REITs: two tortoises stage a sprint finish
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
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
"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
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
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