Ready for the REIT
Barbados has witnessed an expansion of its offerings, with products ranging from the traditional (international business companies, societies with restrictive liability, captive insurance, trusts and international banks) to the modern (private trust companies and foundations). The country has continued to maintain its strong foothold in North America and is seeing success with its timely entry into Latin America. So how will it keep the momentum going? What is the next move for Barbados? The answer is real estate investment trusts (REITs).
What is a REIT?
A REIT typically is a company or trust that manages a portfolio of real estate assets to earn profits for its shareholders or investors. REITs have been in existence in the US, UK, Canada, Australia, Brazil, Singapore, Hong Kong, Mexico, Italy, Germany, Turkey and other countries for many years. The legal form and rules vary in each jurisdiction.REITs are widely acceptable investment vehicles for investments in property and mortgages, and the impetus for their introduction is usually depressed property markets. They generally receive special tax considerations and offer high yields, as well as a liquid method of investing in real estate. REITs allow smaller investors to pool resources with other investors and invest in large-scale commercial real estate. They can be established for a single development project for a limited number of years, or have a broad focus and invest in a variety of properties in different locations.REITs generally fall into three categories: equity REITs, mortgage REITs and hybrid REITs. Equity REITs purchase, own and manage income-generating properties such as office buildings, shopping malls, apartments, hotels and resorts. Equity REITs earn dividends from rental income and capital gains from the sale of properties. In contrast, mortgage REITs provide funding to real estate owners either directly as mortgages or loans, or indirectly through the acquisition of mortgage-backed securities. In addition, mortgage REITs manage their interest-rate and credit risks through the use of derivatives and other hedging methods. Hybrid REITs generally use the investment strategies of both equity REITs and mortgage REITs, and therefore earn returns for investors through a combination of rent and interest.
It is intended Barbadian REITs will be competently crafted with diversified portfolios that will be professionally managed to avoid overpriced, undiversified, single-asset property investments. Regulations will seek to prohibit over-exposure to higher-risk property development. While regulation cannot guarantee positive returns, specialist and professional management, together with a conservative approach, will prevent the erosion of investors’ equity. Barbadian banks that take control of properties as a result of non-performing loans can use REITs as a medium to market the properties for sale and in their deleveraging strategies.
The flexible model proposed for Barbados will consider whether REITs should be formed as a corporation and/or a trust and/or a limited liability partnership. Consideration will also be given to REITs being publicly listed and/or private; capital requirements; ownership structure, whether corporate or individual, foreign or local; the minimum number of investors; whether there are any restrictions on the location of assets; distribution requirements; and the tax treatment of the REIT itself and of the distribution in the hands of the investors in their jurisdiction.
Barbados recognises that, in today’s property market, REITs are one of the most popular and potentially lucrative investment vehicles, as they will be for the foreseeable future. REITs have the ability to make profits from real estate investments available to everyone – small and big investors alike – without any loss of revenue to taxing authorities. Apart from the domestic market, international investors in Barbadian REITS can benefit from the country’s growing network of double-taxation treaties for tax relief. With its reputation for stability and effective regulations, Barbados is in an excellent position to capture REIT investors.
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