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November 2005 Volume 10 Number 3

Global Real Estate Now

Insights, observations and research from PricewaterhouseCoopers international
real estate accounting, tax and business advisory services professionals.*


The rise of CMBS in Europe

by Taco Brink
Will CMBS prove as popular in Europe as it has in the US?

Property derivatives in the United Kingdom

by Matthew Barling
What are the basic property derivative instruments currently being used in the UK
and what special tax regime has been introduced to accommodate this new market?

15 India - the door is now open to real estate investors
by Vivek Mehra and Akash Gupt
In Indias fast-growing economy, real estate has emerged as one of the most
appealing investment areas for domestic as well as foreign investors.

23 China - strong and sustained economic growth is attracting

foreign investment to the China real estate market
by KK So, Gary Chan and Rex Chan
Secondary cities as well as the gateways of Shanghai and Beijing are attracting
real estate investment.


31 Mexico - excellent opportunities for real estate investors
by Roberto del Toro, Jose Luis Olvera, David Cuellar and Martin van der Zwan
Within Latin America, Mexico presents an excellent and stable platform for
real estate investment.

39 European overview - economy and real estate
by Andrew Burrell
Expectations for economic growth in 2005 have been sharply downgraded but
property returns for Spain and Ireland remain promising.

51 Russia - Moving from looking to investing

by Steven Snaith
Investors are showing a greater acceptance of the risks in Russia and an
understanding of how these risks can be managed.

57 Budgeting, forecasting and planning: process and technology
trends in the real estate industry
by David Yakowitz and Kurtis Babczenko
What are the technology options currently available?

Dear Reader:
Welcome to the November edition of PricewaterhouseCoopers
Global Real Estate Now.
As many of you may know, earlier this summer, in addition to being Global Real
Estate Tax Leader, I assumed the role of editorial board chairman for Global Real
Estate Now, a position that was previously and very ably filled by Nick
Cammarano, Jr., our former Global Real Estate Leader, who has been asked to take
on a broader leadership role within the firms Financial Services Industry Group.
I want to take this opportunity now to thank Nick for the years of service and
leadership that he provided.

I also would like to extend a warm

welcome to PricewaterhouseCoopers
new Global Real Assurance Leader and
U.S. Real Estate Sector Leader
William E. Croteau. Bill is a veteran
PricewaterhouseCoopers real estate
partner based in San Francisco who has
had many years of experience working
closely with some of Americas most
recognised real estate investment trusts
and development companies.
The past few months have seen some
auspicious developments for our firms
global real estate practice.
In early October, Euromoney
magazine handed out its Real Estate
Awards for Excellence, with
PricewaterhouseCoopers winning first
place in three categories: the Global
Real Estate Tax Team, the Asian
Real Estate Tax Team, and the
Central/Eastern Europe Tax Team.
In addition, our Nordic and Baltic Real
Estate Tax Team earned a respectable
second place. What makes these
honours most significant is that they
were the result of votes taken by our
peers in the real estate industry around
the world: developers, management
specialists, commercial banks,
investment banks, etc. So thanks to
those among you who voted for us and
congratulations to my colleagues here at

PricewaterhouseCoopers who earned

that recognition.
In the coming weeks, representatives
from our regional teams will be hosting
real estate client conferences, with the
European meeting scheduled for
November 4 in Barcelona, and the Asia
Pacific meeting scheduled for December
2 in Tokyo. In addition, our Latin
American network continues to grow,
with PricewaterhouseCoopers real estate
professionals well-represented in key
investment targets such as Argentina,
Brazil, Mexico and Uruguay, as well as
major investor sources, including the
U.S., U.K., Germany, Netherlands,
Portugal and Spain.
Needless to say, it is an exciting time to
be at the helm. As we move forward in
the coming months, our purpose will be
to extend the breadth and depth of the
services we provide to our clients, based
on the needs and opportunities that
continue to evolve in the industry. As the
influence of global real estate funds,
including REITs, continues to grow, we
will be incorporating new and innovative
tools and financial products to help our
clients achieve success, including new
methods for real estate calculation
modelling and enhanced merger and
acquisition services.

I am looking forward to the challenge of

leading such a highly-respected team of
professionals and to finding new ways
to assist our clients in meeting their own
challenges and opportunities.
Should you have any questions or
comments on the articles in this issue
of Global Real Estate Now, or any
suggestions for future topics,
please feel free to e-mail me at
Kind regards,

Frank van Zelst

Global Real Estate Tax Leader &
Global Real Estate Now Editorial
Board Chairman

The rise of CMBS

in Europe

By Taco Brink, Senior Manager, PricewaterhouseCoopers, London

PricewaterhouseCoopers Global Real Estate Now November 2005 FEATURE

Securitisation is a form of financing where illiquid,

financial assets with predictable cash flows are
sold by an originator to a special purpose vehicle
(SPV) which has borrowed money to finance the
purchase. The SPV raises funds through the issuance
of either asset-backed commercial paper (ABCP) or
bonds (ABS).

The continued growth in

investor demand helped
influence a tightening
of spreads.

Since the sales of pooled mortgage

mark since. However, 2005 is set to be

loans by the US Government National

a record year. The non-US total issuance

Mortgage Association (Ginnie Mae) in

of $33.7 billion includes around 86%

the early 1970s, the total outstanding

European issuance (Chart 1).

issuances of Collateralised Mortgage

Obligations (CMOs), Mortgage Backed
Securities (MBS) and Asset Backed
Securities (ABS) has reached levels well
in excess of US $2 trillion.

Within the European real estate

community, CMBS was not seen as
a primary source of financing for several
reasons. Relationship banking is a
strong and important factor within


European financing and was a major

The growth of commercial mortgage

perspective. Recently, many European

backed securities (CMBS) gained

and, in particular, UK banks have used

momentum during the 1990s, primarily

this relationship banking network as

within the US market. With the exception

a feeder for their conduit programs.

of 1999 and 2000, the US has

More important for the growth in

experienced increased levels of CMBS

European CMBS was the increased

issuance for many years. Annual growth

demand from investors. As the US

during the past few years has continued

market matured, investors began looking

to surprise some market participants.

elsewhere for product. It didnt take long

Through the first nine months of 2005

for the arrangers to work on increasing

the US market has already surpassed

the supply of CMBS in Europe. Initially

2004 totals with $110 billion of issuance.

this was achieved mainly through

So what does this mean for the

single-borrower, large loan transactions,

European CMBS market, if anything?

but it has progressed to a more mixed

Historically there has been very little

market of conduit, single-borrower

correlation between the US and

(single and multi-property), and credit

European markets with respect to CMBS

tenant lease transactions.

hurdle to overcome from a lender

issuance. In 2001 the European market

witnessed a significant change in the
levels of CMBS issuance and annual
issuance has been around the 20 billion

The continued growth in investor

demand helped influence a tightening of
spreads. At Mid-year 2004 the AAA

Chart 1: CMBS volume trends US vs Non-US


$ billions

Non-US $

Currently there
are close to 20
announced conduit
programmes working
the European market.




US $

spreads were pricing near 40 basis




H1 2005

Source: Commercial Mortgage Alert

Whats Next?

points, with some transactions during

the first half of 2005 closing between
14 and 17 basis points for AAA classes.
More recent transactions are closing at
around 20 basis points. The European
CMBS market has been largely
dominated by AAA rating issuance.
As seen in Chart 2, AAA ratings have
made up approximately 60% of the total
issuance to date.
While the tightening spreads reduce the
compensation for bond investors in
comparison to similarly risked assets,
they also reduce the overall cost of
funds for the loan originators and, most
importantly, borrowers. The reduced
cost of funds has helped borrowers to
see CMBS as a more attractive source
of financing to other more traditional
funding alternatives. The result has been
significant growth in European CMBS
issuance from 2000 through 2005, which
is on pace for a record year of issuance.

Can the European CMBS market

continue to grow and sustain a level of
issuance to keep investors, lenders, and
borrowers interested in this source of
financing? Given the emergence of a
number of existing and announced
European CMBS conduit programmes,
it appears the investment banks certainly
believe the European CMBS market will
continue to grow. Currently there are
close to 20 announced conduit
programmes working the European
market. There is some debate as to how
many conduit programmes can compete
and survive in the European market
place. Based on the number of conduits
competing in the US market it seems
likely that 20 or maybe more conduit
programmes could eventually compete
in the European market. The US market
generally assumes conduit issuances to
include multi-borrower multi-property
transactions. However, as seen in
Chart 3, European issuance to date has
seen 50% of the transactions being
single borrower deals with many of
these deals being originated by the
conduit programmes.

PricewaterhouseCoopers Global Real Estate Now November 2005 FEATURE

Chart 2: European CMBS

issuance by rating category








Source: Barclays Capital

Chart 3: European CMBS

issuance by transaction type






Single borrower/multi property

Single borrower/single property
Multi borrower/multi property
Credit tenant lease
Source: Barclays Capital

While there has not been a dominant

transaction type, the single-borrower
single-property transactions have
accounted for 28% of transactions to
date, according to Barclays Capital.
While this type of transaction is
expected to remain strong, it is
anticipated that the true conduit
transactions, which include
multi-borrowers, will increase in
size and frequency.

activity in other European locations,

rather than a decreasing trend for the
UK. It should be noted that Italys 1st
half 2005 share includes a large Italian
Government deal SCIP-2 for over 4.2
billion. The 2004 issuance had several
countries with between 3% and 9%
of total issuance while the UK was
63% of the market.

To date the majority of European

transactions have been UK dominated
with respect to collateral location.
According to Barclays Capital, 74% of
European issuance has occurred in the
UK, with the next closest being France
at 8%. As seen in Chart 4A most other
countries have been fairly evenly
represented with respect to collateral
percentage. While these trends are likely
to continue going forward, there is scope
for countries such as Germany and
France to increase their percentage of
the market as CMBS becomes more
widely accepted in those jurisdictions.
Also, as seen in Chart 4B, the 1st half
of 2005 saw a smaller percentage
of issuance attributable to UK
transactions. This is a result of increased

One of the largest transactions during

the first half of 2005 (excluding SCIP-2)
was the refinancing of the Broadgate
Estate in the City of London, for 2.08
billion. Three other large issuances were
CSFBs 1.06 billion issuance by The
Mall Funding PLC and two Eurohypo
issuances by the Opera Finance plc
platform. The Opera Finance program
was responsible for three securitisations
of large retail properties owned by
Capital Shopping Centres (CSC), among
others. In August of 2004 the first of the
three deals was Lakeside Shopping
Centre on a loan of 650 million. Then,
in early 2005 the MetroCentre loan of
600 million was securitised, followed by
the 710 million issuance covering
CSCs Braehead and Watford assets.

Recent Activity/Pipeline

PricewaterhouseCoopers Global Real Estate Now November 2005 FEATURE

Chart 4a: European CMBS

issuance by geography to date

3% 3%

2% 3%










Source: Barclays Capital

For the second half of 2005 the issuance

levels continue to improve, which will
make 2005 a record year for European
and US issuance. Many are predicting
35-40 billion in total European issuance

Chart 4b: European CMBS

issuance by geography
1st half 2005

Other repeat conduit programmes active

during the first half of 2005 included
Lehman Brothers Windermere program,
Royal Bank of Scotlands EPIC program
and Societe Generales White Tower
program. According to Moodys
Investors Service, new additions to
the European market during the year
were Barclays Eclipse program, Merrill
Lynchs Taurus program and ABN
AMROs Talisman program. Additionally,
conduit programmes which are expected
to issue transactions during the second
half of 2005 include CSFBs Titan
Europe, Commercial First Mortgages
Business Mortgage Finance program,
Deutsche Banks DECO program and
Bear Stearns new conduit program.

