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REITs for corporate real estate
However, while there were few surprises in the draft legislation, there were some disappointments, including the omission of housing REITs — at least for the moment.

Nevertheless, REITs could spell good news for German corporations, who may be tempted to convert their real estate assets into REITs, which would free up capital to invest in their core business. Currently, more than 70 percent of German companies own their real estate assets instead of leasing them. This compares with around 54 percent in the UK and just 25 percent in the US.

“However”, says Dr. Heiko Beck, “corporations in Germany are unlikely to sell properties en masse, following the introduction of REITs”. Instead, he says, they will monitor the market closely to see how it develops before bringing real estate assets to market. Many DAX 30 companies are wary, and do not want to be the first to participate in German REITs. “But the potential is there; there’s no question about that”, he says.


Photo: Dr. Rudolf Hanisch, Vice Chairman of the Management Board of Bayerische Landesbank

Photo: Dr. Florian Schultz, Partner at law firm Linklaters

According to Bernd Knobloch, Chairman of the Board of Eurohypo in Eschborn, shareholders are likely to pressurise companies into offloading non-core assets, such as real estate, because there is no financial incentive to hold them. Dr. Rudolf Hanisch, Vice Chairman of the Management Board of Bayerische Landesbank in Munich, agrees: “After some deliberation, I think most companies will do this”, he says. Such behaviour would certainly mirror what happened in France, following the introduction of REITs in 2003.

“For now, German REITs are likely to concentrate on domestic properties rather than foreign assets, because the double-taxation burden will make it unfavourable to invest abroad”, says Dr. Florian Schultz. “I was hoping that the government would resolve the double-taxation problem associated with foreign real estate assets in REITs. As the legislation stands, real estate outside Germany will be taxed twice: at source in the country in question and as dividend, which is not tax-efficient or attractive to investors wanting to hold foreign real estate assets in their German REITs. I hope the government will manage to resolve this,” he says.

Essentially, German REITs will offer other investors a new — and liquid — way of accessing German real estate, alongside Germany’s existing, albeit less liquid, open real estate funds. The two vehicles are unlikely to be in direct competition with each other, according to the panellists, because REITs are likely to appear more to institutional investors, with open funds being more attractive to retail investors.

Lessons can also be learned from existing REIT markets. While REITs were introduced in the US in 1960, in order to enable private investors to invest in commercial real estate on a large scale, it took three decades for the market to take off: today, the market capitalisation for the FTSE NAREIT All REIT index is $438 billion, according to the National Association of Real Estate Investment Trusts NAREIT, based in Washington, D.C. Progress in France’s REIT market over the past three years has been swifter, fuelled by a growing global interest in real estate. Today, there are around 40 REITs in France, with a market capitalisation of around 40 billion Euros. “This shows that the development of a REIT market takes time,” says Dr. Heiko Beck. However, German REITs are not going to take off overnight, and development this year is likely to be slow, say real estate insiders.