REAL ESTATE - Merrill Lynch last week gave a warm response to the Italian government’s decision to introduce REITs in July 2007, although it hinted that the REITs market would have a slower start than the UK and Germany.

In a research note the investment bank forecast that activity as a result of the introduction of REITs would likely be relatively insignificant, with only two firms (Beni Stabili and IGD) likely to benefit from a marginal reduction in tax.

"We anticipate some more interest to emerge on the back of the new REIT model, but sentiment towards local fundamentals and momentum is sluggish and in our view the UK and German REITs may be off to a better start," the report said.

However, it anticipated longer-term benefits in what is a relatively small element in the Italian property market after a year of low investor interest in the Italian market. Analyst Alec Pelmore described the REIT move as "a more positive surprise" than the introduction earlier this year of 4% stamp duty.

Under the model for Società di Investimento Immobiliare Quotate (SIIQs) – based on the French SIIC – there are no limits on gearing or external management. Although the fine details have yet to be worked out, the government has as yet placed no limitations on the incorporation of residential into the REIT structure.

However, the draft legislation stipulates that at least 35% of non-majority shareholding (49%) must be held by institutional investors. Merrill Lynch said the provision "looks very difficult to implement and we would not be surprised to see this change".

"Ultimately much depends on the finer detail," added the report.