International Bar Association Conference Real Estate Investment Trusts Panel 2 - REIT formation

17 October 2007 Singapore 9142562_1

REITs

 Growth in global REIT market in last 5 years = 350% 1  Proportion of value of global real estate currently in listed form = 8.8%  Number of countries which now have REIT-type legislation = 25+  Proportion of Australian REIT asset base which is offshore = 40%+ Sources: NAREIT, ASX Note (1): Jan 2002, 237 REITs with combined value of USD270.7B; Jan 2007, 334 REITs combined value USD 944.6B

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REITs Worldwide

Dubai (2006) The Netherlands (1969) Belgium (1995) France (2003) Canada (1994) USA (1960) Mexico (2004) Germany (2007E) UK (2007E) Finland (2007E) India (2007E) Bulgaria (2004) Israel (2006) Turkey (1998) Singapore (2002) South Korea (2001) Taiwan (2003) Hongkong (2005) Brasil (1993) Malaysia (1989/2005) Australia (1971) Japan (2000) Luxembourg (1988/2002) Spain (2003) Countries in which REIT structures already exist Italy (1994) New Zealand (1956) South Africa (1981) Countries in which structures similar to REIT structures already exist Countries in which the introduction of REITs is already planned Greece (1999) 2

REIT Formation – Discussion Points

 What are typical structures for REITs and why have they developed?

 Tax is an important factor. What are the key considerations?

 A regulator perspective. What are regulators focussed on?

 REIT IPOs. Why list a REIT? What are key trends in major markets? How does the process differ to a corporate float?

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REIT Formation - Panel

 John Sullivan, Partner, Mallesons Stephen Jaques (Chair)  Michael Blair, Partner, Mayer Brown LLP  Scott Newman, Partner, K&L Gates  Jan Peeters, Partner, Stibbe  Mark Berman, Principal, CompliGlobe Ltd  Peter de Ridder, Partner, Loyens & Loeff 4

REIT – basic structure

 Trust or corporate structure  REIT buys property (diversified or sector focus - offices, shopping centres, logistics)  Issues securities which are listed on stock exchange  Professional manager (and in some cases trustee)  Income fully distributed to investors Investors Securities Dividend/ distribution REIT

(trust structure)

Fees Management services Manager Services Property income Fees Trustee

Holds property (directly or through SPV)

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Structures: North America

Regulatory Requirements US Canada

Structure/Name First REIT listed Number of REITS/Market Capitalisation Main regulatory body Main Regulation Management Local listing required Shareholder base REIT (company/trust) 1960 Modern era 1991  165 publicly traded REITs in FTSE NAREIT Index  US$344 billion capitalisation (July 2007) REIT (trust) Mid 70’s 32 REITs/C$33billion (2006) SEC/Stock Exchanges Provincial Securities Commission Securities Act of 1933 Securities Exchange Act of 1934 Trust Indenture Act of 1930 (for debt) Internal or External May list, but some REITs don’t 100 holders, 5 or fewer individuals may not have more than 50% in value  No applicable Incorporation Statute  Subject to all securities laws Internal or external Yes 6

United States – UPREIT Structure

 100% 

REIT

 Public 

Operating Partnership



Assets

 Limited Partners 7

Structures: Asia Pacific

Regulatory Requirements

Structure/Name First REIT listed Number of REITS/Capitalisation Main regulatory body Main Regulation Management Local listing required Shareholder base

Hong Kong Singapore Australia

REIT (trust) 2005 7 / US$8.7Bn

S-REIT (trust) 2002 18 / US$17.8Bn (incl bus trusts) SFC MAS/SGX Securities and Futures Ordinance and Code on REITS Securities and Futures Act and Property Funds Guidelines External External Yes 25% units held publicly Yes 25% units by 500 + holders LPT (A-REIT) 1971 69 / US$ 115Bn ASIC/ASX Corporations Act External or Internal No 400 + holders with A$2,000 holdings 8

Structures: Europe

Regulatory Requirements

Structure/Name First REIT listed Number of REITS/ Capitalisation Main regulatory body Main Regulation Management Local listing required Shareholder base

France Belgium Germany UK Netherlands

SIIC 2003 SICAFI 1995 REIT-Aktien gesellschaft None listed yet REIT 1 January 2007 Fiscale belegings instelling 1969 30/ US$38bn FTA (Tax authorities) Finance Act Internal/external 14 / US$ 10,5bn CBFA Law 20 July 2004 RD 10 April 1995 Internal/external Pre Reits 4; applications for pre Reits 6; Corporates intending to apply for status 11 Bundesanstalt für Finanzdienstleistungs aufsicht (BaFin) Reit-Gesetz Internal 17/US$67bn HM Revenue & Customs UK Listing Authority Finance Act 2006 UK Listing Authority Listing Rules Internal/external 9 / US$19bn Autoriteit Financiële Markten (AFM) – Belastingdienst Wet Financieel Toezicht; Corporate Income Tax Code Internal/external Yes Yes (EU) 15% of capital by holders of 2% or less. Max 60% any holder/group.

Minimum free float of 30 % Yes (EU) 15% (25 %) of capital by holders of 3% or less. Max 9.99% any holder.

