Global Realestate Now

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.*
Contents
FEATURE ARTICLES
2
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?
EYE ON ASIA
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.
EYE ON THE AMERICAS

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.
EYE ON EUROPE
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.
TECH CORNER
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
frank.van.zelst@nl.pwc.com
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
History
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

100
90
80
70
$ billions
60
50
40
30
20
10
0
1998
Non-US $
Currently there
are close to 20
announced conduit
programmes working
the European market.
1999
2000
2001
US $
spreads were pricing near 40 basis
2002
2003
2004
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.
Chart 2: European CMBS

issuance by rating category
1%
5%
8%
9%
60%
17%
AAA
AA
Sub BBB
BBB
NR
Source: Barclays Capital
Chart 3: European CMBS

issuance by transaction type
14%
22%
14%
22%
28%
Single borrower/multi property

Single borrower/single property
Multi borrower/multi property
Credit tenant lease
Synthetic
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
Chart 4a: European CMBS

issuance by geography to date
3%
3% 3%
2% 3%
4%
8%
74%
UK
France
Spain
Netherlands
Germany
Sweden
Italy
Other
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
2%
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

31%
diligence which includes all aspects of the securitisation process.
56%
Taco Brink can be reached via email at: taco.brink@uk.pwc.com
4%
0%
UK
Pan-EU
France
Netherlands
Germany
Sweden
Source: Commercial Mortgage Alert
Italy
Other
Property derivatives
in the United Kingdom
By Matthew Barling, PricewaterhouseCoopers, London
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
Counterparty
e.g. Bank
Investor
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
11
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

derivatives
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)
Investor
Issuer (e.g. Bank)

Cash
12
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
to UK SDLT.
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 matthew.barling@uk.pwc.com
Eye on Asia
PricewaterhouseCoopers Global Real Estate Now November 2005 EYE ON ASIA
15
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)
b.in 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 :
17
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
18
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

development
(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%.
21
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.
22
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
Conclusion
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 vivek.mehra@in.pwc.com

Akash Gupt can be reached via email at akash.gupt@in.pwc.com
23
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.
Other cities
25
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
opportunities.
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).
26
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
FEs
FIEs
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
28
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.
Conclusion
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 kk.so@hk.pwc.com

Gary Chan can be reached via email at gary.chan@cn.pwc.com
Rex Chan can be reached via email at rex.c.chan@cn.pwc.com
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
31
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.
Value Added Tax
33
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

Ownership
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
34
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

requirements.
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
36
Future Outlook for the Mexican

Real Estate Market
Conclusion
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
infrastructure.
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 roberto.del.torro@mx.pwc.com

David Cuellar is available via email at david.cuellar@mx.pwc.com (Mexico) or
david.z.cuellar@uk.pwc.com (U.K.)
Jose Luis Olvera is available via email at jose.olvera@mx.pwc.com
Martin N. van der Zwan is available via email at martin.van.der.zwan@nl.pwc.com
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
39
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
Germany
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,
41
Table 1: Summary of Economic Forecasts

GDP % pa
Consumer Spending
Employment % pa
Bond yields % pa
Inflation % pa
% pa
Forecast of annual averages 2005-09
Germany
1.6
1.1
0.3
5.0
1.4
France
2.1
2.1
0.5
5.0
1.8
UK
2.5
2.5
0.5
4.9
2.4
Italy
1.5
1.3
0.4
5.0
1.9
Spain
2.8
3.0
1.5
5.0
2.2
Netherlands
1.7
0.6
0.3
5.0
1.8
Belgium
2.1
2.0
0.6
5.0
1.8
Portugal
1.7
2.1
0.4
5.0
2.2
Ireland
4.4
3.2
1.3
5.0
2.3
Sweden
2.5
2.2
0.4
5.0
2.3
Source: Experian
Table 2: Summary of Main European Economies Property Markets

Offices
Offices Retail Industrial
Retail
Industrial
Average 2005-09
Rental
Capital
Return
Rental
Capital
Return
Rental
Capital
Return
Germany
0.5
0.6
5.2
0.5
0.5
5.9
0.5
0.5
4.9
France
2.3
3.0
9.5
2.9
3.4
10.9
1.4
2.3
11.2
UK
3.3
3.4
10.6
2.9
3.1
9.0
2.0
3.3
10.7
Italy
1.0
1.9
7.8
1.7
2.1
8.6
1.3
1.3
8.9
Spain
4.1
4.6
10.4
3.5
4.3
11.3
3.2
4.3
12.5
Netherlands
1.2
0.9
8.1
1.3
1.2
8.5
0.2
0.1
8.4
Belgium
1.7
2.0
8.9
2.2
2.2
9.2
1.5
2.4
9.9
Portugal
2.1
1.9
7.6
2.3
2.7
10.6
1.7
3.1
9.4
Ireland
3.4
4.4
10.9
4.4
6.3
11.0
3.2
4.9
11.9
Sweden
2.2
2.1
8.0
2.7
3.1
9.1
1.8
2.3
10.2
Source: Experian
42
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.
France
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.
UK
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
45
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
Italy
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
46
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
Spain
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.
Netherlands
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
Belgium
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
49
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.
Portugal
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
50
In Ireland strong rental

growth is predicted to
resume in all sectors by
next year.
Ireland
Sweden
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 andrew.burrell@uk.experian.com
51
Overview
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
together with office buildings. The
53
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.
54
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 steven.snaith@ru.pwc.com
Tech Corner
PricewaterhouseCoopers Global Real Estate Now November 2005 TECH CORNER
57
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
processes.
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
59
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.
60
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
CRM/deal-flow
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
modelling.
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: david.yakowitz@us.pwc.com

Kurtis Babczenko can be reached via e-mail at: kurtis.babczenko@us.pwc.com
Real Estate
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November 2005 Volume 10 Number 3

Global Real Estate Now

The rise of CMBS in Europe

Property derivatives in the United Kingdom

23 China - strong and sustained economic growth is attracting

EYE ON THE AMERICAS

51 Russia - Moving from looking to investing

I also would like to extend a warm

PricewaterhouseCoopers who earned

I am looking forward to the challenge of

Frank van Zelst

The rise of CMBS

By Taco Brink, Senior Manager, PricewaterhouseCoopers, London

PricewaterhouseCoopers Global Real Estate Now November 2005 FEATURE

Securitisation is a form of financing where illiquid,

The continued growth in

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

Within the European real estate

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