In this episode, IQ-EQ’s Head of Funds for Jersey, Malcolm Macleod, sits down with Grant Thornton’s Jessica Patel and Ogier’s Sophie Reguengo to discuss the merits of Jersey as a jurisdiction for real estate structuring.
Jessica Patel is a partner in Grant Thornton’s Real Estate & Construction team, based in London. She has significant expertise structuring UK and international property transactions with extensive knowledge advising clients on tax across the property investment and development lifecycle. Jessica works with a number of funds and REITs and leads M&A real estate transactions including due diligence and SPA advice for corporate acquisitions.
Sophie, meanwhile, is a partner in Ogier’s Investment Funds team in Jersey and the firm’s multi-disciplinary Private Equity team. She is a highly experienced investment funds and regulatory lawyer with over 15 years in the funds industry, focused primarily on private equity and real estate structures. She advises private and public funds in relation to fund formation and raising capital, regulation, fund finance, acquisitions and sales, restructuring and winding-up.
Together, they share valuable insight into why Jersey remains a jurisdiction of choice for real estate structuring as well as the most popular Jersey structures and the types of asset/investor using them. They also discuss the recent UK tax changes and wider tax considerations relating to Jersey, before sharing what they see as the hottest topics for real estate in 2021.
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Hello, and welcome to IQ-EQ Real Estate focus, our dedicated podcast series where we hear from interesting experts on the latest trends and hot topics within the real estate sector. I'm Malcolm Macleod, IQ-EQ’s Head of Funds and Institutional services for Jersey, and I'm your host today. This episode, I'm really pleased to be joined by Jessica Patel, a partner at Grant Thornton in London, and Sophia Reguengo, partner at Ogier in Jersey, to discuss the merits of Jersey as a jurisdiction for real estate structuring. Jessica's part of Grant Thornton's real estate construction team. She has significant experience structuring UK and international property transactions, with extensive knowledge advising clients on tax across the property, investment and development life cycle. Jess works on a number of funds and REITs and leads M&A real estate transactions, including due diligence and SPA advice for corporate acquisitions. Sophie meanwhile is a member of Ogier's investment funds team in Jersey and the firm's multidisciplinary private equity team, is a highly experienced investment funds and regulatory lawyer with over 15 years of experience in the funds industry, focused primarily in private equity and real estate structures. She advises private and public funds in relation to fund formation and raising capital, regulation, fund finance, acquisition and sales, restructuring, and winding up. So both are really well-placed to have this chat with me today. Hi Jess. Hi Sophie. Thanks so much for joining me today.
Hi there Malcolm, really pleased to be joining you today.
Really pleased to be joining you today as well.
So Jess, just to kick off with a question for you, perhaps a fairly open question to start with-As a UK tax advisor- do you continue to see Jersey used as a jurisdiction of construction real estate structures?
Yes, from both a UK tax and non-tax perspective, yes, we continue to see Jersey as a jurisdiction for investment into UK real estate. Jersey clearly has the reputation for expertise in the global investment community and appeals because of its varied structures and regulatory framework that is familiar for overseas investors. The flexibility that Jersey company law offers also helps to structure returns effectively to investors, which really makes it a good holding vehicle for investment into UK and pan-European property acquisitions, alongside Luxembourg of course with its extensive double tax treaty networks. For these reasons we're seeing capital flows into overseas structures holding UK real estate, and that's despite the changes to the non-residential large scheme, the regime bringing UK property and certain share disposals by a non-resident in a property rich entity within the charge to UK tax from April 2019. It's worth highlighting that non-resident landlords are also within the scope of more complex UK corporation tax rules from April 2020 as well. While we may see some more onshoring it's relatively early days to see what precise trends are following these big changes. The types of Jersey vehicles we've seen in structures vary. We've structured a fund investing in care homes where the majority investor was an overseas sovereign fund via a Jersey property unit trust structure, often referred to as JPUTs, which have been popular vehicles for tax exempt investors who want to maintain their exempt status. Alongside standard Jersey incorporated companies, we've seen investment into UK property via Jersey incorporated cell companies, or ICCs. ICCs can be useful for umbrella films by allowing assets to be segregated within cells. And each cell is recognized as a separate legal entity and offers the same limited liability that a normal limited company would. I've not mentioned REITs, which have gained popularity over the years, and while REITs must be UK resident, they can be incorporated in other jurisdictions, such as Jersey, which tends to be a popular jurisdiction with the listing of the REITs shares on The International Stock Exchange based in the Channel Islands.
Great. Thanks for that Jess. And Sophie, over to you. What type of real estate structures are you seeing coming to Jersey at the moment and why do you think they're choosing Jersey?