No (but need a “recognised Stock Exchange) Must not have less than six controlling members. Max 10% any holder.

No (no formal listing requirement) No individual may hold 25% or more of shares in the listed entity.

Other restrictions apply 9

Belgium – Corporate Structure with General Partner

Public Commanditaire Vennootschap op aandelen (CVA) General Partner 

Assets

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Tax considerations

 Trust, Limited Partnership or Limited Liability Company in order to achieve tax neutrality concept of the REIT?

 Capitalisation of the REIT: equity and debt/borrowings – does it matter for tax purposes?

 Investor home tax considerations and structuring opportunities 11

REIT Formation – U.S. Tax Requirements

 REIT provisions initially enacted by the U.S. in 1960  Designed to allow individual investors to invest in real estate through a public, liquid vehicle as if such investors had invested directly in the underlying real estate  If properly structured and operated, REIT is a “conduit” for purposes of U.S. income taxation (i.e., no corporate level tax and only one level of tax imposed at the shareholder level)  U.S. REITs: Equity versus Mortgage  Can be a corporation, trust or association, provided the following conditions are met: ⇒ Managed by one or more trustees or directors ⇒ Beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest ⇒ Would be taxable as a domestic corporation if not a REIT 12

REIT Formation – U.S. Tax Requirements

 Not a financial institution such as a bank, savings bank, domestic building and loan associations or an insurance company  Beneficial ownership of which is held by 100 or more persons  Not closely-held (i.e., not more than 50% of the value of the stock of the REIT may be owned, actually or constructively, by or for not more than 5 individuals  Elects to be taxed as a REIT  Satisfies certain gross income, asset and distribution tests to be discussed in connection with “REIT Operating Considerations” and which are generally designed to insure that the REIT operates as a “passive” investment vehicle 13

REIT Formation - Canada

 Many jurisdictions, including Canada, have adopted legislation designed to accomplish the same or substantially similar objectives as prompted the U.S. to enact legislation authorizing REITs  Although Canada’s REIT legislation, which was initially enacted in 1994 and has recently been amended, is in many respects similar to that of the U.S., there are significant differences.

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Regulatory Issues

 Disclosure: fees, transactions with affiliates/interested party transactions, valuations, projections and forecasts, materiality threshold for disclosure, restatements and decisions on impairment, leverage  Operational issues: caps on holdings (concentrations) and on non-real estate investments, uses of guarantees and cross-suretyships, paying dividends in excess of current income  Enforcement issues: misuse of material non-public information, restatements, options grants, timing of revenue recognition, suitability (via regulatory inspections), failure to disclose adequately interested party transactions, misrepresentation (of listing/market), failure to disclose commissions/fees  Valuations: assumptions, exposure to “sub-prime” issues  Significant transactions: M&A activity, fairness opinions in LBOs, proxy contests 15

Hot topics for regulators

 Disclosure of forecasts and projections of distributions, including assumptions and risks  Short-term yield enhancing arrangements/financial engineering (more on this in panel 3)  Funding distributions through debt or return of capital  Manager entrenchment and disincentives to removal: rights in trust deeds vs regulatory/legal requirements  Gearing levels and related risks  Clear, concise and effective disclosure  Approach varies between jurisdictions – regulation v disclosure 16

Key Benefits of Listing a REIT

 

Investors

Access to quality property Replicates direct ownership (with tax pass through)    Liquidity Diversification of risk Transparency      

Vendors / Sponsors

May maximise sale price (broader pool of investors) May be more attractive than private sale Ongoing management fee income stream Free up capital on balance sheet for other uses Potential purchaser for developed assets Potential value uplift in REIT structure 17

REIT IPOs

 Market trends • strong deal flow in some markets, less in others – cost of capital is a key driver; property capitalisation rates another factor • • • off-shore and cross-border REITs broader asset classes – hotels, tourism, retirement villages etc subsidiary wholesale funds/private real estate funds  Offering process and disclosure • • • relatively highly regulated speed to market varies between jurisdictions offer document: − − length and regulatory involvement varies incorporation by reference • related party aspects important – like other spin off transactions 18

REIT IPOs

 Regulatory requirements • • • • listing (spread, scale and suitability) or means to sell if not listed collective investment authorisation required?

ongoing reporting and disclosure obligations future acquisitions, capital raising and takeovers  Key design factors • • • • tax efficiency pipeline of properties to underpin future growth management structure and protections ownership of assets (including co-ownership and pre-emptive rights) 19

Example Australian REIT IPO Structure

Sponsor/ Vendor Public Investors

Often sponsor is also spinning off properties - related party consideration s Units REIT Units

Responsible Entity (RE) Trust 1 Trust 2

Stapled External manager – fixed term management contract as protection feature Management agreement

Manager

Co-owner of asset Passive Assets Active (development) Assets Often sponsor has pre-emptive rights to take assets back if RE removed Extra layer of collective investment regulation as well as securities law and stock exchange rules 20

International Bar Association Conference Real Estate Investment Trusts Panel 2 - REIT formation

17 October 2007 Singapore 9142562_1