SPAIN - The Spanish government's drafted legislation for real estate investment trusts (REITs) must be made more flexible in order to encourage the sector to develop, delegates heard at the latest Urban Land Institute (ULI) conference.

The new regulations, drafted last month, were intended to attract capital and increase liquidity into the property sector, but current proposals are unlikely to attract investors, said Daniel Loureda, chief executive officer at Testa in Madrid.

Speaking at ULI's Barcelona Meeting Point, Loureda said: "The project that the government in Spain is trying to push through lacks a few important points. First of all it must be a lot more flexible. It has been designed from a very tax mentality.

"Right now it limits ownership to 5%. If it goes through like that I do not think we will see any Spanish REITs because there has to be a big share holder to push it though, at least for some period of time."

Government proposals state Spanish REITs must have a minimum of €15m working capital and require a minimum dividend policy of 90%, which Loureda believes must be lowered in order to encourage investors.

Commenting on the need for greater tax incentives, Loureda said the government should offer a tax advantage to REITs that invest in housing. "The Spanish market is going through tough times right now and we think it would be good for the industry and for the country if they had no withholding tax for REITs that have more than 50% of their assets in housing," he said.

Under the drafted legislation, REITs will be exempt from tax under the Spanish Corporate Income Tax Law if they invest three-quarters of their assets in lease-related residential properties and if they pay out 90% of their rental proceeds and capital gains to investors.

The Spanish government is also reportedly considering extending its REIT policy to include urban property.

Spain's previous REIT-like structure consisted of collective real estate investment schemes that only benefited tax breaks if they invested half of their assets in rental residential property and held on to their assets for a minimum of three years.