By Fraser Hughes and Dr. Marcus Cieleback

The topic at EXPO REAL 2007 Tuesday, 9 October 2007 PLANNING & PARTNERSHIPS FORUM Hall C3 2.00 pm – 2.50 pm REITs in Germany: Status quo and perspectives Click here for detailed information on the programme

The introduction of REITs in Germany was a long process. It required political compromises that were not without a great deal of debate. What are the differences from other European countries and REITs in the USA?

The first Real Estate Investment Trust was introduced in the United States in 1960. However, it was not until the early 1990’s that the US REIT gained momentum. In Europe, the Netherlands was the first country to introduce its version of the REIT structure – Fiscale Beleggings Instellingen (FBI) in 1969. Currently there are 25 individual country REIT structures dotted around the world. In this article we aim to compare the main European structures and the US version only. For the European market we focus on the Netherlands, France, UK and Germany.

Generally, the structures contain various minimum investor or shareholder requirements. These requirements attempt to ensure that the REIT is owned by a broad and diverse group of investors. France has recently lowered its maximum shareholder weighting to 60 percent following heavy buying activity from Spanish investors seeking a tax efficient route into the French market in recent years.

The G-REIT aims to eradicate this option, by stating that no single shareholder can hold more than ten percent of the REIT’s voting rights. In the UK a REIT cannot be a ‘close’ company, with the US being more specific stating that a REIT must be owned by 100 or more persons and no five individuals can own more than 50 percent of the shares.

	Source: Eurohypo RAC research, Ellwanger & Geiger; Date: December 31, 2006

In relation to permitted activities, all regimes clearly focus on the ownership of income producing real estate. Eligibility tests come in the form of income and asset tests. In the US both income and asset tests are employed. In the Netherlands, an FBI must only hold passive investments, with any development activities falling under a taxable subsidiary. All development activities must be for the FBI’s own portfolio. In France, development activities are subject to standard corporation tax. The UK and Germany have similar rules which state that 75 percent of income and assets must be derived from qualifying assets.

In general, there are gearing or leverage limits looking across the regimes, either written explicitly in the legislation, or imposed by the market. For example, the Dutch FBI and the G-REIT focus on ratios related to the values of the underlying properties. In the case of the FBI the ratio is 60 percent of fiscal book value, the G-REIT focuses on net asset value. In the UK, REITs must ensure their finance ratio is greater than 1.25. In the United States, although there are no restrictions, the market will penalise REITs with higher relative levels of borrowing. On average, the US REIT market expresses gearing ratios in the region of 35-45 percent.

One of the fundamental criteria of the REIT structure is its distribution obligation, or the amount it must pay to shareholders. On a global basis distributions tend to range between 80-100 percent. Of course, there are slight differences in the classification of what is being distributed. Most countries have a distribution ratio linked to income received from rentals, while capital gains fall under a variety of obligations. In France, a SIIC is required to distribute 50 percent of capital gains however in the UK there is no obligation to do so.

FINANCE INVESTORS AND THE REAL ESTATE INDUSTRY
Unity or Opposition? 

CROSS-BORDER INVESTMENTS
Still plenty of value to be released 

REAL ESTATE ASSET MANAGEMENT
Complex scope of tasks 

New Fund Strategies
Raring to go 

Investment Market Germany
German real estate market in frenzy 

Property derivatives
An emerging market 

Investment vehicles
REITs in the land of open real estate funds