5% 1% 1%

before the end of the year. This is a

significant increase over prior years
and could be the first of many years of
higher levels of issuance in the European
CMBS market.
Given the increased demand for CMBS
issuance on the part of both investors
and borrowers and the increasing
number of conduit platforms in Europe,
it would appear the market will
experience more years of increased
issuance. With the growth in the overall
market we anticipate more diverse
products, such as those which have
evolved in the US market place. As the
European CMBS market increases and
expands into more complex structures,
investor research will need to be
improved with investors also asking
more from the analytic systems and
the issuance platforms.

PricewaterhouseCoopers has extensive global experience in property finance due


diligence which includes all aspects of the securitisation process.


Taco Brink can be reached via email at:








Source: Commercial Mortgage Alert


Property derivatives
in the United Kingdom

By Matthew Barling, PricewaterhouseCoopers, London

PricewaterhouseCoopers Global Real Estate Now November 2005 FEATURE

The derivatives markets have seen enormous growth

over the past twenty years with derivatives being written
over an increasingly diverse array of underlying subject
matter ranging from the vanilla, such as interest rates
and foreign currency, through to the exotic, such as
weather conditions. It is perhaps somewhat surprising
given the dynamic and innovative nature of the
derivative markets that it has taken so long for
derivatives to emerge in the real estate sector given that
real estate is one of the core investment assets.

The expectation is that

the market will continue
to grow as potential users
become more familiar
with the basic property
derivative instruments and
begin to see more clearly
the extensive advantages
and opportunities which
they offer.

For players in the UK real estate sector,

The basic instruments

this wait is now over since the past year

has seen the emergence of a property

The property derivatives market in the

derivatives market in the UK. Whilst the

UK has to date been dominated by two

market is still at an early stage of

basic types of instrument:

development and trading volumes have

Property total return swaps

been relatively low compared with

established derivative markets such
as those relating to interest rate and
currency derivatives (being in the
hundreds of millions of dollars as

Property structured notes (or property

index certificates)

Property total return swap

opposed to trillions), there are strong

A property total return swap (or TRS)

signs of interest in the market amongst

is a derivative contract which enables

a wide range of potential users and there

a counterparty (referred to below as

is a steady stream of new entrants.

the investor) to gain exposure to

The expectation is that the market will

continue to grow as potential users
become more familiar with the basic

fluctuations in the value of real estate

without investing in the underlying
physical real estate assets.

property derivative instruments and

The investor would enter into the

begin to see more clearly the extensive

TRS contract with a counterparty

advantages and opportunities which

(typically a bank or other financial

they offer.

trader). The TRS would have a specified

This article provides an overview of the

basic property derivative instruments
currently being used in the market
together with a summary of the special
tax regime which has been introduced in
the UK in order to accommodate this
new market.

term (e.g., 2 years) and would have a

specified notional principal amount.
Under the terms of the TRS, the investor
would make LIBOR-based payments
computed by reference to the specified
notional principal amount and in return
would receive payments computed by
applying the percentage change in a
specified index of real estate values

Figure 1: Property total return swap

% change in IPD over TRS term

e.g. Bank

LIBOR + spread

Total return swap

Through entering into

the TRS, the investor
has therefore in
effect replicated the
economic return it
would have achieved
had it invested in the
underlying real estate
assets directly.

(such as one of the indices run by the

only a fraction of those which would

Investment Property Databank or IPD)

be associated with borrowing and

over the term of the contract to the

acquiring the physical real estate

notional principal amount.

assets (which would include surveyors

fees, legal fees, agency fees, etc.).

In substance, the economic effect of the

TRS is equivalent to the investor
borrowing funds equal to the notional
principal amount at the relevant LIBOR
based interest rate and investing those
funds into the real estate assets
underlying the relevant IPD index.
The transaction is illustrated in
diagrammatic form in Figure 1 above.

Execution time: In principle, a TRS

could be negotiated and executed
within a matter of days (although in
practice this may take slightly longer)
compared with the long lead times of
many months associated with a
physical property transaction.
SDLT costs: Since the investor is not
acquiring any interest in land, the

Through entering into the TRS, the

transaction is not subject to UK Stamp

investor has therefore in effect replicated

Duty Land Tax.

the economic return it would have

achieved had it invested in the

At present, TRS contracts are being

underlying real estate assets directly.

written over indices of property values

However, entering into the TRS offers a

as opposed to individual property

number of significant commercial

assets. However, as the market develops

advantages compared with borrowing

and becomes more liquid it is certainly

and acquiring the real estate assets

conceivable that TRS transactions could

directly including:

be written over bespoke underlying

property assets.

Implementation costs: The costs

associated with negotiating and
entering into the TRS are likely to be


PricewaterhouseCoopers Global Real Estate Now November 2005 FEATURE

Property structured notes

Similar to a TRS, a property structured

note allows an investor to obtain

A property structured note is a debt

exposure to changes in the value of real

security with an interest coupon and/or

estate assets without investing in the

principal redemption amount linked to

underlying physical property assets.

the performance of a specified index of

The instruments therefore offer the same

real estate values (such as the IPD

advantages offered by TRS in terms of

index). Unlike a TRS, a property

reduced transaction costs, no SDLT

structured note is a funded instrument

charges, etc. Furthermore, since

in that an investor will subscribe an

property structured notes are often listed

initial cash investment amount in return

instruments which can be traded in the

for the issue of the structured note.

secondary market they are more liquid

The economic effect of investing in

than TRS contracts which cannot be

a property structured note is broadly

traded in the market. They may also

equivalent to investing cash equivalent

be more attractive to institutions

to the subscription amount in the

which may be precluded (e.g. due to

relevant real estate assets underlying

regulatory restrictions) from entering into

the reference property value index.

derivative contracts.

The property structured note will

The UK tax regime for property


typically be issued by a financial

institution such as a bank or other
financial trader who may choose to

Similar to a TRS, a
property structured note
allows an investor to
obtain exposure to
changes in the value of
real estate assets without
investing in the underlying
physical property assets.

In the past the development of a

hedge its position by entering into

property derivatives market in the UK

one or more TRS contracts with other

was hampered by the uncertainty

market counterparties. The structure is

associated with the taxation treatment

illustrated in diagrammatic form in

of such instruments in the hands of

Figure 2 below.

investors. Specifically, there was some

Figure 2: Property structured note

Property structured note

(Coupon/redemption linked to IPD % change)


Issuer (e.g. Bank)



PricewaterhouseCoopers Global Real Estate Now November 2005 FEATURE

concern that profits arising from such

is taxable as income. In essence, this

instruments could be taxable but losses

is intended to deliver broadly the same

may not be deductible for tax purposes.

tax result as would have been the

case had the investor borrowed funds

This uncertainty was largely resolved

by the introduction by Finance Act 2004
of a specific regime dealing with
the taxation of property derivative
instruments. This new regime came
into effect on 17 September 2004
and applies to property derivative
transactions entered into on or after

(on which any related funding costs

would be deductible) and used those
funds to acquire a physical property
investment (on which any future
gain/loss would be capital). The rules
therefore attempt to ensure that the tax
result is consistent with the underlying
economic substance of the transactions.

1 August 2004.
However, under the Derivative Contracts
Broadly, the changes introduced by
FA 2004 bring property derivatives
within the scope of the UK tax rules
(the Derivative Contracts rules)
governing the taxation treatment of
derivative contracts in the hands of
companies. Previously such contracts
were excluded from this regime.
The new rules contain specific provisions
governing the taxation of property TRS
transactions in the hands of non-traders.
Under these rules, the property value
linked leg of the TRS is taxable as a
capital item whilst the LIBOR linked leg

Under the Derivative

Contracts rules, the
investor in a TRS is
taxed in respect of the
movement in the property
value leg of the TRS on
an annual basis.

rules, the investor in a TRS is taxed in

respect of the movement in the property
value leg of the TRS on an annual basis.
This is clearly less advantageous than
the tax treatment which would have
applied to a physical property purchase
where the investor would have been
taxed on realisation.
The taxation treatment of property
structured notes is more complex as
it will largely follow the accounting
treatment applied to such instruments.
Under International Accounting
Standards and modified UK generally

In the case of both

a TRS contract and
a property structured
note, the investor
obtains no interest in
physical land.
Consequently, neither
instrument is subject

accepted accounting practice it is

related element of the transaction.

likely that a property structured note

However, as can be appreciated from

would be bifurcated into two

this brief description of the new

separate instruments for accounting

regime, both the accounting and tax

purposes: a host contract which

rules are complex and would require

would typically be a discounted

careful consideration in assessing the

debt security; and an embedded

impact on any particular transaction.

derivative in respect of the property

linked element of the instrument.
The embedded derivative may then be
accounted for at fair value through the
profit and loss (or income statement)

Unlike capital losses generally, the

new rules allow for losses in respect
of property derivatives to be carried
back for two years.

of the investing company. Where a

Payments under property TRS

property structured note is bifurcated

contracts are not subject to deduction

in this way, the UK tax rules would

of UK withholding tax since there is

operate in order to tax the host

a specific exemption from withholding

contract under the UK tax rules for

tax contained within the Derivative

loans (the Loan Relationships rules

Contracts rules.

contained Finance Act 1996) whilst

the embedded derivative would be

In the case of both a TRS contract

taxed under the Derivative Contracts

and a property structured note, the

rules for property derivatives. Once

investor obtains no interest in physical

again, this should lead to capital gains

land. Consequently, neither instrument

treatment for the property value

is subject to UK SDLT.

Matthew Barling can be reached via email at

Eye on Asia

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA


The real estate market in India is on a high growth

curve. A booming economy and favourable
demographics have provided the necessary impetus
for sustained growth. Further, recent policy measures
have opened up foreign investment in the real estate
sector, which for a long time lacked institutional
funding support.

India the door is now open to

real estate investors
By Vivek Mehra, Executive Director and
Akash Gupt, Senior Manager,
PricewaterhouseCoopers, New Delhi

With the liberalisation of the economy

over the past 18 months. According

and the consequent increase in business

to estimates, demand from the IT/ITES

opportunities, Indias real estate sector

(IT enabled services) sector alone is

has assumed growing importance.

expected to be 14 million sq m. (150

Indian real estate has huge potential

million sq ft.) of space across the major

demand in almost every sector, but

cities by 2010.

especially commercial, residential, retail,

industrial, hospitality, healthcare etc.
The demand for commercial and housing
space, in particular rental housing, has
grown tremendously since 2002.

According to the 2001 Census, 27.8%

of Indias over one billion population
lives in cities. According to the Vision
2020 document released by Indias
planning commission, the countrys

Property development has surged in

urban population is expected to rise

India since 2002, helped by an annual

from 28% to 40% of the total population

doubling in demand for office space as

by 2020. Future growth is likely to be

foreign firms invested into the countrys

concentrated in and around 60 to 70

information technology (IT) sector and

large cities with a population of one

call-centres in Mumbai, the National

million or more.

