exporeal.net - INVESTMENT

Providing the REIT structures comply with the eligible assets rule, corporate income tax is not charged. There are rules that specify a minimum holding period duration within some of the regimes. For example, in the UK, should a REIT sell a development property that it has held for less than three years, it will incur charges. Withholding tax is applied to all of the REITs in the figure. The European REITs in question are able to make use of bilateral tax treaties.For the new REITs in Europe a conversion charge is applicable. The French introduced a conversion charge in their first version of the SIIC structure in 2003, charging 16.5 percent of latent capital gains for companies wishing to convert. The UK Government followed suit in 2007 with a two percent conversion charge on qualifying assets. The G-REIT will tax 50 percent of capital gains for properties transferred into a REIT until 31 December 2009. In the US a corporation can elect to become a REIT without tax, but any asset sales within a ten years period after conversion will result in a tax on gains. The Dutch FBI offers no favourable conditions for conversion.For investors wishing to gain exposure to the German market, the introduction of the G-REIT offers a new range of possibilities in the indirect real estate investment market which fulfils broad international investment requirements in terms of liquidity and transparency. Unfortunately, the German REIT Act does not provide for the full spectrum of investment opportunities: in particular the G-REIT may not, or only to a limited extent, invest in German residential property portfolios. This was a political compromise which makes little sense from an economic point of view. Analysis of the 15 largest stocks of the DIMAX in terms of market capitalisation shows that nine of these companies hold considerable residential property portfolios or focus entirely on residential real estate.

So what options exist for residential real estate investors if they cannot transfer or incorporate their portfolios into a G-REIT? The existing companies which own large residential portfolios have already demonstrated that there is a route to the stock market without incorporating German residential portfolios into the G-REIT. In addition, the high level of investor interest in German residential portfolios can be satisfied in other ways. Gagfah is an example of how a “quasi REIT” can be created with German residential property using a foreign holding. Other ways of satisfying investor demand are listing on foreign stock exchanges via, for example, a French SIIC (e.g. Foncière des Regions) or on the alternative investment market in London (e.g. Puma Brandenburg). These vehicles represent an increasingly significant channel for the expanding secondary sales market of residential portfolios. However this cannot be a long-term solution for the German capital market.

Source: AME Capital/Bloomberg; Date: Summer 2007