REAL ESTATE – Germany’s federal cabinet has approved the legalisation of German real estate investment trusts (G-REITs) from January 1, though, as reported, the vehicles will not include residential property.

The relevant draft law now goes to the German parliament for approval. If approval does not materialise before January 1, the government has said G-REITs – listed German real estate firms with tax-privileged status – will be legalised retroactively from that date.

As with other REITs, G-REITs will not face any corporate tax but rather taxes will apply to its dividends. To qualify for this status, the draft law requires that a listed firm be based in Germany and generate its revenues from the trading and leasing of real estate.

Other requirements are that the firm have a permanent 15% free-float and that outstanding debt not exceed 60% of total assets. No one investor may, moreover, hold 10% of the firm.

"These provisions will ensure that German REITs have a broad base of investors. They also ensure fair taxation of foreign shareholders and guard against any tax shortfalls," the finance ministry, which wrote the draft law, said.

As reported, the draft law bars the use of residential property for the creation of G-REITs, yet this only applies to objects built before January 1, 2007. According to the ministry, the exclusion will shave just 14-19% off the potential market capitalisation for G-REITs.

Past studies on G-REITs have predicted that by 2010, their market capitalisation will total at least €50bn by 2010.

When commercial property is sold to create G-REITs, the draft law provides for a halving of the relevant tax rate, but the rebate, which the ministry calls an "exit tax", is only in effect until 2010.

The ministry forecasts that between 2007 and 2011, the listed vehicles will provide the federal, state and local governments with €1.12bn in additional revenue.

Although the government has given the draft law spawning G-REITs its blessing, it is still an open question whether parliament will approve it. This is because of a row between MPs from the governing Conservatives and Social Democrats caused by the ministry’s exemption of residential property from G-REITs.

The exemption was made to placate MPs from the SPD, who insist that legalising residential G-REITs would prompt rent increases, displacement of lower-income persons and fewer investment in both new and standing apartments.

But Conservative MPs have threatened to vote against the draft law in its current form, saying that the exemption was not part of their original coalition agreement with the SPD.