Thanks Malcolm. So at the moment we are seeing tons and tons of JPUTs being used as a structuring vehicle, and for lots of different reasons. From investment holding structures for Jersey and Luxembourg funds, to feeder funds investing in UK funds for the non-UK foreign investors, to classic joint ventures and fund vehicles in their own right. To the extent that the JPUT is a fund vehicle or feeder, it will almost always be approved as a Jersey private fund due to its flexibility and speed to market. Looking at JPS for a moment we should highlight its key selling points. Firstly, the ease of access to European capital via national private placement routes. Speed to market, a 14-hour approval process. Pricing, fees around a thousand pounds to establish and thereafter payable annually. It's very affordable really. You can have up to 50 offers and investors in a Jersey private fund, which provides a huge amount of flexibility when you're thinking about capital raising. I n addition, the pragmatic and relatively light touch regulatory regime, which is permissive and not too prescriptive, for example, there is no requirement for an offer document. Although there is a standard for content requirement where there is one, an audit and Jersey resident directors are optional. Although these are often required for other reasons, such as investor expectation and economic substance. We should remember that whilst the changes to the capital gains regime in the UK has led tax exempt investors to utilize the JPUT, to avail themselves of the various exemptions available under the new legislation, the general benefits of Jersey remain the same as they always have: political stability, legal flexibility, robust court system, a tax neutrality, and a mature and well-resourced workforce with hands-on experience in the real estate sector, across legal accounting and the administration firms. It is really encouraging to see how flexible the JPUT fund is, it can be used in so many different ways. That's not to say we aren't seeing other structuring options. The ICC structure that Jessica mentioned was actually a transaction we worked on together for an FDA regulated client who was looking for a solution to manage lots of different assets under one umbrella, hosting different real estate strategies with different investors. But in this case they were all high net worth Chinese investors.
Excellent. Thanks for that. And Sophie just sticking with you for a second, is there any specific asset types that we're seeing typically being structured in Jersey?
Yes, actually Malcolm we are seeing so many different sectors and asset types covering residential and commercial. Some recent examples of what we have seen include affordable housing – that's UK. Residential generally, care homes, which is what Jessica mentioned earlier, distressed sales, student accommodation, for example, also commercial office real estate. The examples we've seen include Warsaw and Paris. As a group, we've seen a trend in foreign investment towards single-tenant, long-lease commercial real estate in the regional cities outside of London, particularly north of the border into Scotland, which are generally also wrapped up in a JPUT. It would appear that investors are willing to forfeit a little yield for tenant stability and rent annuity. We've also seen more deals focused on logistics parks and similar commercial storage assets, again, mostly through JPUTs, but also through Jersey SPV companies. This is, in our view, consistent with what the market is seeing. Logistics remains an incredibly hot sector, especially urban logistics, last mile assets, tech focused infrastructure assets such as data centers and smart hotels have become more prevalent. And, surprisingly, based on the current number of university students still probably studying from home on Zoom, student housing is still performing strongly. In fact, the ICC structure we mentioned earlier elected for Jersey instead of UK asset holding vehicles. Benelux has been seen as up and coming as a region in the commercial real estate sector. And more so, we see specific investors using Jersey, rather than the asset type. Institutional investors, pension funds, sovereign wealth funds continue to seek tax transparent vehicles such as the JPUT and limited partnerships. These are also common structuring vehicles for Asian, Korean, Malaysian and also Canadian investors. Separately the flexibility under Jersey companies law in terms of returns of capital distribution allow for easier structuring, including for example joint ventures, which is attractive to non-UK real estate investment companies, including REITs. Talking of REITs, whilst a UK concept, as Jessica noted, it is often structured using a Jersey vehicle and even more frequently listed in on TISE. Flexibility of our companies’ law makes the Jersey vehicle attractive for a listing on TISE.
Absolutely. I completely agree. Jess, it's interesting to note that both yourself and Sophie have mentioned JPUTs and perhaps unsurprising. It would good to take a little bit of a closer look at that. From your point of view, what role have they played in tax planning since the changes in April 19 and what are some of the considerations around this?
The JPUT is a common investment vehicle for overseas investors, particularly for institutional investors and sovereign wealth funds who enjoy tax exempt status. Because even though JPUTs have been brought into the scope of UK capital gains tax from April 2019, there are still ways to ensure there is no tax leakage through the structure, which is a real benefit for exempt investors who account for a significant proportion of UK real estate investment. JPUTs are transparent for UK income tax purposes, meaning any income is allocated directly to the unit holders and not taxable at the JPUT level subject to the filing of an application to receive rents free from UK withholding tax. Provided certain conditions are met, elections can be made to shift the tax point for UK capital gains from the JPUT to investors. One of the elections is the transparency election, which ultimately helps preserve the tax transparent nature of JPUTs for UK capital gains. So, there's no tax leakage in the structure, benefiting investors who have exempt tax status. It's worth bearing in mind that the election is irrevocable and needs to be made within 12 months of the JPUT making an acquisition of UK property. Plus, the other bonuses that the transfer of units in a JPUT on a future disposal doesn't attract stamp taxes at the moment, although query how long this benefit will last, wouldn't be a huge step for the property rich concept that we have for non-resident capital gains tax, to extend to stamp duty land tax too.
