The publication of a consultation paper in March on the possible introduction of a UK REIT and the introduction of the French SIIC regime last year have fuelled interest in REIT regimes in Europe. A REIT regime - after the US real estate investment trust - can best be described as a tax-exempt regime for stock companies collectively investing in real estate. The key characteristics that distinguish REITs from other types of tax efficient vehicles are:
q the legal form of a stock company;
q the mandatory diversified investor base (either by way of listing or minimum shareholders requirements), and
q the tax-exempt flow-through character for tax purposes.
The Netherlands was the first European country to introduce a REIT regime in 1969. This regime, referred to as a tax investment institution - fiscale beleggingsinstelling (BI) - is believed to have contributed greatly to the rapid international development of Dutch REITs (such as Rodamco, Corio, Wereldhave and VastNed). The Dutch BI is a classic form of a REIT with a flow-though character: the intention is to bring investors in a BI to the same position as if they had invested in the real estate directly.
The success of the Dutch REIT has not gone unnoticed: Belgium (1995) and France (2003) introduced very similar tax flow-through regimes for property investment companies. In both cases, the introduction was to a large extent motivated by the desire to boost the local real estate market and to be able to compete better with real estate funds in neighbouring countries.
Germany introduced a tax-transparent regime for investment funds in 2003, but the German legislator deliberately excluded investment in real estate. The other form of tax-exempt investment fund is the well-known German open-ended funds, which lack the key characteristics of a REIT and are ‘choked’ by the heavy regulatory regime (and by the mandatory open-ended character, which forces German funds to maintain very large cash reserves).
Technically speaking, Spain also has a REIT with an attractive tax regime. However, the Spanish vehicle is subject to too burdensome a regulatory regime. One bottleneck is the requirement that at least 50% of the total assets should comprise domestic housing, student housing or dwellings for elderly people.
The Italian regime for a real estate investment fund - fondi di investimento immobiliare (FII) - was amended in 2003 and now looks very promising. Although lacking one of the key characteristics of a REIT (it is co-ownership and not a stock company with legal personality), the Italian FII has a very promising tax regime. It is not only fully exempt from tax, it also allows for closed-end ownership and distribution of profits to (foreign) investors free of withholding tax! As the regime is still very new, it is not yet clear whether it will be an international success. A possible drawback could be the regulatory regime: the FII is mandatorily managed by a licensed Italian management company and the fund itself must also obtain a licence from the Italian Central Bank.
The above demonstrates that Belgium (SICAFI), France (SIIC) and the Netherlands (BI) are still the only classic REIT countries in Europe. To understand the features of these three regimes better, it might be interesting briefly to compare the key characteristics:
q Listing is a mandatory requirement to obtain the REIT status of the Belgian SICAFI and the French SIIC. Under the Dutch regime, a BI can either be listed or not listed, but relatively complex shareholder conditions have to be metto qualify as a BI;
q All three regimes impose certain limits on the permitted activities of a REIT vehicle. The background of this activity test is the same for all three countries. The goal is to allow the favourable REIT regime only to a company that primarily invests in real estate assets (no entrepreneurial activities);
q The Belgian and Dutch regimes provide for gearing limitations (maximum debt-to-equity ratios), the underlying principle being that a too highly geared real estate portfolio can no longer be seen as a passive investment activity. The French SIIC regime does not provide for any gearing limit at all;
q As mentioned above, the condition inherent in the typical REIT regime is the profit distribution obligation. All three REIT regimes require that all or most of the profit earned by the REIT be distributed to the shareholder within a certain period after the end of the financial year. Capital gains are, broadly speaking, not included in the distribution obligation (in France half of the capital gains should be distributed within a two-year period).
A more detailed comparison of the three regimes can be found in a recent survey prepared by EPRA1. This survey demonstrates that the French SIIC regime is the most flexible for quoted property investment companies (even though the SIIC regime contains an inherent ‘brake’ on the development of the vehicle outside France’s borders).
Having drawn up an inventory of the European regimes, it can be observed that the number of REIT and REIT-like regimes is growing in Europe as governments attempt to make their real estate markets more attractive and competitive. It will, however, no longer be possible for individual European countries to reserve the tax benefits of a REIT regime to domestic funds and investors. It is becoming more and more apparent that the European Court of Justice’s interpretation of the fundamental EC Treaty freedoms (in particular, the free movement of capital) in its decisions is obliging European countries to give the same competitive tax advantages to operators and investors from other European countries. This EU law development, in combination with the increased international competition, may well achieve a more level playing field for European property investment funds over the coming years.
Ronald J B Wijs is a partner at Loyens & Loeff in Amsterdam and a member of the private equity team, with a specific focus on European private and public property funds