Call for proper tax structuring as real estate investment vehicles become more complex

Faughnan warns “As real estate investment vehicles become more complex, proper structuring from the start, often a few years in advance of the transaction taking place, is crucial to maximising the ultimate benefit. And with the emergence of new investment products, for example funds - now becoming the dominant investors in global real estate - proper advance structuring covering the legal, tax, regulatory and local perspective as well as the exit strategies can make a radical difference”.

Faughnan continued:

“We see Irish investment syndicates continuing to snap up trophy property deals, particularly in the UK and “old Europe” but also across the globe with deal sizes of €1 billion not being unusual. The Irish market simply cannot satisfy demand for these kind of ‘trophy’ deals – hence the move towards increased investment internationally. And with new investment products and structures there are significant opportunities but not coming without their threats. In response to this relatively recent demand, numerous boutique firms and banking divisions have evolved specialising on an exclusive basis in finding international property ‘products’ in which the bigger investors can invest. The types of deals on offer include shares in listed and unlisted companies, straight forward asset deals, mezzanine finance deals and more complex deals based on life assurance and other financial products”.

Faughnan predicts that “real estate will continue to be an attractive asset class for Irish investment but with an increased focus on the underlying fundamentals, ie lower risk lower return opportunities. He sees a continued move to emerging markets such as Asia and Eastern Europe and more recently Latin America”.

Faughnan concluded “the nature of real estate investment will continue to become more complex. For example, more complex investment structures having many parties involved across several territories will require considerable advance planning to ensure the right structures are in place at the right time. Also proper co-ordination and compliance across all countries will maximise the ultimate benefit for all concerned”.

Funds are now the dominant investors in real estate at a global level having massive spending power and offering significant opportunities to Irish investors. The nature of these funds is also changing from closed pan-European funds with 300 million dollars of equity set up as an unregulated limited partnership to global open-ended funds raising that amount of capital each quarter set up as regulated funds.

The Emerging Trends in Real Estate Europe 2007 published by the Urban Land Institute and PwC revealed the following league table in terms of return/risk prospects for European cities:

Ranked table of city return/risk prospects