EU REITs are typically tax-neutral, provided they distribute substantially all of their RE income to investors. However, these distributions are generally subject to withholding tax, which may be credited against investors’ local income tax liability. REITs are restricted in their investment objective, as they usually cannot invest in RE development projects intended for resale. REITs are, typically, publicly listed, making them subject to market volatility.
From a tax perspective, Luxembourg ELTIFs are tax neutral and do not face a mandatory distribution obligation, allowing managers to recycle cash and reinvest where returns are most attractive. Returns on ELTIFs are therefore more capital gains oriented compared to EU REITs. Capital gains are often taxed more favorably than distributions of income in various EU Member States. Moreover, distributions by a Luxembourg ELTIF are not subject to withholding tax and certain jurisdictions provide specific tax incentives for investments in ELTIFs.
From a commercial perspective, ELTIFs can access a wider range of RE assets and even combine them with non-RE investments, unlike REITs. Following a more traditional fund model, ELTIF sponsors typically have significant skin in the game. While REIT yields may be weighed down by legacy portfolios from the RE boom, newly launched ELTIFs can enter the market at more favorable pricing. Fully harmonized across the EU, ELTIFs enjoy cross-border recognition, whereas REITs remain fragmented and country-specific.
While REITs and ELTIFs can be viewed as peers, they can also complement each other. ELTIFs may allocate up to 45% of their assets to liquid instruments, including listed REITs, in order to satisfy the regulatory liquidity pocket requirement for open-ended RE ELTIFs. Listed REITs with a market cap above EUR 1.5 billion do not qualify for the mandatory 55% core investment bucket. This is not a commercial drawback, as investors can access such large listed REITs directly, and exposure to them through an ELTIF, only adds an additional layer of costs.
By contrast, small or non-listed EU or non-EU REITs are eligible for the 55% core bucket. However, non-EU REITs cannot qualify as an alternative investment fund (AIF) to be eligible for the 55% bucket, although REITs seldomly qualify as such.
ELTIFs hold tax, structural and commercial advantages over REITs. With falling interest rates and demand for efficient long-term structures, EU HNWI-focused RE ELTIFs are set to take off and grow.
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