Editor’s Choice: The REIT recipe for success

There is no doubt that Italy’s decision over the summer to ease rules for real estate investment trusts has been spurred by the recent success of the Spanish SOCIMIs, which have taken centre stage in Europe’s listed property sector during the course of this year.

Spain, whose introduction of REITs (or SOCIMIs) in 2009 went barely unnoticed, has only recently been able to leverage the full potential of these structures - witness the resurgence of its property market - thanks to rule changes including more flexible listing and zero taxation.

This activity has not gone unnoticed in other markets, with Italy now looking to replicate Spain’s recipe for success. On August 29, the Italian government approved sweeping measures to reform the local REITs, also known as Società di Investimento Immobiliare Quotate, or SIIQs. Signed by prime minister Matteo Renzi, the 'Unblock Italy' decree has been designed to put the vehicle's tax-efficient status on an equal footing with the successful Spanish and French regimes while also bringing the so-called Società di Investimento Immobiliare Quotate (SIIQs) into line with the country's closed-end property funds.

It was a glorious day, in particular for Aldo Mazzocco, CEO of Italy’s largest SIIQ Beni Stabili, who has been lobbying for reforms of the REIT system since its introduction in 2007. The company, which is majority-owned by French group Foncière des Régions, is one of the only two REITs launched in the country over the past seven years.

'The political will and the technical steps taken to simplify the rules and make the Italian real estate market more attractive for long-term investments are clear and very welcome. These are very important decisions that align Italy with the best European real estate markets, especially the French and the English ones. The government has done what it was asked to do, now it’s up to private companies to get the most out of this new and more flexible regulatory framework,' commented Mazzocco, who is also president of Assoimmobiliare, the industry body representing SIIQs, real estate companies and funds.

The main changes to the regime include raising the investment threshold for single main shareholders to 60%, as in France; a lowering of the minimum free float to 25%; as well as a legal commitment to distribute 50% of the capital gains over a two-year period, as in France, and the planned reduction of the dividend payout requirement from 85% to 70% of the property business income.

RIGHT RECIPE
As pointed out by many, including EPRA CEO Philip Charls, Italy’s government has had an eye on the French REIT sector and how the changes to the regime in Spain and the launch of the structure in Ireland have spawned a series of successful IPOs. In Ireland, three REITs have been launched following the introduction last year of new legislation by the Irish government. The latest flotation - Irish Residential Property REIT - raised €200 mln on the Irish Stock Exchange from capital providers including Canada’s biggest resi landlord, CAPREIT, which has just over 20% - or €42 mln - of the new firm’s shares.

Similarly, Spain has seen four listings on the Madrid stock exchange, raising nearly €3 bn of equity, while the UK, which also introduced changes to the regime earlier this year, has seen new entries including Redefine International, Custodian REIT, Secure Income REIT, Empiric Student Property REIT and Tritax Big Box, the first REIT to specialise in logistics facilities.

Italy is expected to follow suit in the next few months. Henri Quadrelli, an analyst at Société Générale, is confident that the softening of the current SIIQ rules will benefit the country’s minuscule listed real estate sector, helping it to attract more foreign investors as well as facilitating new IPOs. Société Générale's Quadrelli said he expects more IPOs to take place in the future, with banks expected to take part in the action after the next ECB stress test. A larger listed sector is also expected to bring more transparency into valuations, which in turn means a more attractive and liquid sector for international investors.

Up to very recently, foreign institutional investors have had few options to enter the Southern European property market through liquid investments, according to market experts. ‘The issue for us as an indirect investor is whether we can find attractive returns on a risk-adjusted basis,’ commented TIAA Henderson Real Estate fund manager Jason Rodriguez. ‘When trying to generate liquidity, we have struggled in southern Europe relative to the north. You can’t get in and out quickly.’

This is why the right REIT recipe can open doors to a wave of foreign capital, particularly in Southern Europe. Newly launched REITs in Spain have already received backing from sophisticated foreign investors of the likes of Quantum Strategic Partners, Paulson and Co, Moore Capital Management, APG, Cohen & Steers and the Canepa group. In the UK, the introduction of REITs seven years ago literally transformed the ownership structures of the country's leading property companies, which at the time were 75% owned by domestic investors. Today, nearly three-quarters of their investor base is overseas.

While few believe that Italy’s REITs will experience a similar shake-up, it is clear that the first step in the right direction has finally been taken.

Virna Asara
Correspondent Southern Europe

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