GERMANY - The German finance ministry has abruptly decided to exclude residential housing from German real estate investment trusts (G-REITs), due to be legalised by the government from January 1, 2007.

Speaking in Regensburg, deputy finance minister Axel Nawrath said the exclusion of residential housing from the law on G-REITs was necessary to ensure its approval by both the government and parliament.

Last week, German construction minister Wolfgang Tiefensee had indicated he would not support the G-REITs law if it included residential housing. The law was to be approved by ministers of the federal cabinet this Wednesday. Owing to the abrupt change, however, the cabinet is now to approve the law on November 2.

"We personally feel that there is a strong case for residential housing to qualify for REIT status, but we have to accept the political reality," Nawrath told a real estate conference in Regensburg.

According to Nawrath, the planned exclusion applies to residential housing only. Firms that have mixed residential and commercial objects or strictly commercial objects will still qualify for tax-privileged REIT status.

Tiefensee was likely swayed by several MPs from his own Social Democratic Party, which governs in a ‘grand coalition' with the Conservative Christian Democrats.

For several months, the MPs have been arguing that legalising residential REITs would prompt including rent increases, displacement of lower-income persons and fewer investment in both new and standing apartments.

Indeed, owing to the MPs opposition to the overall G-REIT project, it is still an open question whether it will be approved by parliament even if, on November 2, the cabinet clears the relevant legislation.

According to press reports, Nawrath's comments to the Regensburg conference were met with shock and disappointment. However, he urged Germany's real estate industry to rally around G-REITs, noting that if the project proved successful, residential housing might be included at a later stage.

Studies on G-REITs had previously estimated that the vehicles would spawn a new real estate market of at least €50bn by 2010 - though this was on the assumption that residential housing would be included.

In a related event, Deutsche Börse, the operator of Frankfurt's stock exchange said that once G-REITs are legalised, it will launch indices comprised of them.