Sure. Thanks for that. And Jess, just sticking with tax for a moment. What do you see coming down the line and how do you think this might impact Jersey?
It’s worth mentioning that in the 2020 budget, the UK government announced it would be carrying out a review of the UK funds regime with the aim of enhancing the UK’s attractiveness as a location for asset management. As part of this, a consultation has been opened into the tax treatment of asset holding companies in alternative fund structures to essentially come up with a regime that increases the attractiveness of the UK by breaking down some of the barriers, enabling institutional investors, for example, to adopt UK based structures. It’s early days, but we could see more UK based structures alongside Jersey in future. I guess as part of this REITs are a particular focus of the review. A number of the existing rules could be relaxed or simplified under the proposed reforms, such as the listing requirement, which could change the landscape quite significantly, bringing REITS more in line with their overseas counterparts, such as JPUTs. It will be interesting to hear the outcome of this review as these changes combined with the increase in the corporation tax rate to 25% from April 2023 could be a significant driver for the REIT structures as a way to invest into UK real estate. In April 2021, we saw the introduction of the 2% SDLT surcharge for overseas investors in UK residential property come in to play, which could impact the use of overseas structures where UK resi investments are concerned. Having said that, there are still some duty benefits on Jersey and other overseas corporate acquisitions holding UK real estate, for now.
Okay. Thanks for that Jess, lots happening. I guess a final question for both of you, and again, it's a fairly open question: what do you think the hot topics are going to be over the next 12 months?
Thanks, Malcolm, I'll jump in quickly here. So whilst offices, we think, continue to play second fiddle to logistics, they are a haven for investors seeking stable returns and naturally, single-tenant offices further contribute to that stability that investors seek. Yields in London are being so squeezed at the moment that investors and particularly emerging institutional investors, who are developing a stronger stomach for foreign investment, are seeking better yields in secondary locations, such as Glasgow, Edinburgh and Thames Valley. Logistics remains the sweetheart of all the real estate sectors, and it's not hard to understand why as we continue to see an increase in online shopping, versus the decline of the high street and destination retail. As the sector attempts to keep pace with demand, there is a particular shortage of supply in last mile logistics property, and we see many investors attempting to gain more exposure in this sub sector. Also ESG and sustainable finance is on everyone's agenda at the moment as an increasingly more and more important topic, investors conducting more due diligence on managers’ ESG credentials. Sustainable finance refers to the process of taking due account with environmental, social and governance considerations when making an investment decision and a new way in which regulation is already crash landing. Investors are doing a deep dive into ESG policies and want examples and case studies that show sustainability. Managers will need to have a framework to identify, quantify, and report on the sustainability of investments. So this is an area that will keep us busy as lawyers in 2021. We've certainly seen more interest in the build to rent scheme world with one of our blue chip real estate clients currently pursuing a portfolio with this in mind. We suspect we'll start to see a few more of these development structures through JPUTs as these schemes become more mainstream. I'm yet to see one of these BTR schemes come to fruition from development to occupancy, but the idea behind a property scheme designed with tenants in mind and complimentary facilities – yoga studios, bars, gyms, et cetera – is something I'd certainly have enjoyed.
Completely agree Sophie. I think assets linked to life sciences and data centers also seem to be in demand at the moment, which are typically more regional assets and they'll no doubt be significant innovation within real estate over the year, and in years to come, with repositioning and repurposing of existing stock, including some offices and retail, presenting a real opportunity for developers. This may also help overcome some of the supply shortages in logistics and housing. We are seeing living is attracting investment and later living as it's now called too, given the UK demographics and lack of suitable accommodation in this space, this particular sector also continues to attract institutional capital and overseas investment. Real estate has a huge part to play in our climate agenda. The need for the provision of sustainable, energy efficient buildings that can reduce and even potentially reverse the impact on the environment backed by high tech is growing pace and businesses are going to be in the spotlight to show they're playing their part in society. So expecting to see a real focus on net zero carbon buildings. It's going to be a really interesting year for real estate and I think the start of change like we've never seen before.
Absolutely. And on that note, I just want to say thanks to Jess and Sophie for taking the time to share the insights and expertise with us today, it's been a really interesting and informative session and thanks to everyone that's tuned in to listen to this real estate podcast. We hope you found it interesting and useful, and please do feel free to get in touch with myself, Jess or Sophie. We'd be delighted to answer any questions you may have. Thanks everyone. Bye for now.