Capital Region (Delhi and satellite

towns), Bangalore and Hyderabad.
Land prices have increased rapidly in
these markets the extent of the rise,
however, varies from city to city and
even within cities. Gurgaon, a satellite
city of Delhi for instance, has registered
a 40 to 50% increase in property prices

The Indian cities of Mumbai, Bangalore

and New Delhi have emerged as the top
three investors choices for real estate
investment in 2005, according to Jones
Lang LaSalles annual Investor Sentiment
Survey - Asia. The survey also noted
that investment interest in the region will

Indian real estate has

huge potential demand in
almost every sector

continue to be robust this year with more

Traditionally, Non Resident Indians

confidence towards the retail and office

(NRIs) have been allowed to invest in

property markets across the region.

the following real estate activities:

This can be attributed to Indias strong

economic performance and its
established position as an offshoring
destination for many multinational
corporations, which has translated

Development of serviced plots and

construction of residential premises
Construction of commercial premises
including business centres and offices

into a more robust real estate

Development of townships

market environment.

City and regional level urban

infrastructure facilities, including both

Regulatory Environment

roads and bridges

Until February 2005, the real estate

In March 2005, the Indian government

sector in India was tightly regulated.

announced liberalised guidelines

Foreign Direct Investment (FDI)

allowing FDI up to 100% in townships,

was allowed in only four sectors:

housing, built-up infrastructure and

development of integrated townships,

construction-development projects

technology parks, industrial parks and

(including but not restricted to housing,

special economic zones. FDI in these

commercial premises, hotels, resorts,

permitted real estate sectors also

hospitals, educational institutions,

had high threshold requirements.

recreational facilities, city and regional

For example, to develop integrated

level infrastructure).

townships, investors had to develop

a minimum of 100 contiguous acres

As per the guidelines, for the automatic

with a minimum of 2,000 dwelling units.

route to apply, the following conditions

This deterred foreign investment

would have to be complied with:

in real estate development and

foreign investment in the sector
remained minimal.

1. Minimum area
a. in case of development of serviced
housing plots, 10 hectares (25 acres)

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA case of construction-development

projects, built-up area of 50,000 sq m.
c. in case of a combination project, any
of the above two conditions
2. Investment
a. minimum capitalisation of :


water supply, street lighting,

drainage, sewerage and other
conveniences are not available).
The intention of the government by
way of this liberalisation was to clear
the path for foreign investment into
development of the commercial and

US$ 10 million for wholly

owned subsidiaries
US$ 5 million for JV with Indian
partners brought in within 6 months

housing sectors so as to meet the

demand. NRI investments continue to
enjoy special dispensation from the
above prescribed conditions.

of commencement of business
b.original investment cannot be
repatriated before a period
of three years from completion
of capitalisation.

Although the government has not

undertaken capital market level
deregulation measures, such as allowing
REITs (whether domestic or foreign
owned) to operate in India, in 2004

The investor may exit earlier with prior

approval from Foreign Investment
Promotion Board (FIPB).
3. Others
At least 50% of the project to be
developed within five years
from the date of obtaining all
statutory clearances.
Investor not permitted to sell
undeveloped plots (where roads,

Future growth is likely to

be concentrated in and
around 60 to 70 large
cities with a population of
one million or more.

it did allow international and domestic

companies to operate real estate
funds/pooled vehicles through the
private equity fund route. This, combined
with the boom in the real estate market
in India has opened the doors for
a host of realty funds. While most funds
were initially floated by financial
institutions/banks such as HDFC, ICICI
Bank and Kotak Mahindra Bank, real
estate developers like DLF Universal and


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA

even retailers like Pantaloon have now

VCF. The VCF cannot invest more than

entered the arena for creating more retail

25% of its corpus in one undertaking,

facilities. Most of the funds floated in

at least two thirds of investible funds of

the recent past have received a strong

the VCF have to be invested in unlisted

response from investors. Reports

equity shares/equity linked instruments

suggest that over the past six months,

and not more than one third of the

about US$ 500 million has already

investible funds can be invested in debt.

flowed into the real estate sector.

may rise to a massive US$ 7-8 billion.

Opportunities within the real

estate sector

These real estate funds have been

All real estate sectors, residential,

established as venture capital funds

commercial and retail are currently

(VCFs) with specific approval from the

witnessing huge growth in demand.

Securities Exchange Board of India

New customer segments are emerging.

(SEBI). VCFs are allowed to invest in

The residential market is not only

domestic companies whose shares

witnessing huge growth, thanks to easy

are not listed on a recognised stock

availability of finance, but also the

exchange in India and are engaged in

average age for ownership of new

businesses as permitted under

homes is declining drastically. Younger

SEBI guidelines (real estate activity

customers and nuclear families are

is permitted).

creating fundamentally different

Over the next 18-30 months, the flow

customer segments.
SEBI guidelines require minimum

New customer
segments are emerging.
The residential market is
not only witnessing huge
growth, thanks to easy
availability of finance, but
also the average age for
ownership of new homes
is declining drastically.

investment of INR 500,000 (approx.

Similarly, in the retail segment, as the

US$ 110,000) per investor subject to a

market grows exponentially, newer and

commitment of INR 50 million (approx.

larger formats along with the likely entry

US$ 1.11 million) from all investors

of global retail giants in the Indian

before the start of operations by the

market (subject to impending

Recently, the government

of India has legislated the
Special Economic Zones
(SEZ) Act.

government policy revisions with respect

A minimum area size of 1,000 hectares

to FDI in retailing) will necessitate greater

has been prescribed for a multi product

variety and maturity in the retail real

SEZ, whereas sector specific (such as IT,

estate market. Mall developers are

pharmaceuticals, textiles etc.) SEZs can

already adapting to local cultures and

be set up with a much smaller minimum

traditional preferences. Some new

area. Hence, SEZs have generated a lot

genres of malls are Automobile Mall,

of interest among real estate developers,

Gold Souk and Wedding Mall, which

IT players and manufacturer-exporters in

are one-stop shopping destinations for

the country.

what their name describes.

Recently, the government of India has
legislated the Special Economic Zones

Tax Incentives for real estate


(SEZ) Act to give a long term and stable

An Indian company is subject to 33.66%

policy framework with minimal regulation

corporate tax on its business profits.

for development of hassle-free enclaves

Dividends distributed are tax free in the

in India. The SEZ Act provides the

hands of the shareholders, however,

umbrella legal framework covering all

the dividend distributing company is

important legal and regulatory aspects

required to pay dividend distribution tax

of SEZ development as well as for units

at 14.06%. Where the company has

operating in SEZs. SEZs are specifically

booked profits but tax losses, minimum

delineated, duty free enclaves, deemed

alternate tax of 8.415% is payable.

to be outside the customs territory of

India. Units operating in SEZs enjoy a
corporate tax holiday on export
earnings, indirect tax exemptions and
liberal exchange controls. The SEZ Act
provides for substantive fiscal benefits
to developers as well.

A tax holiday is available to companies

engaged in developing approved
housing projects subject to such
projects being approved prior to 31
March 2007 and the project being
completed within four years from the
year of approval.

The Indian governments

tax policy is not in tandem
with the governments
liberalisation initiatives
being undertaken in the
real estate sector.

A tax holiday of 10 consecutive years

The prevailing tenancy laws in India

(out of the first 15 years) is available for

are not in favour of owners of the land.

industrial & IT parks provided certain

Under the Rent Control Act, tenants

conditions attached are fulfilled, one of

continue to pay the same rent fixed

which is that the industrial park/IT

in 1947. This has deterred fresh

park needs to be notified prior to

investments in housing for rental

31 March 2006.

purposes. Poor collection from the

obsolete rental values make repairs

A SEZ developer is entitled to a 10 year

corporate tax holiday. In addition to the
corporate tax holiday, the SEZ developer
is also eligible for exemption from
payment of dividend distribution tax,
minimum alternate tax and long term
capital gains tax on the transfer of

and maintenance unviable for the

landlords, thereby resulting in the
decrepit condition of many buildings.
The Urban Land Ceiling Act and Rent
Control Acts have distorted property
markets in cities, leading to
exceptionally high property prices.

shareholding in SEZ company.

A high percentage of land holdings do

Challenges for the

real estate sector

not have clear titles. Land is generally

non-corporatised and is typically held
by individual/families. This restricts

The Indian governments tax policy is

not in tandem with the governments
liberalisation initiatives being undertaken

organised dealing and hinders transfer

of titles. Legal processes for property
disputes are time consuming.

in the real estate sector. There are no

substantial tax incentives for real estate

Stamp duties continue to be high and

development except in the limited

in some states as much as 10-13%.

circumstances mentioned above.

The industry has repeatedly called for

Even in these situations, the tax

rationalisation and lowering of stamp

incentive windows have a short life left.

duties to global levels of 2-3%.

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA


City urban planning projected smaller

purposes and, due to demand and

commercial plots and this, along with

supply interplays, there has been some

rigid building and zoning laws, makes it

rationalisation in property prices across

difficult to procure larger contiguous land

the country.

areas (for example, for retail space).

Land use conversion is both time
consuming and complex.

However, the majority of new shopping

malls being developed remain
fragmented and sub-optimally planned

Occupancy costs may marginally

in terms of positioning infrastructure.

increase for retail outlets at malls and

In the near future, there is a likelihood of

for office space etc. with the imposition

a shake out within the shopping malls

of service tax on certain services

business with the emergence of a few

connected with management of

large dominant national/regional players

commercial real estate (as proposed

that are relatively more professionally

in the Union Budget 2005-06).

managed and a host of speciality/niche

local players. With the expected opening

A period of transition in
retail sector

up of the countrys retail sector to

foreign investment, shopping malls of
international scale and quality should

Scarcity of quality real estate at

affordable rentals has traditionally been
a key challenge to growth for organised
retailers in India. However, the retail
boom that is being witnessed in India
today is likely to have a significant
impact on the commercial real estate
sector. Presently, most of the major
Indian cities have significant commercial
projects under construction for retail

A high percentage of
land holdings do not have
clear titles.

also emerge soon. Since Indias current

foreign investment regime does not
permit FDI in retail trading, the
international brands available in India as
of today are on the Franchisee model.
A long standing demand of the
international players has been to open
up the retail sector to FDI, which would
pave the way for India to house all
international retail brands.


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA

In Indias fast-growing
economy, real estate
has emerged as one
of the most appealing
investment areas for
domestic as well as
foreign investors.

An increased alliance/partnership

the IT sector. As the IT sector expands

between large regional real estate

to second and third tier cities across

developers and national retail companies

India, the real estate boom will follow.

on joint development/management

In the last few months, IT companies

of retail real estate catering to the

such as IBM, Dell, Cognizant, Mphasis

pan-Indian or regional growth plans,

and Satyam have revealed plans for

and other synergies between specific

cities like Coimbatore, Mangalore,

retailer(s) and mall developer(s) can also

Chandigarh and Vizag and Jaipur.

be expected.

Demand from the IT sector aside,

the basic need for modern real estate

The key implication for retailers is that

advance planning with respect to market

will provide lucrative opportunities

for investment.

expansion is necessary since, not only

is identification of optimal property

Low interest rates, modern attitudes to

challenging, the cycle time between

home ownership (the average age of a

identification and possession of

new homeowner is now 32 years

ready-to-move-in retail property

compared with 45 years a decade ago),

is rather long, typically between

economic prosperity along with a

18 and 24 months.

change of attitude amongst the young

working population from that of save


and buy to buy and repay and

liberalised FDI regime have all

In Indias fast-growing economy, real

estate has emerged as one of the most
appealing investment areas for domestic
as well as foreign investors.

contributed to this boom. Once the

government puts into place land reforms
and addresses the challenges facing the
real estate sector (as set out above), this

The real estate sector will continue to

sector has the potential to contribute

derive its growth from the booming IT

immensely to the countrys GDP.

sector, since an estimated seventy

percent of the new construction is for

Vivek Mehra can be reached via email at

Akash Gupt can be reached via email at

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA


General trends
The China property market has undergone significant
growth in recent years. Since 1997, property prices
have grown on a year on year basis and at an
increasing speed. The rapid growth has attracted
foreign investors from around the globe, initially from
Hong Kong, Singapore and Taiwan, and more recently
from the US, Europe and Australia. Among these
foreign investors, the number of institutional investors
has been increasing.

