REAL ESTATE - Germany's lower house of parliament, the Bundestag, has approved draft law legalising German real estate investments trusts (G-REITs) retroactively from 1 January.

The upper house, or Bundesrat, still must approve the draft law on 30 March for it to become law. Given the outcome of Bundestag vote this would appear to be a formality.

As with other REITs, G-REITs will not be subject to corporate tax but their dividends will be taxed. To qualify for G-REIT status the draft law requires that a listed firm generate at least 75% of its revenues from real estate and distribute at least 90% of its earnings as dividends.

The draft law has undergone several changes since its approval by the cabinet in November. Chief of them is a change to the so-called exit tax whereby sellers of property to G-REITs pay half of the normal tax on proceeds from the sale.

While the draft law originally stipulated that sellers to G-REITs had to have owned their property for ten years to qualify for the exit tax, the timeframe has been halved. The exit tax is due to expire by the end of 2009.

German fund industry association BVI had also sought to have the exit tax apply to property sold to German open-ended real estate funds but the draft law approved by the Bundestag does not provide for this.

Another important change was that G-REITs were given the right to acquire residential property outside of Germany. However, they are barred from acquiring domestic residential property built before 1 January 2007.

According to German real estate industry lobby IVD, the launch of G-REITs would create a new market worth €40bn by 2010. But IVD added it was disappointed by the exclusion of German residential property from G-REITs.

"In no other country but Germany - where the rights of the tenant are most protected - was a ban introduced," IVD vice-president Jürgen Michael Schick noted. "Behind this ban, there is a deep mistrust of market forces."

Schick added that it was "myopic" of the government to think the ban would prevent further mass sales of residential property like those involving private equity firms in past years.

But for Patrick Sumner, head of property equities at Henderson Global Investors, the advantages of the G-REITs legislation outweigh any disadvantages.

Sumner said: "It will speed the transfer of property from German corporate ownership, helping the restructuring of German industry; it will open the way for institutional investors to restructure their portfolios and it will provide an exit for the open- and closed-ended funds."