Finding the right pitch
The EU REIT seems like a good idea: any investor can see the advantage of a single, tax-efficient pan-European property investment vehicle. But how could it happen? How could the EU pull it off? It is hard enough getting REITs in single countries, so wouldn't tax harmonisation at EU level be particularly difficult?
The answer is that EU tax policy is on the way...but not for everyone.
The organisation that I manage - the Swedish Property Federation - is a founding member of the European Property Federation (EPF), a body that works with the European authorities on EU property legislation. Our work in the EPF helps us to see what's coming, and we see a union emerging from crisis with the capacity to focus on policies where there is real EU added value. The changes are happening now.
It is this leaner, more focused Europe that is giving the EU REIT a chance, because EU tax policy is part of the shake-up.
Tax is a prime example of everything that's wrong with EU policy today: too much harmonisation where it's not needed, and not enough where it is.
Why should the EU stop states from having low VAT rates on renovation and repair of housing or on rent? Why should it reserve this privilege for social housing? What possible interstate ‘distortion of competition' could there be for something as immobile as housing services? In my view, that is the kind of thing that has to go.
On the other hand, where there are major cross-border aspects to a business - and cross-border property investment in Europe is accelerating exponentially - the whole purpose of the EU is to work toward a level playing field where companies compete, not countries. The EU REIT is key to that.
The tax harmonisation aspect to the EU REIT should not be a very big obstacle, because the goal should be to co-ordinate only the essentials, leaving each member state the freedom to adapt the other aspects to its particular taxation, housing and savings policies.
Europeans simply need to agree that no tax should be paid at company level on rental income or on capital gains if the capital gains are re-invested in property or distributed to shareholders as dividends. The origin of company income, or who the REIT is open to, or how much of the net income should be distributed, only need a flexible EU framework. Many important aspects such as gearing or the exit tax are eminently local in nature and shouldn't be covered by the EU at all.
Still, some countries do not want any kind of tax approximation because they see tax as fundamental to their national competitive advantage. For others, tax equates with national sovereignty just as the currency does.
The solution is an EU Treaty provision called ‘enhanced co-operation': on a proposal from the European Commission and under the control of the European Parliament some states go ahead and harmonise, but those who do not want to do not have to.
With enhanced co-operation, everybody wins. Countries with sovereignty concerns can stay out, but the beauty of the system, enshrined in the Treaties, is that they can change their minds and join at any time.
The process has already begun. The pioneer enhanced cooperation, now coming onto the assembly line, is the common consolidated EU corporate tax base. That makes sense: How can you compare tax ‘rates' if the tax bases differ?
The next logical step would be the corporate tax rates themselves, very likely not a single European rate but a band keeping divergence within limits, just as was done years ago for VAT. This, too, will have to be done through enhanced co-operation.
This is the context in which the EU REIT can flourish. As work on the corporate tax base accelerates and the question of corporate tax rates comes out of the closet, the EU REIT starts to draw attention because of the major benefits it would bring: spreading property investment to small and disadvantaged countries and regions, combating the overheating of prime property markets, empowering small investors, helping to compete with non-European funds and stimulating housing finance.
The challenge is that there is still a lot of work to do to help people and politicians understand the benefits of REITs. The whole property industry needs to come together on this, and even that is not enough: national and European universities, think-tanks and the press have to take part in the research and debate.
Progress on national REITs is crucial to the whole process. It creates a REIT culture without which an EU REIT would be a non-starter. At the same time, the European debate fosters interest in national REITs, even in countries that won't be signing up at EU level. In fact, the national and EU REIT efforts fuel each other in a virtuous circle.
This is the way forward.
The EPF position on the EU REIT can be downloaded at www.epf-fepi.com
Per-Åke Eriksson is managing director of the Swedish Property Federation and chairman of the EPF EU REIT Committee