Strong and sustained economic

growth is attracting foreign
investment to the China real
estate market
By KK So, Asia Pacific Real Estate Tax Leader,
PricewaterhouseCoopers, Hong Kong,
Gary Chan, Tax Partner,
PricewaterhouseCoopers, Shanghai and
Rex Chan, Tax Partner,
PricewaterhouseCoopers, Beijing

Strong and sustained economic growth,

In terms of geographic locations, primary

as illustrated by the double digit GDP

cities such as Beijing and Shanghai

growth in major cities, has no doubt

naturally become the gateways for

been the major driving force behind the

foreign investors to enter the China

growth of the China property market.

property market.

Chinas accession to the WTO followed

by the gradual liberalisation of various

Beijing and Shanghai

business sectors, Bejing Olympics 2008,

Shanghai World Expo 2010, and the
potential appreciation in value of the
Renminbi are among the other factors
which add fuel to the recent growth.

In Bejing and Shanghai, the luxury

residential market continues to grow
steadily. Years of economic growth
has created domestic demand for better
quality of living. On the other hand,

In terms of asset classes, the China

the continuous expansion of foreign

property market presents a full variety

investment in China has brought to

of choices to foreign investors, including

these capital cities more and more

residential developments, office and

senior executives, thereby ensuring

retail, industrial developments, logistics

the steady demand for the luxury

facilities, serviced apartments, hotels,

residential market.

non-performing loan portfolios etc.

The prospects of Beijing

Olympics 2008 and
Shanghai Expo 2010 only
add to the growth story of
the retail sector.

In a bid to stabilise the residential

the liberalisation of the retail market

market and discourage speculation,

under the WTO agreement has brought

the government introduced a series of

in more and more foreign retailers,

measures in the first half of 2005,

thereby creating substantial demand for

including raising the interest rate on

retail spaces, says Mr Jim Yip, Associate

housing mortgages, imposing business

Director of DTZ Debenham Tie Leung

tax on the sale of residential property

in Shanghai.

by individuals, tightening bank lending

and restricting the transfer of
uncompleted projects. It would appear
that the impact of these measures is
transient. As confirmed by Mr Yang Yu,
Chief Representative of Grosvenor
Asia Standard Limited Shanghai

In terms of the office market, due to

new supply in Beijing, the vacancy
rate rose in the first half of 2005.
However, demand for office space in
the central business district is expected
to remain firm.

Representative Office, the demand from

In Shanghai, the supply of prime office

domestic and expatriate dwellers is still

spaces remains tight, resulting in a surge

going strong.

in office rents. In response to the rising

Likewise, the retail market in Beijing and

Shanghai has recorded satisfactory
growth. Rising disposable income of the
residents has boosted the consumption

office rents, some smaller companies

are seen to be moving out of the
central business district to more
secondary areas.

in the retail sector. The prospects of

Apart from the more conventional

Beijing Olympics 2008 and Shanghai

sectors, foreign investors are also

Expo 2010 only add to the growth story

considering property projects within

of the retail sector. In response to these

logistics parks and industrial parks.

developments, supermarket chains,

In this regard, Mr Jim Yip observes that

convenience stores, trendy shops and

foreign investors are evaluating the

other retailers continue to expand to

viability of entering into sale and lease

secure market share. On the other hand,

back arrangements.

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA

Other cities


classes foreign investors are targeting in

these cities.

In addition to the primary cities such as

Beijing and Shanghai, it is worth noting
that foreign investors have been moving

Structural and Tax Issues for

Direct Investment

onto the secondary cities to seek for

more exciting opportunities. As observed

Foreign direct investment in the China

by Mr KK Chiu, Executive Director of

property market may take different legal

DTZ Debenham Tie Leung Ltd in Hong

structures, and different taxation

Kong, the move to the secondary cities

consequences follow.

is made possible with the experience

gained by these foreign investors from
their earlier entry into the primary cities.
On the other hand, the very keen
competition, coupled with the limited
supply of trophy properties in the
primary cities, are among the forces
driving foreign investors to consider the
secondary cities to achieve higher yields
and better capital growth potential.
These secondary cities include
Changsha, Chengdu, Chongqing,
Dalian, Fuzhou, Guangzhou, Harbin,
Jinan, Nanjing, Ningbo, Shenyang,
Tianjin, Wuhan, Wuxi, Xian and others.
Shopping malls, residential
developments, industry parks and
logistic parks are among the asset

In addition to the primary

cities such as Beijing
and Shanghai, it is
worth noting that foreign
investors have been
moving onto the
secondary cities to
seek for more exciting

A typical structure for a foreign investor

to hold property in China is via an
offshore company, commonly referred to
as a foreign enterprise (FEs). For a FE
which does not maintain any permanent
establishment in China, its rental income
from its China property is typically
subject to withholding income tax at
the rate of 10%. The rental income also
attracts other taxes; the major ones
include business tax and urban real
estate tax. As a very general indication,
the withholding income tax and other
taxes could add up to something around
27% of the rental income. (Please note
that the actual tax liabilities may vary
depending on the exact location of
the property).


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA

Alternatively, foreign investors may

Disposal of China property is also

consider buying into an existing onshore

subject to various China taxes. In terms

company which owns property in China,

of the tax rates, land appreciation tax

or teaming up with local partners to form

stands out from the others ranging from

an onshore joint venture company to

30% to 60%. Other major taxes include

undertake property development in

income tax, business tax and deed tax.

China. The investee company in this

Again, FEs are generally subject to

case is commonly referred to as a

income tax by way of withholding at

foreign investment enterprise (FIE).

10% of the gain, whereas FIEs are

Unlike FEs which are generally subject

subject to income tax at 33% based on

to income tax by way of withholding,

their net profits.

FIEs are subject to income tax

generally at 33% based on their net
profits (a lower rate may apply to certain
special economic zones in China).
In arriving at the net profits, interest
expenses and depreciation may be
deducted. FIEs are also subject to the
other taxes such as business tax and

The use of special purpose vehicles

(SPVs) to hold property in China is
not uncommon. In practice, it is noted
that some of these SPVs are set up in
jurisdictions which have concluded
double taxation treaties with China.
The use of such SPVs may help to
mitigate the risk of being deemed to

urban real estate tax.

have a permanent establishment in

Set out below is a table summarising the

China for tax purposes and allow

major China taxes which are applicable

a more tax efficient exit from the

to rental income derived from properties

property investment.

in China under the above two structures:

The use of special

purpose vehicles (SPVs)
to hold property in China
is not uncommon.

Major Taxes



Business Tax

5% of gross rental revenue

5% of gross rental revenue

Income Tax

10% x (gross monthly rental

33% x net profit for the year, but a

income earned Business

lower tax rate may apply if the

Tax paid)

properties are located in certain

special economic zones.

Urban Real Estate Tax

1.2% of discounted purchase

1.2% of discounted purchase cost, or

cost, or 12% x gross rental

12% x gross rental revenue. (Note

revenue. (Note that the method

that the method of calculation and the

of calculation and the tax rate

tax rate vary depending on the

vary depending on the location

location of the property).

of the property).

The REIT vehicle structure

is not new in the region.

Indirect Investment via REITs

to believe that the China REITs market

will grow. In this regard, Mr Edmund Ho,

For the more cautious foreign investors,

Director of Citigroup Global Markets Asia

they may add a China element to

Ltd in Hong Kong, observes that the

their portfolios by way of an indirect

Chinese government has introduced

investment. In this regard, the

various measures in a bid to ensure the

development of the real estate

orderly development of the China

investment trust (REIT) regimes in

property market, such as the tightening

the region offer an alternative.

of bank lending and the restrictions on

The REIT vehicle structure is not

new in the region. Indeed, Singapore
has built up a respectable REIT regime
over the last few years, which is
capable of accommodating cross-border
REIT listing.

sale of uncompleted properties. Such

measures have created cash flow
problems for local developers and
investors, and prompted them to look
out for alternative funding sources.
The lack of an active secondary market
for large or en-bloc properties also

On the other hand, the timely removal of

makes it difficult for property owners to

the geographical restrictions for Hong

divest their property holding. On the

Kong REITs to invest in real estate

other hand, while there is no lack of

outside Hong Kong has placed Hong

funds from foreign investors who are

Kong in competition with Singapore to

getting ever more interested in the

be the regional centre of REITs. With its

property market in China, given the

proximity to China, coupled with its

unique business environment in China,

prominent position as an international

many of them may have concern that

financial centre, Hong Kong is well

they may not have the necessary

placed to act as the intermediary via

experience and connections to make

which foreign investors may indirectly

successful direct investment in China.

invest in the China property market.

This gives rise to a unique opportunity

for the seasoned financial intermediaries,

As a matter of fact, in light of the recent

developments, there are good reasons

such as investment bankers in Hong

Kong who have accumulated a wealth of


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA

China experience, to play the role as a

concern shared by many investors.

middleman to bridge the supply

In this regard, Mr CK Lau, Regional

and demand.

Director of Valuation Advisory Services

and Capital Markets of Jones Lang

Indeed, it is noted that various

investment bankers are at the moment
busy at forming their China property
portfolios in preparation for a REIT listing
in Hong Kong towards the end of 2005
or early 2006. These portfolios comprise
office buildings, shopping malls, and
logistics facilities. It is anticipated that
the successful launches of these REITs
will accelerate the growth of REITs of
China property in Hong Kong.

With its rapid growth over the years, the
China property market has presented a
lot of opportunities to foreign investors.
However, opportunities seldom go
without risks. For example, the
possibility of over-supply is a common

LaSalle in Hong Kong, remarks that,

while there is no lack of supply in the
medium term, investors should look out
for quality properties both in terms of
hardware and software as the demand
for such properties should remain strong
as the economy in China continues to
grow. Tax and other regulatory issues
could also catch the unprepared.
Investors, particularly foreign investors,
should obtain proper advice to avoid
falling into the minefields created by
these issues.
In the long run, it would appear that the
prospects of the China property market
remain promising. Foreign investment
will certainly improve the liquidity and
facilitate the growth of the real estate
market in China.

KK So can be reached via email at

Gary Chan can be reached via email at
Rex Chan can be reached via email at

In light of the recent

developments, there are
good reasons to believe
that the China REITs
market will grow.

Eye on Americas

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON AMERICAS


The Mexican Real Estate Market

The real estate market in Mexico, which is tightly
related to the economy, has grown slowly but steadily
in recent past years. The stable economy, with low
inflation rates, a tax disciplined government,
revaluated peso against the dollar, and reduced
interest rates provides an excellent and solid basis for
investors seeking real estate investments in Mexico.

