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EURO REITS

Two of Europe’s largest economies are set to allow real estate investment trusts next year

By Donna Mitchell

The British and German economies are among Europe’s largest and most sophisticated. Some would say it’s that much stranger, then, that these two are among the last to adopt the REIT structure.

Belgium legalized REITs in 1995, as did Turkey, followed by Greece in 1999, Bulgaria in 2003 and France in 2004. In the Netherlands REITs have been welcome since 1969. (The U.S. has had them since 1960.)

REITs give investors a way to own a variety of real estate holdings or mortgages — and to sell off those investments quickly. The trusts get special tax considerations, too. In the U.S., for instance, REITs can deduct the dividends they pay, as long as those distributions amount to at least 90 percent of taxable income.

The U.K. and Germany are expected to allow REITs next year, with conditions, at least where Britain is concerned. The treasury department there has caused consternation by proposing restrictions that would keep investors from holding more than 10 percent of a REIT. Another unpopular proposal would have REITs set aside pretax earnings to the tune of 2.5 times their debt interest burden, according to Martin Allen, a REIT analyst at Morgan Stanley.

Critics have suggested that only individual investors, not professional fund managers, be subject to that 10 percent limit; they also argue for a more relaxed earnings-to-interest coverage ratio.

The British Property Federation, which represents real estate investors, is pressing the government for a clause in the draft legislation allowing future REITs to transfer assets from existing entities without tax penalties.

“In our view, if investors are not confident that the U.K. REIT regime will allow these types of transactions which are essential for a healthy growing market, they will be reluctant to enter the regime in the first place,” wrote Liz Peace, head of the federation, in a January response to the government.

The British government should postpone the launch, says Martin Barber, chief executive of Capital & Regional, a London-based real estate investment and management firm. Barber argues that without some easing of these restrictions, REITs will be seriously compromised.

Germany’s Finance Ministry announced its support for REITs early last year, and German property professionals and finance ministry officials met this past February to discuss drafting legislation for so-called G-REITs. Currently, the parties are considering either a trust or corporate model. There are subtle differences between these models for how they would treat income from German assets, but in both cases, dividends paid out by the REITs are taxed in the property’s country of origin rather than the investor’s country, wrote Max Berkelder, a REIT analyst at Kempen & Co. Merchant Bank, in a February report.

The German Initiative Finanzstandort Deutschland, an advocacy group for the German financial industry, proposed a list of eligibility rules for REITs. Among the rules are that the trusts should be internally managed and publicly listed, that the “exit tax” on companies converting to the status be limited to half the normal tax rate of 25 percent and that real estate holdings account for at least 75 percent of a REIT’s gross asset value.

Berkelder looks cautiously at the recent run-ups in German real estate stocks in anticipation of their REIT status next year. Such price increases are causing fairly high expectations for net asset values, which leaves little room for improvement if G-REITs are adopted, he says.

Similarly, with property values in Britain already seen as very high, some say there is but one direction left for them: down.