New Real Estate Securitization Law Unveiled

Real Estate Investment Trusts (REITs)

REITs refer to a trustee institution's issuance of benefit securities to members of the public or to specified persons in a private placement to raise funds for investment in real estate, rights associated with real estate, marketable securities backed by real estate or other underlying investment assets as approved by the competent authority. REITs shall, in principle, be limited to closed-end funds; however, applications may be filed with the competent authority for approval to issue open-end funds with limits on the buyback period, quantity or other restrictions (Article 16).

The Law limits investment or use of REIT funds to: existing real properties with stable income; relevant rights to existing real properties with stable income; other benefit securities or asset-backed securities issued or delivered by the engaged institution or special purpose company in accordance with the Law; bank deposits, government bonds or financial paper, treasury bills or transferable bank certificates of deposit; commercial paper guaranteed or accepted by a bank with an assessment rating or credit rating above that specified by the competent authority; other financial instruments as approved by the competent authority; and other objects of investment or utilization as approved by the competent authority (Articles 17 and 18). Trust dividends or other benefits must be paid out within six months of the end of each accounting year (Articles 28 and 50).

Real Estate Asset Trusts (REATs)

REATs refer to those trusts formed when an originator entrusts its real estate assets or its relevant rights to real estate assets to a trustee institution, which then issues benefit securities representing the beneficiary's rights to dividends, interest or other benefits generated by the entrusted properties or property rights to members of the general public or specified persons in a private placement. The Law limits real estate assets that may be transferred to trusteeship for securitization (Article 30) to existing real properties with a stable income and the relevant rights to existing real properties with stable income. Where the assets to be entrusted are subject to a mortgage, the originator must have the mortgage removed and provide relevant evidentiary documentation of such to the trustee institution. Where circumstances do not permit removal of the mortgage, the originator must provide a duly notarized agreement from the mortgage holder pledging not to exercise mortgage rights during the period of the trust deed. The originator is further obligated to provide the trustee with documentation detailing its debt obligations and must fix a period of no less than one month, providing a public announcement thereof, during which creditors may voice objections. Documentation of objection(s) must be provided to the trustee institution.

Where the originator is an interested party to the trustee institution, the Law forbids the trustee from issuing benefit securities against the entrusted property; however, where multiple originators are involved and the overall stake in the entrusted assets and collateral of the interested party to the trustee is less than 20%, this restriction does not apply (Article 35). The timetable for dividend payout is the same as that for real estate investment trusts (Article 36).

A number of real estate securitization deals are in the pipeline. Chia Hsin Cement Group has been among the first to dabble in real estate asset trusts. It has entered into an agreement with Industrial Bank of Taiwan and the Taipei branch of Societe Generale to securitize a 45,492 sq. metre office building in Taipei that, according to local dailies, currently generates in excess of NT$200 million annually in rental income. Chia Hsin hopes to raise NT$2 billion to NT$2.5 billion through the arrangement.

Critics say the biggest problem with the Law is that it doesn't apply to projects under development, but only to existing projects. President Chen Shui-bian did, however, state in a July 31 interview with the Far Eastern Economic Review that the government is eager to extend the Law to cover development projects.

The Ministry of Finance has indicated that earnings on real estate-backed securities will be taxed at the same 6% rate as is contained in the Financial Asset Securitization Law, and the rates may be subject to periodic adjustment based upon prevailing market conditions pending a biennial review. The ministry has also proposed that companies engaging in real estate investment trust services have a minimum capitalization of NT$2 billion, while those engaging in real estate asset trust services have a minimum capitalization of NT$300 million.