Fitch: US Tax Reform Could Hasten REIT Privatizations

NEW YORK--(BUSINESS WIRE)-- Tax-related changes signed into law last week remove some hurdles faced by foreign investors when it comes to REIT acquisitions, according to Fitch Ratings. Foreign investors are already considered a key source of incremental capital for the current wave of REIT privatizations, and their ability to generate higher returns from lower taxes increase the likelihood of transactions occurring.

One of the most important changes eased the tax consequences of the control or sale of assets under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). The Protecting Americans from Tax Hikes Act of 2015 exempts "qualified foreign pension funds" from FIRPTA taxation, thus putting foreign funds on even footing with domestic funds.

As noted in a special report earlier this year, Fitch expects a wave of REIT privatizations over the next 1-3 years due to capital's low cost and high availability, less discerning underwriting and the aging of the commercial real estate cycle. Moreover, we forecast that foreign investors (including sovereign wealth funds and other long-term equity sources such as Chinese insurance companies) will be a more significant source of capital relative to the last wave.

Our view is based on the premise that long-term investors are increasingly looking to real estate for returns - cash yields are higher than government debt yields in the G20 - as well as inflation protection and diversification benefits. Taking a REIT private would provide a buyer with a portfolio transaction and an operating platform to scale subsequent asset or entity acquisitions.

The impact on volumes will depend on whether a fund meets the standard for the exemption. For example, Norway's Government Pension Fund Global would appear to screen as a qualified fund based on its name; however, it has no formal pension liabilities and was set up to provide fiscal policy flexibility as changes in oil revenues and population demographics require.

Since the report was published, six privatizations were announced for $28 billion, taking the 2015 total to $32 billion. This year will approximate the amount seen in 2006, which preceded the more than $80 billion of transactions in 2007. This year's privatizations were all led by private equity funds, but foreign capital could act as both a competitor and partner to these funds going forward.

The range of implications for bondholders from REIT privatizations is broad and can include bond tenders, consent payments and credit downgrades. However, REIT bonds enjoy key structural attributes that offer bondholders better prospects for tenders at a negotiated price than for other investment-grade corporate bonds. These attributes have often enabled REIT bondholders to extract significant value from acquirers by essentially holding a blocking position on the completion of the transaction.

For additional information on this topic, please see our special report titled, "U.S. Equity REITs: The Privatization Fuse is Lit," which is available on our website at www.fitchratings.com

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Related Research

U.S. Equity REITs: The Privatization Fuse Is Lit (Capital Availability and Relative Pricing Reminiscent of Last Wave)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865364

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View source version on businesswire.com: http://www.businesswire.com/news/home/20151223005428/en/

Fitch Ratings
Britton Costa, CFA
Director
US Corporates, REITs
+1 212-908-0524
or
Steven Marks
Managing Director
US Corporates, REITs
+1 212-908-9161
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
Fitch Ratings, Inc.
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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