Market woes force France, Italy to change REIT regimes

France and Italy are set to ease rules for real estate investment trusts (REITs) from next year as the listed tax transparent structures are coming under increasing pressure amid the global financial crisis. Real estate investment trusts are struggling to keep afloat as they suffer from a combination of lack of financing, a deteriorating economy and a steep fall in the value of their real estate. Many property stocks have seen their share prices decimated in the past year.

In November, the French Senate unveiled that is was considering changes to the SIIC statute and in particular an extension by three years to 2011 of a requirement for shareholders to own a maximum of 60% of a SIIC from January 2009. The French Senate has already adopted most amendments to the SIIC regime outlined by Philippe Marini, senator from the UMP party of President Sarkozy, as part of a stimulus package. The final approval of the SIIC 5 regime - the fifth amendment to the French REIT statute introduced in 2003 - will likely take place at end December.

Under the new regime, property investment vehicles will be allowed to suspend their REIT status while bringing their capital in line with the 60% shareholding limit. They will then be able to re-convert to the status without penalty. During 2009, these firms would have to pay standard corporation tax of 34.5%, which could however be reduced to 16.5% if they meet the requirements by December 2010.

The amendments also include raising the reduced corporation tax rate on capital gains from property assets sold from corporate balance sheets into SIIC to 19% from 16.5% at present. ‘In the context of the global financial crisis, this extension [of the legislation] promises to be an alternative for industrial and financial firms seeking some means of financing at a time when bank lending is very difficult to obtain,’ says Dorian Kelberg, managing director of Fédération des Sociétés Immobilières et Foncières (FSIF), which collaborated with the government to draw up the legislation as part of France’s 2009 Budget Law. The organisation was assisted by law firm Baker & McKenzie.

The French government introduced the 60% shareholding limit on SIICs at a market peak in late 2006. To comply with the legislation, up to €2 bn of SIIC stocks had to be refloated by the end of 2008. But as the market headed towards a meltdown, the value of SIIC shares fell significantly, making share sales unprofitable for shareholders.

Italy also unveiled plans to change its REIT structure introduced at the start of the year in a bid to increase liquidity and boost investor interest in the tax-transparent structure. As part of a plan to revitalise the economy, Rome is expected to pass changes raising the shareholding limit for the first two years of SIIC status to 70%, from 51% at present. Additionally, the new regime brings the free float requirement to 15%, down from 35% at present, while distribution of capital gains is reduced to 70%, compared to 85% at present.

The changes would allow Beni Stabili, a major office-focused group and long supporter of the introduction of the SIIQ regime, to convert to the tax-advantaged statute from January 2009. The firm abandoned plans to opt for SIIQ status earlier in 2008, blaming the poor performance of its shares. As a result, the sale of shares by Beni Stabili’s majority shareholder Foncière des Régions would have resulted in a significant loss.