Mexico excellent opportunities

for real estate investors
By Roberto del Toro, Partner,
Jose Luis Olvera, Senior Associate,
PricewaterhouseCoopers Mexico,
David Cuellar, Manager,
PricewaterhouseCoopers, London and
Martin van der Zwan, Senior Manager,
PricewaterhouseCoopers, Amsterdam

The size of the real estate market

In further support of this, the current

has shown a steady growth of

Mexican residential market conditions

approximately 2.3% per annum since

are such that the expected need for

2001. This growth is fuelled by the

additional residences in the coming

increase in the construction of low

years could be equal to the total

income residential homes; commercial

number of homes built in Mexico

space; tourism, oil, hydraulic, electric

throughout its history.

and industrial infrastructure.

Currently, Mexican and non-Mexican
The main area of growth has been in

private investors account for 58.5% of

residential development, not only the

the total investment in the real estate

low income segment, but also the

market, while the government accounts

middle and high-value residential

for the other 41.5%.

segment. This is due to the fact that

the Mexican government identified
and earmarked the development of
residential property and infrastructure
as one of the main drivers in its strategy
for economic development.

Most of the real estate market activity

is concentrated in Mexico City, Nuevo
Leon, Tabasco, Jalisco, Baja California,
Chihuahua, Tamaulipas, Campeche,
Sonora and Estado de Mexico. In these
states the income and the industrial

It is expected that the growth in

activity is higher than in the others.

residential development will continue at

its current pace given the stability of

The Mexican Tax System

mortgage interest rates and the increase

in the range of mortgages offered by
banks and other institutions.

The Mexican tax system is very mature

and its impact depends on the location

Mexico has entered into

treaties for the avoidance
of double taxation with its
major trading partners.

of the investor and whether the

Mexico has entered into treaties for the

investor invests as an individual, trust

avoidance of double taxation with its

or corporation.

major trading partners, for examples,

the US, Canada and most of the leading

Foreign corporate investors owning

Mexican real estate are taxed on any
capital gains arising from the real estate
at 25% on the gross proceeds of the
sale, without any deduction.
Alternatively, by appointing a legal
representative in Mexico and complying
with other requirements, the foreign
seller could be eligible to be taxed on a
net gain basis at the rate of 30% on the
net gain (29% in 2006 and 28% for 2007
and the subsequent years). The gain is

European and Asian economies. Such

tax treaties generally allocate the right to
tax income and gains realised on real
estate to the jurisdiction in which the real
estate is located. Mexican real estate
should thus be taxed in Mexico. Sellers
that reside in a country that has a tax
treaty in force with Mexico may apply
either the provisions of the tax treaty
(provided certain conditions are met) or
the Mexican Income Tax Law (MITL),
whichever are more favourable.

computed as the proceeds received on

the sale less the tax basis of the assets.
In this respect, the tax basis for real

Transfer Tax

estate is equal to the purchase price less

Acquisition of Mexican real estate is

depreciation of the construction, and

subject to immovable property transfer

the balance is adjusted for inflation. It is

tax. The rate varies per state and ranges

important to point out that land does not

from approximately 1% to 4.5% on the

depreciate, but appreciates as of the

fair market value of the real estate.

moment of a sale. Rental income is

The tax is imposed on the acquirer and

subject to a 25% rate in accordance

is non-recoverable. In addition, other

with Mexican law.

local fees may apply on the sale of

immovable property such as registration
and notary fees.

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON AMERICAS

Value Added Tax


income tax to the extent certain

formalities are met.

Mexican Value Added Tax (VAT) is

levied at 15% (10% in the border zone).

Tax Incentives for Investors

The sale or lease of real estate is

generally subject to VAT, but the sale of

To attract and facilitate investments in

land and the sale and rent of residential

Mexican real estate, the MITL provides

property are exempt.

special rules for trusts that have the

sole purpose of constructing or

Tax Incentives for Home


acquiring properties intended for

alienation or lease, as well as the
acquisition of the right to obtain

In 2003, the Mexican government

revenues from those activities.

introduced certain tax incentives to

promote home ownership. As a result,

General Aspects:

individuals may claim a deduction on the

The Mexican Real Estate Investment

interest effectively paid (interes real) on

Trust (MREIT) is itself not subject to

mortgages for the acquisition of a home.

corporate taxes. Rather the beneficiaries

For these purposes, the amount of the

are the parties subject to taxes based on

mortgage must not exceed 1.5 Million

their status and are responsible for

UDIS (approximately $500,000 U.S.

fulfilling the tax obligations related to

Dollars). Interes real is in general terms

the MREIT.

the interest rate less the inflation rate

(e.g., 10% interest rate less 4% inflation

Requirements for MREIT status:

rate equals a 6% interest deduction).

1. Constituted under Mexican laws.

As a further incentive measure, income

arising from the sale of a house by an
individual is exempt from Mexican

The Mexican Real Estate

Investment Trust (MREIT)
is itself not subject to
corporate taxes.

2. Business purpose is the construction

or acquisition of properties intended
for their alienation or lease, as well as


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON AMERICAS

the acquisition of the right to obtain

beneficiaries must pay the

revenues from such leases.

corresponding tax on the profit

3. 70% or more of the funds are invested

obtained from the sale of such

in the activities mentioned in the

certificates. The profit will be the

previous point and the remaining

difference between the income

funds in federal government bonds.

obtained from the alienation of the

4. Compliance with certain information

Income Tax:
The beneficiaries may opt to appoint
the financial institution managing the
MREIT as the responsible party to
determine the profit or loss arising
from the trusts transactions. The
financial institution must disclose the
corresponding amount of taxable gain
or loss to each beneficiary, based on
their participation in the MREIT in the

certificate and its average tax cost.

Value Added Tax:
The financial institution shall determine
the VAT due and file the VAT returns.
Asset Tax:
The financial institution shall determine
the asset tax base considering the
assets and liabilities related to the
MREIT. The beneficiaries will increase
their own asset tax base by including
the asset tax portion that corresponds
to their participation in the MREIT.

immediate prior year. The beneficiaries

must include or deduct such amount

Other Advantages:

in their annual income tax calculation.

Neither the financial institution nor the

The MREIT issues trust certificates

(participation certificates) that

advance payments for income tax and

represent the ownership in a specific

asset tax purposes.

property or in a pool of properties.

When such certificates are sold, the

The beneficiaries will

increase their own asset
tax base by including the
asset tax portion that
corresponds to their
participation in the MREIT.

beneficiaries are required to make any

If certain requirements are met, the

contribution of properties by the

Several tax, accounting,

and environmental
regulations have been
enacted. Furthermore,
each municipality or state
applies different rules and
regulations that need to
be complied with.

trustees to the trust is not considered

shares of the company, rather than

as alienation for tax purposes, thus

acquiring the real estate directly.

providing for roll over treatment.

Foreign registered pension and
retirement funds that are exempt from
income tax in their country should be
eligible for the exemption granted by
the MITL for the benefits obtained
from the trust, provided certain
conditions are met.

Mexican Real Estate

Development Companies
In recent years, Mexican and
non-Mexican residents began to
establish Mexican real estate
development companies for the purpose
of developing real estate in Mexico.

Regulatory Environment
Real estate developers have been
confronted with an increase in the
regulatory environment. Several tax,
accounting, and environmental
regulations have been enacted.
Furthermore, each municipality or state
applies different rules and regulations
that need to be complied with, including,
among others, the local financial code,
transfer taxes and construction licenses.
For accounting purposes, real estate
developers as well as commercial
businesses are required to apply the
Mexican General Accepted Accounting

The common practice of establishing a

Principles. Depending on the information

development company is carried out

requirements from parent companies

during the first stages of real estate

and/or regulatory agencies there may

development. After a certain period of

be a need to also apply International

time, and before the development

Accounting Norms, as required for other

project is finished, the shares of the

industries and activities.

company are sold. This method allows

the acquirer to not pay the real estate
transfer tax, since it is acquiring the


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON AMERICAS

Future Outlook for the Mexican

Real Estate Market


Based on the current situation, real

mature with a good tax treaty network.

estate market experts anticipate that the

Specific tax incentives to promote home

growth in the real estate market during

ownership and regulations such as those

the next few years will be concentrated,

for the Mexican real estate investment

in the following areas:

trust and the use of Mexican real estate

The Mexican tax system is very

development companies, provide a

1. Development of low income housing;

sound base for future investments.

2. Ground transportation infrastructure,

including highways;
3. Residential, office buildings and
commercial real estate;
4. Electric, hydraulic and urban

The regulatory environment has

increased and investors need to be
aware of differences in local regulations.
In summary, within Latin America,
the Mexican market provides an
excellent and stable platform for real
estate investments by domestic and
foreign investors.

Roberto del Toro can be reached via email at

David Cuellar is available via email at (Mexico) or (U.K.)
Jose Luis Olvera is available via email at
Martin N. van der Zwan is available via email at

Within Latin America,

the Mexican market
provides an excellent
and stable platform for
real estate investments
by domestic and
foreign investors.

Eye on Europe

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE


Eurozone weakness persists

The Eurozones growth rate continues to lag well
behind that seen in most other advanced economies.
External developments, such as higher oil prices and
the strong euro, have hit prospects, but the main
problems remain internally generated.

European overview economy

and real estate
By Andrew Burrell, Associate Director,
Macroeconomics, Experian, London

Tight policies, high employment and low

Moreover, with worries about the impact

confidence continue to undermine

on inflation, there is unlikely to be any

domestic activity, particularly in the

immediate boost from monetary policy.

regions core economies. Expectations

The European Central Bank (ECB) has

for growth in 2005 have been sharply

emphasised its concerns about strong

downgraded and risks remain firmly on

money supply growth and over-heating

the downside.

housing markets in many countries.

Interest rates are likely to stay at

Modest activity in the single currency

area contrasts starkly with other
European countries, such as the UK,
Sweden and Norway, and lags US
activity by an even wider margin. Even
Japan, which has endured exceptional
weakness in the last decade, is now

the level that has prevailed since

mid-2003 (2%) over the coming months.
A stimulus from fiscal policy can also
be ruled out given that many budget
deficits are above the 3% limit
allowed by the EU Stability and Growth
Pact guidelines.

experiencing a much stronger expansion

than the Eurozone. The sluggishness is

Looking ahead, demand conditions in

further highlighted by the fortunes of the

the Eurozone are expected to improve

regions largest economies. In Germany,

gradually, as exports respond to the

poor export growth has depressed

recent euro depreciation and sentiment

activity, while in France consumer

continues to revive. Labour markets are

demand has hit a weak patch. Italy

also expected to be more supportive,

recently experienced a rebound, but this

as unemployment edges lower. These

followed a recession in the previous two

factors should underpin a modest upturn

quarters, and the upturn is likely to

in domestic spending in the most

prove short-lived.

sluggish economies, notably Germany

Looking ahead, demand

conditions in the
Eurozone are expected
to improve gradually.

and Italy, over the next year, helping

constrained growth in the larger

overall Eurozone growth approach

countries at Europes heart, notably

2% again.

France and Italy.

Output growth averages 2% over the

Over the past decade, German GDP

period 2005-9, well below the rates

growth has averaged less than 1.5%

expected in either the US or the rest of

a year only Japan has done

Western Europe. This continues the

less well of the major economies.

pattern of the past decade. In addition

The under-performance in both cases

to tight monetary and fiscal conditions,

relates to weak consumer demand,

the lack of dynamism reflects structural

reflecting ageing and slow-growing

problems in the Eurozone: high

populations, and an over reliance on

unemployment, inflexible labour markets,

the public sector. Germany has also had

large government sectors and ageing

to cope with the integration of the

populations. But these difficulties

former-communist eastern zone, where

are not universal. There are wide

high unemployment has added to the

divergences in performance among

burden on public finances. The fiscal

European economies, with Ireland

deficit has been over 3% of GDP in each

displaying considerable dynamism

of the past four years, while fiscal debt

and Spain achieving faster growth than

is creeping towards 70%.

many non-Eurozone economies.

