When it comes to financial innovation,

the UK often gets a head start over

Germany. Small wonder, considering

that London is a much larger (and more

dynamic) financial centre than Frankfurt and

that when new products from the US come

to Europe, they usually land in London first.

The US may have broken with the British

Crown, but close ties between the two

Anglo-Saxon countries remain.

On real estate investment trusts (REITs),

however, the German government is unwilling

to come second to the UK. Berlin said in

late July that it would launch REITs on

January 1, 2007 to coincide with the debut of

REITs in the UK. The launch depends on the

German parliament's approval of the REIT


The announcement from Berlin came as a

huge relief to Germany's real estate industry,

which is eagerly awaiting a new, highly-liquid

market that some experts say could swell to

€130bn by 2010. If true, that would put

Germany's REIT market ahead of the UK's.

The latter's REIT market is estimated to

reach €100bn by the next decade, according

to analysts cited by the Financial Times.

The announcement has in any event

calmed fears in Germany's real estate industry

that the launch of REITs would be held up

due to opposition to them within the Social

Democratic Party (SPD), which governs in a

"grand coalition" with the Conservative

CDU/CSU party.

Since last spring, several MPs from the

SPD have argued that REITs will encourage

private equity houses to buy even more flats

in Germany and that this, in turn, will lead to

higher rents and condominiums that lowerincome

people cannot afford.

But finance minister Peer Steinbrück

decided to ignore the concerns within his

own party and will unveil a draft law legalising

REITs to the federal cabinet on

September 20.

"The impetus for this is the need to launch

REITs at the same time as the UK," says

Ulrike Abratis, a finance ministry spokeswoman.

Details of the draft law have already been

leaked to the German press. According to

them, property investment vehicles that qualify

for the tax-privileged REIT status must be

listed on a German stock exchange and distribute

90% of their earnings to shareholders.

To ensure taxation of dividends to foreign

shareholders in German REITs, the law

is to restrict their shareholding to 10%. As

per its international agreements, Berlin may

not tax dividends on foreign shareholdings in

German firms that exceed 10%.

A similar shareholding restriction is

planned for UK REITs, though the vehicles

do not automatically lose their tax-privileged

status if a single shareholding should exceed

the 10% threshold.

According to the UK government, the REIT

will lose the status if it does not take "appropriate

steps" to bring the shareholding back

down to below 10%.

Back in Berlin, there was no word from the

finance ministry on what tax rate German

companies and other institutional investors

will face when they create REITs from direct

holdings in real estate. Previously, the ministry

had suggested a rate of 20%, which is

about half the current rate.

Finally, the law is likely to allow German

REITs to invest in residential housing, which

is surprising amid the opposition to the move

among the SPD MPs. Yet this should not

spoil its chances of being approved by parliament.

Opposition to REITs is not the

majority opinion of the SPD, and the law

could even pass with votes from the opposition

Free Democrats (Liberal party) and environmentalist


DEGI, one of the German real estate fund

companies considering a future REIT, said it

was delighted to hear that the vehicles may

be permitted to invest in residential housing

and not just commercial property. "This

means that it is very realistic that Germany's

REIT market will reach €130bn by 2010, as

has been projected by the IFD (a German

financial centre lobby)," says a spokesman

for DEGI, which is part of bancassurance

firm Allianz-Dresdner.

Rüdiger Päsler, managing director of

German fund industry association BVI, also

welcomed the news from Berlin, noting that

they could help resolve the extreme overcapacity

in Germany's property market and

promote new development.

"REITs have a risk profile like shares.

Their existence will cause property to

change hands a lot more quickly," Päsler

said. "They should also help boost real

estate development, particularly in so-called

‘1B' areas." In Germany, 1B areas are smaller

cities like Salzgitter, which is near

Hanover, the capital of Lower Saxony.

Several DEGI peers, namely

Commerzbank's CGI and DekaBank, the

asset manager for state-owned Sparkassen

(savings banks), have already said they will

create REITs once they are legalised. Last

spring, CGI even launched its maiden REIT

in France, where there are more than 20 of

the vehicles, with a combined market capitalisation

of €26bn.

Listed property investment vehicles like

Bonn-based IVG Immobilien have also

announced plans to launch REITs. As a

result, experts say that at least ten German

REITs could materialise soon after their


Jan Wagner