There was a spate of IPOs in the residential market this year, but Germany’s underdeveloped REIT market was unable to participate. Helge Dammann reports
It was widely noted that Germany recently had a few very substantial initial public offerings in the residential property sector, as well as mergers and acquisitions by listed vehicles in the market. The real estate investment trust (REIT) regime was not used for any of these activities due to unfortunate limitations for owning residential real estate.
When the German REIT (G-REIT) was introduced in 2007, most of the major industrial countries already had a REIT regime. The introduction of the G-REIT was forced by the German real estate industry, which felt that Germany needed to keep up with other EU countries, such as France, the Netherlands and the UK.
The German model is appropriate. G-REITs are stock corporations that must be listed on an organised stock market in Germany, the European Union or the European Economic Area. G-REITs’ income is tax-exempt, providing that certain requirements are met. Primarily, the G-REIT must distribute at least 90% of its income annually and meet certain asset, yield-structure and share-ownership requirements. Withholding tax is usually limited to 15% for foreigners. As mentioned, G-REITs cannot own German residential property constructed before 2007.
In 2008, the upper house of the German parliament passed amendments to the tax provisions of the REIT Act (REITA). The amended act now provides relief from double taxation of REIT dividends derived from foreign properties and taxable subsidiaries. This step gave the G-REIT equal footing to other tax-transparent German fund structures in the context of international real estate investments, but the market has not yet used the outbound investment opportunities.
German real estate organisations are lobbying for further amendments to the REITA in order to remedy other deficiencies of the G-REIT and to unlock growth potential of the G-REIT sector. Certain demands were picked up by the German legislator after the general elections in 2009 but not pursued. The inclusion of German residential properties constructed before 2007, especially, would open the G-REIT market for wider investments. However, with general elections in September this year the
legislator is not expected to act in the near future.
Today the burden of promoting German REITs and providing a convincing role model for new REITs lies with a small community. As of April 2013, only five real estate companies had opted for G-REIT status. Four REITs are listed on the REIT index of the German Stock Exchange (Deutsche Börse). The fifth and latest was listed at the Munich Stock Exchange in 2012. The companies’ total market capitalisation amounts to about €1.1bn as at April 2013, at a net asset value of €1.8bn as at December 2012. It was recently reported that Prime Office REIT was to boost its size through a large transaction.
Compared with other industrial countries, such as the US or UK, a higher proportion of German companies own the buildings they occupy (approximately 70%). So there is potential for corporate real estate to be pooled in G-REITs. However, since the IPO market has been less dynamic during the financial crisis, REIT IPO activity has been slow and it is not expected to turn around very fast – it requires normalisation alongside the recovering banking sector.
In the course of the implementation of the EU Alternative Investment Fund Managers Directive (AIFMD), it is still unclear whether G-REITs will be regarded as AIFs and thus be regulated under the German transformation act, the KAGB. Property organisations are lobbying heavily for the exclusion, arguing, rightly, that REITs are actively operating business entities rather than passive investment funds and do not have a defined investment policy as do funds. If these arguments prevail and G-REITs do not become AIFMD-regulated, they would have a certain advantage over regulated non-listed funds. It is doubtful whether this alone will help the REIT sector to grow further. Legislative measures like the inclusion of all residential property would do more.
Another aspect is the more restrictive redemption policy that is going to apply to remaining German open-ended funds (GOEFs). The liquidity of these funds will be reduced, which should also give REITs a certain advantage.
Overall, with a favourable tax regime both for private and institutional investors, a German REIT is an attractive vehicle for accessing diversified and focused real estate portfolios through daily tradable shares.
Helge Dammann is a partner at PwC