German labour market rigidities and high


taxes have driven up labour costs and

A fundamental factor in the lacklustre

the government has attempted to

performance of the Eurozone is the

address these issues with reforms.

weakness of Germany. The Continents

There is evidence that these are having

largest economy exerts a major impact

a beneficial impact on relative unit labour

on its smaller neighbours, such as the

costs, particularly when compared with

Netherlands and Austria, and has also

progress in Italy and France. Moreover,

eroded competitiveness. In recent years,


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE

Table 1: Summary of Economic Forecasts

GDP % pa

Consumer Spending

Employment % pa

Bond yields % pa

Inflation % pa

% pa
Forecast of annual averages 2005-09




























































Source: Experian

Table 2: Summary of Main European Economies Property Markets


Offices Retail Industrial



Average 2005-09














































































































Source: Experian


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE

the largest German corporates have

Germany is set to remain the most

been forced into action to restore

sluggish Eurozone member, with

profits and cut costs by harsh global

consumer demand continuing to be

competitive pressures. More remains to

undermined by stubbornly high

be done, but the inconclusive outcome

unemployment and slow job creation.

of Septembers election is likely to stall

any radical action by the government.

Economic underachievement has hit

German property markets. There have

In any case, the effects of liberalisation

been steady declines in rents in both

are likely to be offset by negative factors

retail and office markets over the last

in the near term. High unemployment

four years and recently the industrial

and rising energy prices continue to

sector appears to have joined the slump.

constrain domestic demand and GDP

Total property returns have been under

growth is expected to be less than 1%

4% in the recent past, bottom of the

this year. But there are signs of

Eurozone rankings.

improvement. Manufacturing orders are

on a rising trend, boosted by the weaker
euro, while business confidence is
building. This should underpin growth
into next year.

The slow economic recovery is expected

to boost occupier demand over the
forecast horizon. Rents continue to
edge lower this year and next, but
thereafter sustained revival is in

Medium-term prospects are for further

prospect, with offices rebounding

slow improvement in economic activity.

strongest. But German investment

Annual growth is forecast to average

performance over the five year forecast

1.6% in the period 2005-09, a moderate

period remains the least impressive in

improvement on the rate achieved over

the Eurozone by a wide margin, with

recent years, and GDP increases are

total returns of 5-6%.

expected to reach a more respectable

2% by the end of the decade. But

A fundamental factor
in the lacklustre
performance of the
Eurozone is the weakness
of Germany.

Continued anaemic
expansion in major export
markets, especially
Germany and Italy, will do
little to revive exports next
year, but solid consumer
demand supports a
modest upturn.


a drag, GDP growth is forecast to slow

to 1.5%. Continued anaemic expansion

The French economy has been among

in major export markets, especially

the best performers in the Eurozone over

Germany and Italy, will do little to revive

the past decade. Annual output growth

exports next year, but solid consumer

has averaged 2.3%, with employment

demand supports a modest upturn.

creation an impressive 1% a year.

Output growth is forecast at 2.0% in

In stark contrast to the sluggishness in

2006, still below trend, with only modest

Germany, activity has been supported by

employment growth and reductions in

buoyant domestic demand, most notably

unemployment in prospect.

consumer spending, which has been

driven by strong income growth.

Growth is expected to accelerate toward

the long-term trend rate of 2.3% after

Activity in France has slowed since

2007. This is healthy when compared

mid-2004, though GDP growth was

with most of the Eurozone, but trails the

a solid 2.3% for last year as a whole.

forecast for other EU economies such

Hopes that the revival would resume

as the UK, Spain and Sweden, where

were boosted by a consumer upturn in

structural problems such as rigid labour

the early months of this year, but the

markets and over-sized government

improvement was short-lived.

sectors are less evident than in France.

Unemployment has fallen in recent

months, but employment growth has

French property markets have seen

remained subdued. The jobless total

mixed rental performance. Conditions

remains a burden on the public finances,

in office and industrial sectors have

with the fiscal deficit now unlikely to fall

improved, but remain muted, while retail

below 3% of GDP before 2006.

is growing rapidly. More balanced rental

growth is expected over the next few

French consumer spending is still

years as occupier demand revives,

expected to increase by around 2% in

though industrial markets continue to

2005, but with net trade acting as

trail. Total returns have held up well

France, therefore, remains

one of Europes strongest
investment markets.

against a relatively weak economic

market and more cautious borrowing

background and are forecast to remain

have combined to curb expenditure in

close to 10% in all but the office sector,

the first half of this year. Retail sales

with industrial the top performer. France,

confirm that high street demand

therefore, remains one of Europes

remained in the doldrums during

strongest investment markets.

the summer and the outlook is

highly uncertain.


Inevitably, GDP has suffered. In the year

Consumer spending, boosted by strong

to 2005q2, annual growth was at its the

borrowing and booming housing

weakest since 1993. But a number of

markets, has underpinned the UKs

factors suggest that the pace of UK

economic performance in recent years.

activity will revive over the next few

It has enabled the economy to grow at

quarters. The MPCs cut in interest rates

an above-trend pace for a long period

during August should support consumer

and has sustained momentum when the

demand, while exports will benefit

international background has been

from the healthier global background,

unfavourable. Fiscal conditions have also

supported by the gradual acceleration in

been significantly looser than on the

the Eurozone. In contrast to the recent

Continent, as the Labour governments

past, little boost can be expected from

unprecedented spending spree targeted

government spending as fiscal

key public services. In the first five years

constraints bite.

of the century, GDP growth averaged

2.7%, one of the fastest in Europe.

The labour market has seen a shift over

recent months, as unemployment has

Over the past year, however, there have

started to rise gradually. The claimant

been clear signs that the long period of

count measure rose in August for the

UK consumer exuberance is ending.

seventh month in succession, while the

More subdued job creation, higher taxes

broader ILO measure also saw an

and interest rates, a weaker housing

increase in the summer. But employment

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE


growth has continued and job growth

The gulf between UK investment and

of 0.5% a year is forecast, as the

occupier markets is, however, expected

economy regains momentum in the

to narrow over the coming years.

next few years.

Rental growth steadily improves in both

office and industrial sectors, offsetting

Despite a better second half, the

economy is expected to grow by just
2% in the current year. Consumer
spending growth is projected to languish
at a decade-low of 1.8%, with only
modest improvement in prospect next
year. But a stronger external contribution
and buoyant business investment allow
a recovery in GDP growth to around
2.5% next year. Looking further ahead,
we forecast output growth is set to
accelerate to 2.7%, as consumer
spending gradually recovers.

a modest retail slowdown. Over the

medium term, five-year rental growth
rates of 3% a year on average are
respectable relative to general inflation
rates of around 2%. Returns are
projected to decline sharply over the
next two years, but average almost
10% per annum over the forecast
horizon one of the EUs better
outturns. Industrial property continues to
perform strongest in line with historical
experience, though this is matched by
offices towards the end of the decade.

UK commercial property recovered

last year. Positive rental growth was
recorded after two successive years
of contraction, with the marked
improvement in London offices was an
important influence. Meanwhile, total
returns on property soared to 18%, the
highest since 1993, with retail outturns
exceeding 20%.

UK Returns are projected

to decline sharply over
the next two years, but
average almost 10 per
cent per annum over the
forecast horizon

Italys economy has struggled over
recent years in the face of fiscal
pressures, structural problems and
unfavourable demographics. GDP
growth has averaged less than 1% a
year since 2001. Despite this, for much
of the period, employment creation has


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE

been healthy, thanks largely to

prospect during the current year, while

labour reforms. As a result, Italys

job creation keeps pace with EU-15

unemployment rate remains well below

average thereafter.

those of France and Germany.

The outlook for the Italy over the
In 2004, activity hit a three-year high

medium to long term remains very

supported by exports, business

mixed. GDP growth is expected to

investment and residential construction.

average less than 2.0% a year until 2009

But GDP growth remained an

only Germany has weaker prospects

unimpressive 1.2%, year-on-year, with

amongst the larger European

consumer spending rising at an even

economies. By contrast, employment

more sluggish rate. Moreover, the

growth is sustained at more impressive

economy slipped back into technical

rates, despite Italys unfavourable

recession around the turn of the year

demographic outlook. Overall,

and the subsequent recovery largely

considerable structural reform effort is

reflects influences that are unlikely to

still needed to boost performance over

be sustained. Recent indicators confirm

the longer term.

this view, with declining retail sales and

industrial production, and unemployment
edging higher.

Italian property has weathered economic

weakness fairly well. Rental growth was
reasonably buoyant during 2004, led by

Italian performance is
close to the European
average and there is also
potential upside, given
under-capacity and
a rapidly developing
investment market.

Against this weak external and domestic

increases in the retail sector. Markets are

background, GDP is set to stagnate in

forecast to suffer a relapse in the current

2005, though an improvement is in

year, with offices particularly badly hit.

prospect during next year, pushing

Thereafter rental growth is forecast to

activity to a four-year high of 1.5%.

gradually build, with average increases

Labour markets have held up relatively

just under 1.5%. Returns were a healthy

well in the slowdown by contrast.

9.5% last year. An office-led decline is in

Employment growth of 0.6% is in

prospect over the next two years,

Spains commercial
property markets have
remained amongst
Europes strongest.

though a recovery brings medium term

external demand is in prospect, as

averages up to around 8%. Italian

consumer spending and the housing

performance is close to the European

markets cool. Despite this, inflation is

average and there is also potential

expected to remain high and will

upside, given under-capacity and a

continue to undermine competitiveness.

rapidly developing investment market.

Spains commercial property markets


have remained amongst Europes

Spain has performed strongly in

of over 3% in the last 12 months. This

recent years relative to other Eurozone

strength is sustained over the medium

economies. Since a dip in 2001-2,

term. Retail and industrial markets are

activity has gradually picked up and

expected to cool slightly, but this is

exceeded 3% last year. Domestic

offset by the steady revival in offices.

demand continues to drive growth with

Spain is expected to be one of the top

net trade remaining a drag, which has

performing investment markets over the

led to concerns that the expansion is

short to medium term, with double-digit

unbalanced. Moreover, consumer price

returns projected in all sectors over the

inflation continues to run at 1-1.5

next 5 years.

strongest, experiencing rental growth

percentage points above both the

Euroland mean and the ECB target.


Demand has held up in early 2005 and

The Dutch economy has shared in the

GDP is forecast to rise by close to 3%

economic malaise of its German

this year and next. Thereafter, Spain

neighbour. After dipping into recession

continues to out-perform EU growth

during 2003, GDP growth picked up last

averages, though the lead is slightly

year, though it remained well below

less pronounced, while employment

trend, with consumer demand static and

increases are predicted to slow. But a

employment contracting. Export-led

better balance between domestic and

growth has continued into the current

Commercial property
demand has dipped
during Belgiums
economic downturn.

year, though activity has been

period). The outlook for returns is

significantly slower than in 2004. Inflation

healthier, with continued improvement

has also accelerated faster than in many

across the sectors and medium-term

other European economies, though it

averages of over 8%, not far off the

remains below the EU average.

