Industry leaders have waxed lyrical about the EU-REIT. But is this ambition a road to nowhere? Alec Emmott reports
Whatever one may think about Wikipedia it has the great merit of giving, within its pages, a faithful reflection of current attitudes. Not surprising then that a coalition is defined as "an alliance among individuals, during which they co-operate in joint action, each in their own self-interest. This alliance may be temporary or a matter of convenience".
But as recent history has taught us, ‘coalition' should not be confused with ‘consensus' - and before rushing to promote a European real estate investment trust (REIT), it may be worth some reflection as to whether a ‘one-size fits all' solution has any particular merits in a European community which is still characterised by significant differences in the role of real estate in the very disparate economies of the 27 EU member states.
The US experience has shown that the REIT discussion should be focused on producing a balance between the requirements of local savers/pensioners, and the capital/funding requirements of the capital-intensive real estate sector. This should in turn produce macro-economic benefits in terms of the liquidity and depth of the market for investment property, giving an opportunity for corporates to externalise their property assets - the virtuous circle.
Tax transparency is a means to this end: and not the end in itself. The discussion has been rather hi-jacked by the tax lawyers because the devil is in the detail; but in drilling down into this detail we should not lose sight of the fact that if the final product does not open up new access to the capital markets then it will, in the end, wither from lack of interest.
It has been said that the goal is to avoid double taxation. This is incorrect. The goal is to create a savings entity which is properly funded to be able to acquire and hold a mutualised portfolio of property, and which compensates for the illiquidity of the underlying asset class by giving liquidity to the shares in the entity. Such liquidity is ensured by the obligation to distribute untaxed revenue, as a taxable dividend. But experience in the major economies of the world has long demonstrated that such a philosopher's stone is not to be used indiscriminately. Borrowing short and lending long is always dangerous.
So there are two prerequisites for the success of any such project - the existence of an organised, structured market for the underlying assets, and the existence of the checks and balances always necessary when dealing with the public/retail savings sector.
The Belgians (and subsequently the French) decided in 2002, when looking at the possibility of introducing a REIT structure, that those checks and balances could best be provided through the existing compliance regulations of an organised stock market.
This logic has been followed by the other member states that have so far reflected on the subject. It is equally clear that there is no current ‘internal' market for property; but a series of local or regional markets with differing landlord and tenant law, title, valuation practice and structure - let alone very different transaction volumes.
It is thus a fallacious premise that all 27 European member states ‘need' a REIT structure. At best differing property markets, capital markets, savings markets and stock markets will ‘need' differing adaptations of the basic principle. It should come as no surprise that those countries which now have a REIT option available not only have an organised, structured property market (liquid within the restricted property sense of the term) but also possess a regulated stock market.
Most industry observers in Europe are amazed at the speed with which the REIT option has spread within Europe by a ‘domino' effect based on best-practice benchmarking (emulation rather than legislation…).
Those listed companies that have opted have at all times been open for discussion and exchange with those wishing to promote the idea or its variants - as indeed has EPRA, the trade association for listed European property companies. At various times there have been bipartite discussions (either with industry representatives or with the appropriate part of their finance ministry) with all those European countries that have successfully introduced REIT regimes.
The European Commission has not taken part in such discussions, given that the adaptation of the basic concept on a case-by-case basis is a function of local markets. Indeed the formulation of policy on any ‘conversion' charge (exit or entry tax) could not be anything else.
The Commission has equally demonstrated that it is quite capable of taking the initiative of calling in interested parties for discussion if it so wants and as it recently did, in an exemplary manner, in creating an all-party working group to study the market for open-ended property funds.
The OECD is already working on a harmonisation of the tissue of bipartite tax treaties between individual countries, and will recommend to member states (both within and without Europe) a level playing field in terms of withholding tax on cross-border dividends.
Under the principal of subsidiarity, however, such matters are reserved for individual negotiation between member states of the EU, and not for the Commission - even under the latest extensions to the treaty.
Lastly, is it necessary to be a REIT in order to invest cross-border in Europe? Cross-border transaction volumes demonstrate that both listed and non-listed structures, REIT or not, increase year on year their ability to export capital and expertise to take advantage of value-add opportunities wherever they see them.
The French version of the statute actively encourages inward investment by other listed actors, who may benefit from the SIIC tax treatment if they accept a listing on the Paris exchange. French SIICs have also demonstrated that they can be active exporters of capital. If one is looking for a good European idea (and why not…?) maybe promoting cross-border licensing of listed REITs makes better sense than a lowest common denominator project.
Alec Emmott is principal at Europroperty Consulting
