fpmi calls for no-delay authorization of REITs
by Finanzplatz München Initiative
The Munich Financial Center Initiative is calling for the authorization of real estate investment trusts (REITs) by the beginning of 2007 in Germany. A later date of introduction, or a limited one, would have negative effects on Germany's real estate and capital markets. Tax-related problems associated with REITs do, however, persist. Needed to be found is a reliable way of taxing investors. SPD politicians have issued the demand that residential housing not be incorporated at all into REITs. fpmi rejects this demand, as the limiting of the REITs to commercial real estate would greatly increase the risk borne by the investment vehicles.
REITs would also make Germany's real estate market easier to understand and follow for international investors, thus enhancing the market's appeal to them. Delays in granting the authorization of use for the REITs in Germany, or the placing of a limitation to commercial real estate upon them, would only lead to Germany's falling further back in the race to secure international capital.
fpmi members have issued the following position papers on REITs:
Allianz: time for legislators to take actionAllianz would warmly welcome the no-delay introduction of REITs in Germany, as this internationally-renowned investment product represents an important extension to the range of instruments available in the country. Germany's private investors could use REITs to set the level of real estate investment in their portfolios in highly flexible and non-bureaucratic ways, ones meeting the investors' individual needs and wishes. These features make REITs the ideal complement – but not the forthcoming replacement (due to the divergence of investor orientation which the REITs and funds exemplify) – to open-ended real estate funds. Although such a move seems unlikely, the German government's failure to legally authorize the REITs' use would cause demand to be satisfied in other, competing national capital markets – much to the detriment of the German economy. Such 'emigrations' of capital are already beginning to manifest themselves. These in turn make it essential that Germany's legislators take quick action. The tax-related details requiring clarification constitute no reason to further delay the granting of this approval.
Association of Bavaria's banks: offer a requisite spectrum of productsGermany's real estate market has accepted the realities of a globalized economy. One of these realities is the offering in Germany of all those products available elsewhere in the world. Comprised in this spectrum of products are everything from financial advisories and structured financing to syndications, securitizations and REITs. We therefore call upon Germany's politicians to enable the country's financial markets to offer this instrument. A failure to do would further impair the German financial community's international-level viability.
BayernLB: REITs are a coming productWhile Germany is still deliberating whether or not to introduce REITs, other countries have already moved on to the next step, and are partaking in the successes enjoyed by this real estate investment product. By way of an example: France, which authorized in 2003 the Sociétés d'Investissements Immobiliers Cotées (SIIC). The market for these has doubled since then. German critics foresee the REITs' causing declines in tax revenues. The debate in this area has yet to be concluded. Other countries' track records show that the introduction of REITs revitalizes real estate markets. The incorporation of German real estate into REITs listed outside the country would lessen the importance of Germany's financial community. It is thus high time to conclude the debate. Solutions ensuring that taxation will be paid by investors in REITs have been formulated and are now under consideration. The contract signed by the coalition parties calls for the taking of steps fostering the growth of the real estate market. As has been repeatedly demonstrated, the introduction of REITs would constitute one of these steps. Its prospect is one of the main engines driving up publicly-listed real estate companies.
Triggered by revaulations and outflows of funds, the crises being experienced by open-ended funds shows that Germany urgently needs alternative ways of investing in real estate. REITs have the potential to be one of German real estate's success stories, as both real estate and capital are in ample supply here. Optimal would be the melding of the two on Germany's financial markets.
Munich Securities Exchange supports introduction of REITs in GermanyThe Munich Securities Exchange supports the introduction of REITs in Germany. They have long been a fixture of capital markets in the USA and the UK, where they have grown to be an attractive (especially for private investors) class of assets in their own right. The REITs offer investors a number of advantages which real estate funds do not have. REITs have to be listed on securities exchange, are required to provide clear and detailed information, and feature investor-friendly profit distribution requirements. Up to 90% of the REITs' earnings are distributed to investors. The delay in introducing enabling legislature has caused German real estate to be bundled into REITs which are traded abroad. This development threatens to cause Germany to fall even farther behind in Europe and in the rest of the world. The Munich Securities Exchange is therefore expressly welcoming the federal minister of finance's push to have created by the beginning of 2007 the legal preconditions required to introduce REITs in Germany.
State of Bavaria: REITS would be a valuable addition to the financial communities in Bavaria and GermanyREITs facilitate companies' mobilization of the real estate into which their capital has been committed. The investment vehicles increase the companies' liquidity. REITs could also impart further momentum to the development of our financial community. The Germany Financial Center Initiative proposes the introducing of tax-advantaged REITs. This idea received fundamental support in the agreement forming Germany's ruling coalition. Estimates forecast that REITs will receive some €100 billion in capital in the first five years after their being authorized in Germany.
Configured according to foreign models, REITs are primarily publicly-listed joint stock companies which manage real estate, which are exempt from paying corporate income and trading taxes, and which distribute nearly all of their profits to shareholders. The shareholders are then liable to pay taxes at their own applicable rates. The half-of-income procedure is not used in calculating tax liability. The real estate funds now the norm in Germany are not highly regarded by foreign investors, who view their rates of return as being too low and their value determination regulations as being too complicated. Banks and insurers expect the introduction of REITs to channel an inflow of capital into Germany, and to thus revitalize the country's real estate market. A satisfactory procedure for the taxing of REITs still, however, has to be found.