EU mean.

In 2005, GDP growth is expected to


drop to an anaemic 0.5%, with

consumer spending contracting.

In 2004, the Belgian economy recovered

An even bigger slump in household

strongly to record growth of just under

demand is in prospect next year, but

3% on the back of strong exports. But

this is largely due to a reallocation of

conditions have deteriorated this year

health care spending to government

and, although consumer demand has

consumption, while GDP growth is

held up, the latest figures point to

predicted to pick up. Over the medium

stagnation in the manufacturing sector,

term, the Netherlands regains some of

while unemployment has edged higher.

its vigour, but, with output increasing

At the same time as demand has

less than 2% a year and employment

weakened, oil prices have pushed

growth only 0.3%, it remains one of

Belgian inflation well above the ECBs

the Eurozones laggards.

2% target.

Poor economic performance has

GDP growth is forecast to dip to just

undermined Dutch property markets in

over 1% in 2005, though a steady upturn

recent years. Offices have been

is expected over the following 12

particularly badly hit and all other

months. Thereafter, unspectacular

sectors have experienced slowing rents.

activity of between 2 and 2.5% a year is

No strong upsurge is in prospect, but

projected (close to EU averages).

after bottoming out over the next year or

Consumer demand is underpinned by

so, rental increases revive steadily (albeit

respectable employment creation of

averaging only 1.2% in the 5 year

around 0.5% a year and by income tax

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE


reforms. This outlook is, however,

EU economies. This softness has helped

contingent on an improvement in the

subdue inflation in recent months,

external environment, given the

although recent indirect tax increases

openness of the economy.

are expected to bring a rebound later

in 2005.

Commercial property demand has

dipped during Belgiums economic

No immediate rebound in activity

downturn and rental increases are

is in prospect this year, but Portugals

expected to remain subdued in all

GDP growth is forecast to improve to

sectors during 2005. Thereafter, a slow

1.8% in 2006 and averages around 2%

recovery is in prospect in line with

a year thereafter. Employment prospects

economic trends, though five-year

are expected to gradually revive, but the

averages show annual rental growth

expansion is set to be less than 0.5 per

of only 2% a year. Total returns have

cent annually. Overall, performance is

had a more even performance in the

well below the EU averages and is

recent past and are projected to

much less impressive than in the heady

edge up to 9% by the end of the

pre-EMU days of the mid to late 1990s.

forecast period.
Progress in Portugals commercial

Portugal has faced

a difficult post-EMU
adjustment, largely as a
result of fiscal problems.


property markets is expected to stall this

Portugal has faced a difficult post-EMU

resumes next year and is sustained over

adjustment, largely as a result of fiscal

the forecast horizon. Total returns are

problems. Activity revived last year,

expected to steadily improve and

although even a turnaround in consumer

compare with European averages,

spending could not push growth above

though a sizeable gap is maintained

1%. In 2005, indicators point to

between the subdued office sector and

a slowdown, in line with most other

the buoyant retail market.

year (retail aside), though the upturn


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE

In Ireland strong rental

growth is predicted to
resume in all sectors by
next year.



Irelands economic renaissance has

The Swedish economic recovery

continued, with the economy recording

delivered growth of over 3% last year,

one of the EUs most impressive growth

the strongest since 2000. Evidence

rates again last year. Momentum has

suggests that there has been loss of

been led by consumer demand,

momentum during 2005, although the

investment and exports, though there

slowdown has been less marked than in

is evidence of a deceleration in recent

the core EU economies. Meanwhile,

quarters and the latest indicators have

inflationary pressures have remained

been less positive. Consumer price

subdued, with price increases averaging

inflation has been steady at close to

less than 1% in recent months and

2% in 2005, after a long period

providing no immediate threat to the low

of running at rates well above the

interest rate environment.

Eurozone average.
Output is forecast to grow less rapidly
Irish GDP growth is expected to reach

this year, as external demand weakens

5% this year and then averages about

and domestic spending cannot bridge

4.5 per cent over the medium term.

the gap. GDP increases then average

This is accompanied by employment

2.5% a year over the medium term,

and consumer spending growth that are

with annual employment growth

also well above the western European

of around 0.4%. EMU entry is

average, although Irelands lead is less

ruled out in the near future, so

marked than in the previous decade.

Sweden will continue to exploit its

Although the outlook is both balanced

strong links to Europe without the

and sustainable, there remain potential

monetary constraints.

external downsides for the highly open

economy and the lingering risk of
a crash in the residential market.

Swedish property markets have

recovered slowly. Rental growth rates
are projected to recover, with increases

Irelands commercial property markets

averaging about 2.3% a year over the

have had a very mixed performance.

forecast period, led by the retail sector.

The retail sector has boomed, while

Total returns also pick up, with the

office rents have slumped. Strong rental

industrial sectors double-digit

growth is predicted to resume in all

outturns most buoyant, but offices

sectors by next year and prospects are

trailing well behind.

for a steady improvement over the five

year forecast period. A more balanced
profile of returns is also expected,
as offices recover and retail cools.
A forecast average return of 11%
suggests that Ireland will be one of the
EUs strongest investment performers.

Andrew Burrell can be reached via email at

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE


In the 2005 Emerging Trends Real Estate Survey
Moscow, along with Istanbul, was identified as one of
the two most promising real estate markets for
development. Consistent with this view, in recent
months there has been a significant shift in interest in
the Moscow real estate market.

Russia real estate moving

from looking to investing
By Steven Snaith, Tax Partner,
PricewaterhouseCoopers, Moscow

For many years foreign investors have

understanding of how these risks can

been looking with interest at the

be managed. In addition, yields are

Moscow real estate market but very

moving downwards but are still attractive

few deals were concluded. This was

when compared with other markets in

due largely to the lack of supply of

Central Europe. For example, yields in

suitable investments as well as

the Class A office sector space are

competition from Russian investors

around 12% whilst yields in warehousing

flush with cash, willing to accept lower

are close to 15%. According to certain

yields and with the ability to move more

market forecasts it is expected that

quickly in the market.

yields will have decreased to around

9-10% by 2010.

However, in recent years there has been

a significant increase in the supply of

For any potential investor it is important

real estate on the Moscow market in all

that they familiarise themselves with

sectors. In the office sector more than

the local situation. It is not just from a

3.5 million sq m of office space (1.5

market sector perspective, where they

million sq m owner occupied) was put

need to understand the development in

into operation in the period 2000 to

each of the sectors, but they also need

2004. In addition, in 2005 more than

to obtain a thorough understanding of

500,000 sq m of retail completions are

the legal, tax, other local political and

planned and over 250,000 sq m of

planning environments as well as

logistics and warehouse properties.

understanding the sources of financing

available to them.

Investors are showing a greater

acceptance of the risks in Russia and an

Increasingly investors
are finding that it is
becoming easier to raise
money to invest in
Russian real estate.

Types of investor and assets

well as an increasing number of

entrepreneurial investors. Many such

Recently the types of investors working

entrepreneurial investors have already

in the market have also changed.

done deals in Central and Eastern

Previously most of the deals being

Europe and are now looking to move

transacted involved Russian money but

further East.

increasingly foreign investors are looking

to invest. Such foreign investors include

Often such investors are willing to look

a number of foreign funds. Nonetheless,

at a wider asset class as well as different

while interest has certainly increased,

types of investment. In addition, a

there is still much room for growth

number of investors are looking to

of the estimated more than $2 billion

partner with local Russian companies.

directly invested in Central and Eastern

Increasingly investors are finding that it

Europe, it is estimated that less than

is becoming easier to raise money to

$100 million found its way to Russia

invest in Russian real estate. One such

despite more attractive fundamentals

example is Raven Group which recently

than some of the other Central and

completed a listing on the AIM in

Eastern European markets.

London and has announced it is looking

to invest over $500 million in Russian

In 2004 some of the first foreign fund

real estate.

real estate investments took place with

Eastern Property Holdings acquisition

Until recently, foreign investors were

of Berlin House and Fleming Family

mainly looking to acquire Class A office

Partners Real Estate funds purchase of

properties, but now they are now

Gogolevsky Boulevard No 11 and, in

considering a wider range of assets and

2005 its purchase of an office building

there is increasing availability (although

at Lesnaya street No 3.

the market is still tight) of different types

of properties. Many investors are now

However, other foreign investors are also

considering retail space and hotels, as

looking to be involved, including some of

well as warehousing and logistics

the large real estate investment funds as

PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE

together with office buildings. The


Structuring the deal

likelihood is that there will be an

increasing number of deals in these

One particular feature of the Russian

areas as opposed to the more traditional

real estate market is that virtually all of

office transactions because of the

the deals being considered involve the

increased range of acceptable product

acquisition of a company owning the

available on the market.

property, usually as a single asset

owning entity, as opposed to the

With the improved legal environment,

purchasing of the property asset itself.

more foreign investors are considering

There are a number of advantages to

either buying or leasing land plots in

such corporate deals, principally for

Russia and investing in greenfield

the seller, as often it may be possible

developments in all of the above market

for the seller to achieve an exit from the

areas. Joint ventures with Russian

transaction without incurring Russian tax

partners for development purposes are

if the entity being sold is held from an

not uncommon, but proper structuring of

appropriate foreign jurisdiction. Whilst

such arrangements requires careful

there are also some advantages for the

planning of a long term relationship and

buyer, principally around there being no

exit strategies.

VAT on the purchase of shares as

Nonetheless, challenges still lie ahead

and specific aspects of the market
need to be carefully managed, such
as the inability to directly acquire land

opposed to the purchase of property

and there being no need to re-register
title to the property, there are also a
number of disadvantages.

in Moscow (the norm being 49 year

These disadvantages are wider than the

land leases) and often a lack of

fact that a corporate deal brings with it

transparency and comparables making

all the previous operating history of the

valuations difficult.

company and legal deficiencies

embedded in it, and often include

Virtually all of the

deals being considered
involve the acquisition
of a company owning
the property.


PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON EUROPE

significant tax disadvantages. These

property (real or through rouble

arise primarily as a result of uncertainties

devaluation), the debt may be only

and frequent tax changes in the past

a small part of the market value of the

legislation which meant structuring any

property. Whilst it may be possible to

real estate transaction at that time was

substitute existing debt, it is often very

difficult to do tax efficiently, as well as

difficult to increase the level of debt in

because the asset is denominated in the

a Russian company tax effectively, and

books of the Russian entity at its historic

standard structures used elsewhere in

rouble cost.

the world often do not work or are

extremely difficult and/or aggressive to

With the significant rouble devaluation

use in Russia.

that took place between 1998 and

2000 this means older buildings are

It is, therefore, extremely important when

often sitting in the books of Russian

modelling any potential yields to ensure

entities at amounts significantly below

the tax situation and the current

current market value. Even for newer

structure of the target company is fully

buildings, due to recent market

understood such that the impact of

conditions there is often a large

Russian tax on the post tax yield is fully

difference between the book value of

taken into account. It is not possible

a building and its market value. As such,

generally to model on a consolidated

the purchase of a property these days

basis as in practice it may not be

often involves acquiring a company with

possible to achieve such consolidation.

a large future potential gain embedded

There is a big difference between a 15%

in the company.

and an 11.4% yield. This also means

certain companies (properties) on the

In addition, being able to tax efficiently

finance any acquisition is difficult in
Russia. As it is usually the company

market may be more attractive than

others due to the way in which they
are structured.

being acquired, it is often difficult to

push down the debt into the entity owing

Tax is not the only driver when looking

the real estate such that interest on the

at acquiring a company as clearly a full

debt can be used to offset rental

financial and legal due diligence will be

income. In an ideal scenario it should be

required. This will be to ensure that the

possible to structure investment into

asset has the correct registration and

Russian real estate such that Russian

approvals from the various city and

corporate tax has only a minimal impact

federal authorities as well as ensuring

on the overall yield.

the validity of leases and other contracts

and absence of bad debts in the

Being able to tax

efficiently finance any
acquisition is difficult
in Russia.

