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10 years of real estate tax
The last 10 years have seen some very interesting developments in the real estate sector. The financial crisis revealed market bubbles forming, leading to a shift in investment focus which has had a permanent impact on the sector globally. Taxand's global real estate tax service line reviews key developments in the real estate sector, the tax measures governments around the world have introduced to stimulate sector growth, and a look ahead into the future of the real estate investment market.
For the years up until the outbreak of the financial crisis in early 2008, it seemed that the sky was the limit for the real estate sector. A key factor affecting the global real estate market at this time however was the US housing bubble. Property appeared overvalued and construction collapsed. Until 2010 the market recovered slowly and impairments still had to be taken. It seems that the crisis has had a long-term, perhaps permanent impact on the sector, being a shift of focus that has changed the business model: redevelopment instead of development; financing with equity instead of debt and a shift to the long-term income (rents) instead of the “hit and run” model (focused on quick increases in value).
Governments responded to the crisis by extending existing and introducing new fiscal measures to get the real estate market moving again. For example, several countries decreased their real estate transfer tax rate and stamp duty rates. Some countries introduced exemptions or refunds to target first time buyers and stimulate land ownership, particularly owners of land which had been rezoned from non-development land to development land, through the reduction of capital gains tax rates. Another example is Argentina’s government, which started offering taxpayers who declare non declared funds “public bonds” to purchase real estate.
The past decade has also seen a number of countries such as the UK, Germany, Switzerland, Belgium and Ireland introduce specific legislation to facilitate the creation of real estate investment trusts or “REITs”. Other collective investment vehicles include the Irish Collective Asset-management Vehicle or “ICAV” and the VBI in the Netherlands, also introduced to boost investments in domestic and non-domestic property through the country. We expect the future to bring further relaxation of the REIT requirements in the different countries and expect that slowly but surely there will be a move towards an international REIT model, with treaty terms to cover it and tax sharing arrangements where necessary.
On the other hand, in some countries, the real estate market is already back to the level before the crisis or even at a higher level. In some countries there are even ‘rumors’ about a new real estate bubble. Hence, as for example in Denmark or in Poland, there are no set tax stimulus measures, especially for the real estate sector. In the UK (with some very hot spots such as London) the government has also not felt the need to stimulate the market through tax measures. If anything, it has tended to raise taxes, particularly transfer taxes, to cool the market.
As of 2015, in most countries recovery has picked up the pace. Most of the property has been impaired and banks have slowly restarted to finance the activities in the sector again. Also, institutional investors and other alternative financiers have rediscovered the real estate sector again. Confidence in the sector is back.
For the future, global developments (ie demographic shifts, the power of the internet and an increased focus on sustainability) will off course impact the real estate sector. We will see an increase in demand for retirement homes with an ever aging population. Retail will always have a role to play, but due to the shift from ‘bricks to clicks’, the demand for retail real estate is changing. This means an increase in demand for (self)storage and a focus on prime locations (where stores still are profitable). Subprime office space locations with high vacancy rates will be subject to transformation into student-housing and serviced offices for SMEs. These trends have already started but only now are coming to full effect due to the crisis.
Looking ahead, we will see the real estate market turning even more from a local market into an international market, and becoming a more professional investment environment. In addition, the real estate market worldwide is becoming more transparent and regulated by national and international regulations like, for example, the European Alternative Investment Fund Managers Directive or AIFMD regulations.
The financial crisis had a permanent impact on the real estate sector. Focus shifted to a more long term driven business model, demonstrated by an increase in demand for retirement homes for example. For retail property, a shift from ‘bricks to clicks’ has resulted in a corresponding shift of focus to prime retail locations and an increase of storage property. Also an increasing demand for sustainable property, eg transforming subprime office space into serviced offices and (student) housing. And last but not least it could be expected that in the future, as a result of the globalisation and the professionalisation of the real estate investment market, amongst the existing domestic real estate collective investment vehicles, an international REIT model will be introduced.
To respond to these trends, it may be worthwhile for investors to contact their tax adviser to consider their options.