REAL ESTATE - The Association of Foreign Banks in Germany (VAD) reckons that despite more recent anti-private equity rhetoric from the governing Social Democrats, Berlin will legalise Real Estate Investment Trusts from 2007.

About a year ago, Franz Müntefering, a senior SPD official who is Germany’s vice chancellor, compared private equity houses to “locusts”. The remark put private equity houses on the defensive and provoked a debate about the future development of the German financial centre.

The SPD’s parliamentary group has now caused more controversy by unveiling a paper entitled ‘Locusts Outside Your Flat?’. The SPD paper analyses the massive acquisitions of residential flats by Anglo-Saxon private equity firms Fortress and Terra Firma.

”The emergence of such a paper does not make us very optimistic about REITs in Germany,” said Michael Zitzmann, chairman of VAD who is head of Citigroup’s German arm. “Nonetheless, what we’ve heard from the government is that the legislation for REITs will be in place by the beginning of 2007.”

The launch of REITs in Germany, originally expected this year, has been delayed by disagreement among public authorities on how the vehicles should be taxed. Property experts believe that once German REITs emerge, they could spawn a market of at least €50bn by 2010.

Indeed, some bigger German pension funds have indicated an interest in investing in REITs – listed vehicles that buy, sell and manage real estate.

Turning to fund regulation, one of the chief concerns of foreign banks, VAD noted that the BaFin had become far more flexible and cooperative.

As an example, VAD said the approval process for new funds and KAGs (investment companies) had been drastically cut. Moreover, the BaFin was actively encouraging more foreign asset managers to settle in Germany, it said.

“It seems that amid concerns about the future development of the German financial centre, a new wind is blowing through the regulator,” commented Zitzmann.

On hedge funds, first legalised in Germany in January 2004, VAD said the nascent industry would be given a boost if private investors would be permitted to invest in single hedge funds.