However, this would mean being able to

structure financing tax efficiently, which
is difficult due to the way the companies
owning the real estate were previously
financed and the lack of group relief or
tax consolidation in Russia. Often the
companies being acquired have only a
minimal amount of existing debt or, due
to the increase in the value of the

company. In addition, since many

company sales are structured from
a pricing perspective as an asset sale
based on yield there needs to be a
comprehensive understanding of the
sustainability of the yield going forward
not just in terms of income but also
whether post acquisition the costs will
remain the same.

The starting point in

looking at the tax
implications of investment
in real estate in Europe
is the nature of the
vehicle investing.

Fund Structuring

funds are typically structured as tax

exempt (e.g. in a tax haven) or as a tax

As has been mentioned already, Russia

transparent (e.g. limited partnerships or

is becoming attractive as an investment

contractual vehicles).

target for real estate funds. At present

much of the investment has been by

Such vehicles are not generally entitled

country specific funds investing

to the benefits of double tax treaties and

exclusively in Russia, although other

it is therefore necessary to have an

opportunistic investors are also starting

intermediate holding company in a

to look at Russia as well.

jurisdiction with an appropriate double

tax treaty with Russia, a participation

The starting point in looking at the tax

exemption that exempts from tax capital

implications of investment in real estate

gains and dividends in respect of the

in Europe is the nature of the vehicle

underlying SPV and a means of

investing. From an investors tax

mitigating withholding tax on dividends

perspective, it is important that profits

out of the holding company. Cyprus is

received by the fund are not subject to

one, but there are others and the choice

tax, either in the fund vehicle itself or by

will ultimately depend upon the tax

withholding tax on distributions made

requirements of investors.

by the fund. In order to achieve this,

Steven Snaith can be reached via email at

Tech Corner

PricewaterhouseCoopers Global Real Estate Now November 2005 TECH CORNER


Real estate companies face many challenges with

respect to the budgeting, forecasting and planning
processes. Though these processes are all
interrelated, they typically are performed by disparate
groups including leasing, property management,
property and corporate accounting. Technology
vendors have strived to provide solutions for
components of the processes, but no solution exists
to support the end-to-end collaborative planning
life cycle.

Budgeting, forecasting and

planning: process and
technology trends in the real
estate industry
By David Yakowitz, Director and
Kurtis Babczenko, Director,
PricewaterhouseCoopers Advisory, Chicago

In this article, we will explore some of

property vs. corporate budgeting are

the key trends related to budgeting,

very different, a key challenge in overall

forecasting and planning within the real

corporate planning is the ability to

estate industry, as well as some of the

combine information from each process,

technology options currently available.

and model various permutations of

property and corporate scenarios.

Financial planning tasks typically have

been divided into the categories of

Many organisations continue to use

property budgeting and forecasting,

spreadsheets and other offline solutions

and corporate budgeting. Property

to manage their budgeting, forecasting

level budgeting and forecasting focuses

and planning processes. While these

on the anticipated net operating income

tools are intuitive and easy to use, they

at the asset level. Corporate budgeting

have little or no integration to underlying

focuses on the non-asset specific

property management and financial

costs such as general and administrative

systems and generally require manual

costs. Outputs from these functions

re-entry of necessary data. Such

must be combined to provide overall

processes are inefficient and prone to

corporate plans. Since the information

error and make it very difficult to keep

required and techniques used in

the budget models synchronised with

The concept of creating

a single corporate
planning function is
gaining momentum within
the industry, and
corporate planning
departments are being
evaluated as the
mechanism to oversee
the overall budgeting,
forecasting and planning

up-to-date leasing and financial

and the ability to model all business

information. Such a situation can easily

segments using methodologies that are

impede an organisations ability to look

appropriate for that segment. Table 1

forward and consider continuous

summarises some of the key elements

planning approaches such as

we see considered in efficient corporate

rolling budgeting.

planning functions.

As a result of these challenges, many

Clearly, the ability to leverage technology

organisations are evaluating new

is critical in developing an efficient

organisational models and technology to

corporate planning process. While there

address the inefficiencies in the planning

has been a category of technology

function. The concept of creating a

providers targeting solutions in the

single corporate planning function is

budgeting and planning area for some

gaining momentum within the industry,

time, this group has been relatively

and corporate planning departments are

non-existent in the real estate sector.

being evaluated as the mechanism to

The solutions from this group, referred to

oversee the overall budgeting,

as Business Performance Management

forecasting and planning processes.

(BPM) vendors, allow for consolidation

Key roles played by this group include:

of underlying operational and financial

ownership and management of the

system information, and provide

planning process, providing necessary

modelling and collaboration tools which

top-down guidance for key budgeting

are layered on top. These providers have

and planning parameters, determination

built their solutions based on general

of appropriate mix of property/asset

planning requirements and tend not to

level assumptions, and definition of

have real estate industry specific

general business scenarios. These

solutions such as functionality for

groups require the ability to consolidate,

property budgeting.

view and analyse data from multiple

sources, the ability to define and
measure key performance indicators,

As BPM tools gain momentum, vendors

of property management and financial

PricewaterhouseCoopers Global Real Estate Now November 2005 TECH CORNER


Table 1: Key elements of an efficient corporate planning function

Linkage of budget development to

Corporate objectives

business strategy

Portfolio objectives
Asset plans

Tie incentives to performance measures

Asset quality

balanced scorecard

Tenant satisfaction
Profitable growth

Incorporation of cost management into

Product type/submarket benchmarks

budgeting process

Service contracts
Purchase contracts

Reduction of planning complexity and

and cycle time

Minimise data collection, reconciliation,

and integration efforts
Leverage technology to automate
and collaborate

Continuous planning and forecasting

Monitor significant changes

Model business opportunities
Leverage technology

Source: PricewaterhouseCoopers

While there has been a

category of technology
providers targeting
solutions in the budgeting
and planning area for
some time, this group
has been relatively
non-existent in the real
estate sector.


PricewaterhouseCoopers Global Real Estate Now November 2005 TECH CORNER

systems, including both Enterprise

CRM/deal-flow information and

Resource Planning (ERP) vendors and

assumptions in the budget. As a result,

niche real estate vendors, have also

if a leasing agent is tracking two

entered the budgeting and planning

potential deals for a space, there is no

space in recent years. As such, their

easy way in the budgeting system to

products tend to be less mature from

identify them and simply assign

a functional perspective but they often

probabilities. Instead, leasing would

have advantages from a data integration

need to re-enter deal terms as a leasing

perspective. They also provide more

assumption in the budgeting system.

specialised functionality for the real

estate industry including the ability to
leverage underlying contractual lease
information on a real-time basis and
track both budgeted (projected) numbers
and actuals (i.e., what was actually
spent) at the space or lease level.

The ability to leverage technology in the

budgeting and planning area helps to
enable implementation of many of the
best practice ideas discussed above.
For example, the ability to leverage
existing data reduces the need for data
collection and reconciliation and helps

While the property

budgeting solutions
provide mechanisms
for assumptions to be
maintained, there is
generally no good
integration between
information and
assumptions in
the budget.

Despite the advances we have seen

minimises errors. Utilising business rules

from a technology standpoint, there

and workflow technology helps

remain a number of opportunities for

automate the review and approval

the technology providers. One of the key

procedures, reducing overall cycle time

challenge areas that remain is the ability

and enabling a more repeatable process.

to effectively incorporate the leasing

However, technology is only one

pipeline into the budgeting process.

component of the puzzle needed to

While the property budgeting solutions

drive efficiency into the planning

provide mechanisms for assumptions

process. Critical to a successful process,

to be maintained, there is generally

and often the most difficult to

o good integration between

implement, are the organisational and

The future of corporate

planning in the real estate
industry holds much
promise, and will mature
significantly in the coming
years due to the specific
needs of the industry
to combine real estatespecific modelling
with general business

cultural changes required. Appropriately

realities. For example, the ability to

linking incentives and performance

automatically incorporate the latest

measurement to the process requires

signed lease deals, and the ability to

top-down commitment and often causes

reforecast by automatically incorporating

the greatest amount of resistance.

year-to-date actuals into the budgeting

These changes will not happen overnight

process already exist today. Existing

and require strong leadership and a clear

applications also allow us to complete

vision of the future state efficiencies.

5-, 10- and up to 15-year forecasts

using a combination of existing

The future of corporate planning in the

real estate industry holds much promise,
and will mature significantly in the
coming years due to the specific
needs of the industry to combine real
estate-specific modelling with general
business modelling. The ability of
technology to support adaptation of
corporate planning best practices
continues to progress and should be a
key enabler. Capabilities we could only
imagine in the recent past are now

contractual lease data and assumptions

maintained within the budgeting
tools. With integration and some
customisation, the ability to mix
property budgeting scenarios with
general business models can also be
accomplished. As technology continues
to improve, it will allow real estate
companies to implement even
more progressive ideas in the
budgeting, forecasting and corporate
planning areas.

David Yakowitz can be reached via e-mail at:

Kurtis Babczenko can be reached via e-mail at:

Real Estate

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Global Real Estate Leaders

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Global Real Estate Tax Leader
Amsterdam, The Netherlands
Tel: [31] (20) 568 6872
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Tel: [1] (415) 498 7405
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Global Real Estate Advisory Leader
New York, United States of America
Tel: [1] (646) 471 8877 or
[1] (646) 471 2666

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Robert Grome
Asia Pacific Investment Management
& Real Estate Leader
Hong Kong
Tel: [852] 2289 1133
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Asia Pacific Real Estate Assurance Leader
Sydney, Australia
Tel: [61] (2) 8266 2933
Kwok Kay So
Asia Pacific Real Estate Tax Leader
Hong Kong
Tel: [852] 2289 3789

European Real Estate Leaders

Henrik Steinbrecher
European Real Estate Leader
Stockholm, Sweden
Tel: [46] (8) 555 330 97
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European Real Estate Tax Leader
Amsterdam, The Netherlands
Tel: [31] (20) 568 6872

Kees Hage
European Real Estate Assurance Leader
Rotterdam, The Netherlands
Tel: [31] (10) 4008 414
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European Real Estate Advisory Leader
Berlin, Germany
Tel: [49] (30) 26 36 1149
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Real Estate Leader - Central & Eastern
Europe and CIS
Prague, Czech Republic
Tel: [420] 251 152 619

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Real Estate Leaders
John Forbes
UK Real Estate Tax Leader
London, United Kingdom
Tel: [44] (0) 20 7804 3161
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Real Estate Leader
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Tel: [44] (0) 20 7212 5225

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Tel: [55] (11) 3674 3833

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United States
Real Estate Leaders
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US Real Estate Practice Leader
US Real Estate Assurance Leader
San Francisco, United States of America
Tel: [1] (415) 498 7405
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New York, United States of America
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PricewaterhouseCoopers ( provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in
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