Beyond good deeds

By Francesca Rush.

Key Points:

We all know the Australian property market is renowned as being sophisticated and leading the way in property securitisation vehicles such as LPTs, wholesale REITS and other asset holding property vehicles. We also know the domestic market is limited by a shortage of quality investment grade property and that more significant investment opportunities exist off shore.

We recognise these developments have taken shape over a number of years, having greatly changed the way we understand property investment and do property business. The fact is, the industry has moved beyond traditional property work. The most important, and obvious, aspect to draw on is that property will not stand still, so there is a need to be at the forefront of these developments. Again, this is nothing new, but what is the right approach and what kind of external support can add value?

"What is the right approach to structuring? to investments? to sector exposure? to region exposure?" are questions that our institutional clients have been asking themselves more frequently since the takeover boom and the subsequent consolidation in the LPT sector post-2002.

Looking to offshore assets and broadening the investor base for Australian fund managers, developers and institutional investors is part of the solution.

Getting the vehicle right

Getting the right "vehicle" to be a platform for offshore property investments - particularly from an Australian income tax perspective - is critical. For over a decade and particularly since the introduction of the Managed Investments Act in 1998, Australian investors have embraced the "unit trust" model as an optimum model for property investments.

The Australian market understands the legal nature of a unit holder's interest, the scope of a trustee's duties and importantly the industry has been able to convince our tax, stamp duty and investment regulators to pass favourable (or at least generally workable) legislation recognising the interests of unit holders and trustees in a manner that gives developers, investors and fund managers a degree of certainty of the tax, stamp duty and regulatory consequences of using a form of unit trust - listed, wholesale or otherwise. Our colleagues in the US and Japan also understand the investment trust well, and our UK and European colleagues are catching up.

Having said this, Australian income tax treatment of unit trusts is complicated - the rules relating to "interest and royalty withholding taxes", "trading trusts", FIFs (Foreign Investment Funds), CFCs (Controlled Foreign Corporations) and FTCs (Foreign Tax Credits) - may all need to be considered by an Australian investor or fund manager seeking to invest in a single offshore property asset.

The risks associated with the interaction of Australian income tax and income and capital derived from offshore investments are becoming better understood by Australian investors and fund managers. Many participants are seeking to mitigate and manage those risks before acquiring any offshore assets and some investors now accept a degree of "tax risk" as being inherent in a "cross border" deal on assets with a healthy yield and capital growth potential. This risk is then addressed in the mixing pot of property, credit and return risks that are "usual or customary" in many direct or indirect property investments.

This edition

In this special edition of Insights we have identified six areas of interest for industry participants:

• looking back at the evolution of the LPT market and in particular how "stapled" structures until recent times have been the answer to unlocking value for investors (LPTs in 2005 - A long journey from 1991 by Michael Parshall)
• considering whether the use of "special purpose vehicles" as a way to reduce property project risks and limit recourse to project assets and cashflows is effective (Does the use of SPVs provide effective liability limitation? by Graeme Gurney)
• how to manage conflicts of interest and trustee's duties - in particular when the conflicts arise in conglomerate groups (Managing conflicts in the Australian property trust industry by John Moutsopoulos)
• recent stamp duty law changes and how they impact on many dealings that were previously duty free (Stamp duty - a year in focus by David Klarich)
• how recent changes to the infrastructure charges regime in Queensland may impact upon future infrastructure development in the state (The new infrastructure charges regime in Queensland by Karen Trainor)
• the 2005 update on last year's very sought after "Retail Tenancies Comparative Analysis" (Retail tenancies - state by state)

We hope that you enjoy reading these articles at your leisure over the next few days and we look forward to catching up with you at Congress.

For further information, please contact Francesca Rush.