Association of Bavaria's cooperative banks and credit unions: positive effectsThe Association approves the prospective introduction of REITs in Germany. These special-purpose companies invest capital entrusted to them in buildings and properties, which the companies then manage. The REITs' earnings stem from rental income and increases in value.
Standing in the way of the authorization of REITs in Germany is the vehicles' needed to be exempted from corporate income tax, something which Germany's tax code does not currently permit.
The consigning of real estate to REITs increases companies' liquidity, and enables them to devote themselves to their core businesses. The management of the real estate by professionals enables it to be more effectively utilized.
Several countries in Europe, among them France, have authorized REITs and equipped them with tax advantages. Further countries are about to promulgate the appropriate laws.
The objections to the introduction of REITs: they could give rise to large-scale reductions in tax income and to encumbrances for tenants of the affected apartments. These arguments are not well-founded, as the introduction of REITs will not be accompanied by an abolishment of Germany's rental laws. Nor do the models being discussed have tax loopholes.
The association sees the legislation authorizing the use of REITs and making its way through the approval process in a number of European countries as threatening to cause Germany to lose further ground. German companies have already started founding REITs in France. In what would be a repeat of the situation prevailing in English Limiteds, the freedom of selection of corporate forms existing in the EU could produce a trend towards non-German REITs.
HypoVereinsbank: significant advantages not being consideredIn 2005, the IFD (German Financial Center Initiative) submitted a proposal on G-REITs (German REITs). Since then, a variety of political persuasions has joined in discussing these investment vehicles. The discussion initially centered on the possibility of taxes not being collected from non-German investors. The current focus: the possibility of social disadvantages ensuing in the housing market. Not being considered at all are the significant and incontrovertible advantages accruing from REITs, including greater degrees of real estate fungibility and accountability, the opportunities arising for small-scale investors to partake in the development of one of Germany's most important markets, the incentives created for companies to redeploy the capital which they have committed to real estate, and to devote themselves to the core businesses. By the time we have come up with a compromise, our European neighbors may well have shot past us in the race for the business of international investors.
Munich Re / MEAG: also authorize private REITsThe introduction of REITs in Germany would increase the appeal of the country's financial community on a sustained basis. The existence of German REITs would increase the international-level viability of German real estate investment vehicles. This, in turn, would attract greater amounts of non-German capital to the country. The employment of REITs enables the compiling of diversified portfolios of real estate, and to do so with smaller amounts of capital than those required to do the same with real estate funds. REITs also offer a greater rapidity of portfolio diversification and restructuring. Decisive in determining the viability of REITs will be whether shares in them are classified by Germany's financial supervisory code authorities as being real estate and not as stock investments. The former legal classification would cause insurers and providential funds to mobilize their real estate holdings, or to invest their capital in REITs. Both publicly-listed and private REITs should be authorized. The latter would be less affected by the daily ups and downs on security exchanges than by the prospects for long-term development evinced by their underlying real estate portfolios. This trait would make them highly attractive to institutional investors employed by insurers, who would prize a long-term stability of real estate value.
Association of Bavaria's savings banks: there is no comparable form of investment vehicleIn the USA, REITs have been one of the market's successes for some 40 years. A large number of countries, with these including France, have followed in America's footsteps. These publicly-listed vehicles of real estate investment have a special feature. As a rule, they pay no corporate income tax. Instead, they have to distribute most of their profits to their shareholders, who are tax liable for them.
REITs would fill a gap existing in Germany's line-up of real estate investment vehicles. The country does have publicly-listed and traded joint stock real estate companies. They are relatively unpopular with international and national-based investors, who prefer to directly invest in real estate, or to use closed or open-ended funds (used by private investors), or open-ended, special-purpose funds (used by institutional investors). The primary disadvantages of direct investments and closed real funds are their lack of marketability and, often, of accountability. The latter is provided by open-ended real estate and special-purpose funds. Both of these offer tax efficiencies, as only investors are liable for taxation. Both kinds of funds have portfolios and investment procedures governed by strictly-limiting legal stipulations. These were enacted to provide investors with a high level of protection.
REITs have, by way of contrast, other features which make them highly attractive to investors from both Germany and abroad. For instance, no restrictions are placed upon their choice of investments. As a consequence a large number of special-focus REITs have coming into being in the USA. These invest in such selected sectors as hotels, and as logistic or health care facilities. These focuses impart the REITs with opportunity-risk profiles which strongly differ from those of real estate funds. The protection of investors is also guaranteed by the adherence to corporate governance standards enacted by corporate and capital market codes, with these particularly applying to publicly listed REITs. These in turn are widely traded, provided that they dispose of adequate liquidity. REITs' tax accountability makes them especially attractive to foreign investors. Their track record in the USA has shown that their level of correlation with other classes of assets is relatively low.
For the Association of Bavaria's saving banks, the lesson to be learned from the above facts is: no forms of investment are comparable to REITs, or are available only in limited amounts. The REITs have features distinguishing them from the long-standing forms of real estate investments. These features are especially attractive to private investors planning and acting on non-short term bases. The REITs also have an opportunity-risk profile different than that of open-ended real estate funds. The introduction of REITs could produce increases in tax revenues from and in the number of jobs in the real estate sector. These prospects mandate the conclusion of legislative preparations requisite for the introduction of REITs by the end of this year.