In 1996, the Belgian Banking and Finance Commission was inspired by the American real estate investment funds (REITs) to introduce a tax-effective vehicle for property investment, namely the SICAFI. A SICAFI is a regulated closed-end investment company, domiciled in Belgium, and intended to favour property investments by either individual or institutional investors that prefer to own ‘indirect’ property over actual bricks and mortar. Thirteen SICAFIs have been launched since, covering all property segments (offices, retail, semi-industrial and residential). The SICAFIs are comparable to US REITs or to Dutch ‘Fiscale Beleggingsinstellingen’.
The most important rules for SICAFIs can be summarised as follows:
q Total debt capacity (financial and non-financial debt, including dividends to pay out) cannot exceed 33% of total assets. Although the restricted debt ratio aims at protecting investors, it somewhat restricts the SICAFI’s gearing capacity under the current low interest rates. A 50% debt ratio would be more appropriate in our view, allowing property portfolios to further expand. Financial charges may not account for more than 80% of total revenues;
q Property portfolios have to be valued quarterly at market prices by an independent surveyor, to which assessments SICAFIs are bound. As a result, no depreciation applies on buildings. In addition, a property investment may not exceed 20% of total property value, unless a special derogation is granted;
q SICAFIs are exempted from income tax as long as 80% of earnings are annually distributed (95% of net income for REITs), after provisions for renovations and repair. Tax exemption only applies on assets located in Belgium;
q 30% of total outstanding shares must be listed.
We admit investors show a less enthusiastic attitude towards listed SICAFIs, in sharp contrast with ‘the investment hype’ seen in 1999. Some companies have a credibility problem based on their rather poor performance over the past few months. Just consider the discounts SICAFIs are trading at. Moreover, investors are concerned about the poor liquidity of listed property funds, not only in Belgium but also beyond its borders. Nonetheless, we believe the Belgian property market is dotted with investment opportunities, especially in light of the inevitable upcoming consolidation trend, besides the attractive dividends yields on offer.
Belgian property markets performed weakly in 1999. The Brussels Real Estate Index (BRE – accounting for roughly 85% of SICAFIs) has edged 20.59% lower since January 1, 1999, slightly underperforming both the Bel20 and the Belgian all-share indices, down 19.33% and 19.49% respectively, over the same period.
The spread between the average gross dividend, yielded by 12 SICAFIs, and the 10-year OLO bond gross yield declined from 170 basis points in mid-April 1999 to 86bps at mid-January 2000. The gap has since widened again to the current 201bps. In other words, the 10-year OLO bond carried only a slightly lower (around 5.88%) yield than that from a range of Belgian-listed SICAFIs (6.74% on average) in mid-January, which was a dramatic change. However, SICAFI shares have declined severely since, and it is not clear whether they have been through the worst or not.
Alert investors are no longer willing to pay substantial premiums for SICAFIs. Higher interest rates have caused their average premium to NAV of 30% in mid-February 1999 to be converted into a discount of approximately 9.5% on March 20, 2000. All SICAFIs have become increasingly squeezed, as shown in the table, and are now all trading at a discount to NAV. We would remind the reader that real estate portfolios are externally valued at their gross market value (with purchasing costs up to 13.9%, including the very expensive 12.5% transfer tax). Wereldhave Belgium and the newly launched Intervest, are posted at net market value because of their Dutch origins (thus excluding the 13.9% acquisition cost). This is an important point to be considered when comparing discounts/premiums to NAV of foreign property funds with Belgian counterparts or vice versa.
Gross dividend yields (ServiceFlats excluded) hovered in the range of 5% to 5.64% in mid-February 1999, independent of their portfolio content (offices, industrial or retail), which was illogical. Dividend yields are now fluctuating within a much wider range between 8.62% (Siref, a semi-industrial property fund) and 6.34% (Befimmo, the second-ranked office SICAFI) gross.
Liquidity has not improved over the last months – on the contrary. Retail investors have been easily able to dispose of their stocks, in contrast to institutional investors who might encounter difficulties in exiting. In fact, SICAFIs are still suffering from a poor daily trading volume.
Real estate is a 10-year-plus investment. SICAFIs will attract renewed interest when market conditions improve. Long-term investors will pay more attention to company fundamentals (such as the NAV) instead of the dividend yield. The property sector is progressively regarded as a ‘value sector’, although we realise that the NAV parameter is not optimal either.
Pol Tansens is an equity analyst with Fortis Bank in Brussels