In 2022, real estate investment trusts (REIT) will actively develop in Ukraine as an alternative tinstrument for investment and keeping the citizens’ fortune.
Experts predict a gradual flow of citizens' funds on deposits to the REITs.
The main feature of this financial instrument is that citizens can invest their own savings by acquiring publicly traded securities and make a profit of 10% per annum in relation to the currency exchange rate.
"There will be no need to purchase an apartment, maintain and rent it out, instead it will be possible to profit from an investment in a trust that directly owns and rents this property. Such trusts exist all over the world and this is a fairly popular type of placing idle funds," he stresses.
In Ukraine, as a rule, the real estate investment trusts are closed to ordinary investors. However, according to the specialist, at the end of 2021, several powerful Ukrainian developers announced establishing such trusts with the possibility of investing in them for everyone.
The developers will use the obtained investment funds to develop their own projects in different real estate segments.
"Individuals' investments in real estate investment trusts will become an additional source of financing for the construction of real estate facilities without bank lending. This will allow the developers to obtain targeted financing for a specific property and the end investors to profit from implementing these projects," Sementsov believes.
Investment trusts: How it works
The procedure for joining the REIT is simple: the investor will be offered to purchase the trust's securities that they can freely use and that they also can make a profit on within a certain period.
According to Ukrainian legislation, depending on the trust type, the minimum amount for joining a real estate investment trust due to purchasing securities can be from $5,000. The expert believes that such trusts are able to attract the attention of the foreign investors to the Ukrainian real estate market, because for them, the format of REITs is understandable and widespread.
In fact, REIT is a management company that doles out the funds obtained to different segments of real estate. Securities of the international REITs are freely listed on the financial exchanges and are more liquid than the real estate properties because they can be sold at market value much faster than, for example, an apartment.
"The largest share of the income of any REIT is rent payments providing stable and predictable inpayments In addition, the REIT profit does not depend on the level of inflation because the cost of real estate and rental payments very often increases by the equivalent of the working capital depreciation. In fact, the phenomenon of real estate investment trusts is one of the areas to create a transparent real estate market in Ukraine that will boost raising foreign investment into this sector of the Ukrainian economy," the specialist explains.
In Ukraine, the return on investment in real estate trusts is on average 10% per annum pegged to foreign currency. For example, in the USA such profit does not exceed 2-5%.
REIT as an alternative to bank investments
Investing in REITs can become an alternative to the bank deposits, but with more attractive returns. Indeed, at the end of 2021, the rate on bank deposits in hryvnia ranged from 9% to 11%, while the rate in foreign currency for short-term investments was 0.4-0.8% and for long-term investments—1-3.7% .
At the same time, the forecasts of the financial analysts indicate that in 2022 an increase in % on foreign currency deposits is unlikely, and the rate on hryvnia investments may increase by an average of only 0.5-1%.
"Financial experts predict that in 2022 the situation in the banking sector is unlikely to change radically. At the same time, this "status quo" gives impetus to the development of investment alternative sources to keep fortune, taking into account inflation and making passive profits," he said.
In his opinion, in 2022, it may be most appropriate for the individuals to invest in government bonds, residential real estate in the primary market, service apartments, and REITs. Depositing funds will be the least attractive for the citizens of Ukraine.
In addition, there is still a tax on income on deposits, the amount of which is 18% of personal income tax, and one will also have to pay 1.5% of the military tax (total 19.5%). As for the taxation of investments in REITs, the tax on the investor will be paid by the investment trust: this is 9% tax on dividends, 1.5% military tax, and the fund's remuneration in the amount of up to 1-1.5%. That is, unlike 19.5% taxes on deposits, the investor will have to pay only 11-12%.
In the next 2-3 years, at least 10 real estate investment trusts may appear and become fully operational in Ukraine. The expert does not rule out that together with the trusts established by Ukrainian developers, 2-3 foreign REITs may also enter the Ukrainian market.
"First of all, powerful Ukrainian development companies are interested in establishing such trusts. That is, the companies that plan to simultaneously implement from 3 to 5 large-scale projects spread over 5-10 years in different real estate segments," he says.
The specialist predicts a gradual flow of funds from citizens on deposits to REITs in 2022. However, the focus of the potential investors’ attention to such trusts is possible not earlier than May-June.
"According to the most optimistic forecasts, in 2022 the "flow" of the capital of individuals from the banking sector to investment trusts can be up to 2-2.5% of the total amount of investment in foreign currency (up to $250 million), and up to 3-5% of the total amount of hryvnia deposits (about 25-30 billion hryvnia)," Volodymyr Sementsov sums up.