By Sara Seddon Kilbinger February 2007

 

 

With the introduction of the investment vehicle of the same name in Germany, Great Britain, and Italy, 2007 will be the year of the Real Estate Investment Trust, in short: REIT.

UK REITs were introduced on 1 January, with nine companies converting to REIT status, including British Land. While it was also hoped that German REITs would be introduced at the beginning of this year, it is now unlikely that they will be introduced before the summer. Italian REITs are expected to be introduced in July.

German REITs were in the hot seat at EXPO REAL in October 2006. Germany, Europe’s largest economy, has by far the largest real estate stock in Europe, yet only a small fraction is held by institutional real estate investors; therefore, securing a much larger slice of the market would make sense and add a greater degree of liquidity. 

	Photo: Bernd Knobloch, Chairman of the Board of Eurohypo
	Photo Dr. Heiko Beck, Member of the Board of Managing Directors of Commerz Grundbesitz Group

All the signs reveal that Germany is finally ready for REITs: Germany’s IFD, an action group for the financial sector, has estimated that investors could channel around 120 billion Euros into German REITs within the next five years. The British Property Federation, a real estate trade group in the UK, estimates that around 40 billion GBP could be invested in UK REITs this year.

But German REIT legislation has been a long time coming, says panelist Dr. Heiko Beck, Member of the Board of Managing Directors of Commerz Grundbesitz Group in Wiesbaden, noting that the legislation has been three years in the making. A REIT is a vehicle that invests in real estate and, in return, enjoys a measure of protection from corporate and trade tax. As a result, the REIT is expected to distribute a significant amount of its income to shareholders. German REIT stock corporations are generally unregulated stock corporations. All shares in the REIT AG must constitute a single class of ordinary shares with voting rights issued against full payment of the issue price. The minimum nominal amount of stated capital is 15 million Euros. So far, there have not been any real surprises with German REIT legislation, says panelist Dr. Florian Schultz, Partner at law firm Linklaters in Frankfurt. Some of the key points of the draft legislation from the German government include:

• less than ten percent ownership for individual shareholders;
• a free float of 25 percent initially and at least 15 percent thereafter;
• at least 90 percent of a REIT’s income to be redistributed to shareholders;
• at least 75 percent of the total assets must be properties.

If a company sells its real estate to a REIT, it can enjoy tax breaks on extraordinary income if the company holds it more than ten years in its company assets. In this case, the taxation on book profits is reduced by 50 percent.