Changes to the tax code approved by Congress may set the stage for increased privatization of real estate investment trusts, according to a new report from Fitch Ratings.
The tax legislation that passed through the House and Senate included a provision that eased the tax consequences for the control or sale of assets under the Foreign Investment in Real Property Tax Act. Foreign pension funds are now exempt from FIRPTA taxation, putting them in the same realm as domestic funds.
Fitch had previously estimated that REIT privatizations would pick up over the next one to three years with the low cost and pronounced availability of capital. Much of that capital, Fitch argues, will likely come from foreign investors such as sovereign wealth funds or equity sources such as Chinese insurance companies.
"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," the Fitch analysts wrote. "Taking a REIT private would provide a buyer with a portfolio transaction and an operating platform to scale subsequent asset or entity acquisitions."
Thus, with their more amenable tax status, foreign investors will have more incentive to funnel their pent-up demand for assets into REIT privatizations, Fitch declared.
