year. Of this €13.5 billion, an estimated €11.4 billion will be required from private capital sources. While a portion of this will be provided by Ireland’s domestic banks, the majority will be required from international sources, including through investment funds.

However, responses to the COTW’s public consultation highlighted concerns over Irish Real Estate Funds (IREFs) and Real Estate Investment Trusts (REITs) and their role in the Irish property market. The COTW recommendation to examine the REIT and IREF tax regimes with regard to institutional investment in the Irish property market has been incorporated into the Terms of Reference of this Review. 

Relevant Terms of Reference

Irish Real Estate Funds

The Irish Real Estate Fund (IREF) is a tax regime which was introduced in the Finance Act 2016 to address concerns over the use of collective investment vehicles by certain non-resident investors to minimise their exposure to Irish tax on Irish property transactions.  

IREFs are Irish funds, or sub-funds where the fund is an umbrella scheme, where at least 25 per cent of the value of the assets held by the fund is derived from Irish real estate assets (subject to certain exclusions). While loans which derive their value from Irish land are normally treated as IREF assets, such loans are not treated as IREF assets where they form part of the loan origination business of the fund. IREFs are taxed under the gross roll-up regime.

Irish regulated funds that are treated as IREFs must withhold tax (WHT) at 20 per cent from certain distributions to non-resident investors. The intention of this regime is to ensure that profits arising to an Irish fund from Irish property remains within the charge to Irish tax. WHT is not deducted from payments to exempt investors (evidenced by way of a valid declaration), such as Irish regulated funds, life assurance companies, pension funds and their EU/EEA-based equivalents, charities, credit unions and section 110 companies.

A number of anti-avoidance measures were brought forward in the Finance Act 2019 with the goal of ensuring that the IREF WHT was not being avoided, including a debt cap; an income-to-interest ratio to limit excessive leveraging; and a “wholly and exclusively” test to limit excessive expenses. Finance Act 2019 also introduced the requirement to file an IREF WHT return on an annual basis, regardless of the occurrence of a taxable event.

Role of IREFs in the Property Sector

Based on IREF WHT annual tax return data, there were 222 IREFs holding €24.6 billion of Irish property in 2021.^[44] 

The largest component of the property holdings was commercial property worth €10.2 billion while residential property holdings were €6.3 billion.

Using a different dataset the Central Bank estimated that Irish domiciled funds held approximately €22.1 billion of Irish property or about 35 per cent of the Irish ‘investable’ CRE as of mid-2022.^[45] 

Real Estate Investment Trusts

The Irish REIT tax regime was introduced in 2013 to facilitate investment in the property market in the wake of the financial and property crashes. The REIT framework is designed to encourage stable long-term engagement in the rental market rather than short-term gains.

REIT structures, which are common internationally, are publicly listed companies whose income is derived from the rental of commercial and residential property. A key requirement of the REIT tax regime is that the REIT must distribute 85 per cent of its rental profits annually by way of a dividend, for taxation in the hands of the investors. This measure is designed to prevent an indefinite tax-free roll-up of property rental profits within the REIT.

Distributions from a REIT are subject to Dividend Withholding Tax (DWT) at 25 per cent, which is available as a credit against tax liabilities. An Irish-resident “excluded person”, such as a pension scheme or charity investing in the REIT, may receive distributions gross, subject to completion of the appropriate declaration form.

As with IREFs, the Finance Act 2019 further amended the taxation of REITs by extending the obligation to deduct DWT to include distributions out of the proceeds of capital disposals. A provision providing a relief from CGT on ceasing to be a REIT was limited to apply only after a minimum term of 15 years of REIT status. Other amendments were made to prevent the use of inflated costs to reduce distributable profits.

Role of REITs in the Property Sector

Four REITs were established in Ireland since the introduction of the regime in 2013. In 2019 they held €3.8 billion in property assets and collectively raised an estimated €1.8 billion in equity investment. However, only one REIT, I-Res, remains operating today.