The introduction of France’s SIIC structure has been positively received by specialist real estate sector investors and by the broad market. Since the introduction of the new regime, the French real estate sector has significantly outperformed the market, with exceptional results from existing companies and the arrival of new players in the sector.
The French government introduced their version of REIT legislation, les Sociétés d'Investissements Immobiliers Cotées (SIIC), at the end of 2003. There were several underlying motives for this. The listed sector in France wanted to align its competitive position in its domestic market against that of non-resident investors by adjusting the French tax regime to match the tax flow-through regimes applicable in countries such as Benelux, Germany, the US, and so on. Moreover, French industry was able to demonstrate to the finance ministry that such a `
move would generate resources to help reduce the French government’s budget deficit, by way of the ‘exit tax’ to be paid by property companies on unrealised capital gains, as they opted to convert into the SIIC structure.
The listed sector in France was also reacting to a persistent and structural discount by the market to the value of its underlying assets, and was able to demonstrate that a listed tax-transparent vehicle, with a corporate income tax exemption for specific areas of activity and an obligation to distribute cash-flow, had enabled the absorption of this discount elsewhere.
At the end of November 2004, the government announced that it had approved an amendment to the existing SIIC legislation (SIIC II), covering the contribution of assets to SIIC entities in exchange for equity. The legislation was proposed as an amendment to the 2005 finance bill and is applicable for the calendar years 2005-2007. During this period, a party can contribute (transfer) a property or property portfolio to an SIIC structure and receive shares in the SIIC in return. The tax liabilities on the difference between the historical value of assets on the balance sheet and their value on the open market will be settled at the reduced exit tax rate of 16.5% (payable in four annual instalments) rather than at the normal corporation tax rate of 34%.
The SIIC will undertake to hold any such property for at least five years after the transfer. The new legislation does not, however, impose such conditions on the contributor of such property and this could give rise to an important new source of equity in encouraging divestment by existing holders of property through this tax-efficient route.
There are few examples at present but it is expected that the legislation will be of interest to corporates wishing to outsource, to institutional owners wishing to diversify, as well as an exit opportunity for non-listed funds.
Since the introduction of the SIIC structure, the re-rating of the sector in France has provided investors with an exceptional return (figure 1). The FTSE EPRA/NAREIT France has returned 127% since the end of 2002, or SIIC introduction, significantly outpacing both the European and global indices.
Figure 2 provides an overview of the current SIIC market. The size of the SIIC market has grown phenomenally since the legislation became effective in 2003. Total market capitalisation has risen from €10bn to more than €25bn in July 2005, indicating not only exceptional individual performances (particularly from the larger, well-known companies that have achieved returns well in excess of the broad European market) but also an extension of the sector.
According to Max Berkelder, property analyst at Kempen & Co, “As a result of SIIC I, a number of listed property companies have been delisted from the stock exchange or have seen their free float market caps reduced because of bids (ie, Sophia, Bail Investissement, SFL and Gecina). The hopes are high for SIIC II to change this trend and bring new-blood listed companies to the market such as Casino’s subsidiary Mercialys.” Other retailers such as Carrefour and Lafayette are named in this respect as well. Another viable option for increasing the size of the sector is the sale of portfolios by opportunity funds to small listed SIICs in return for shares. The benefit of this ‘kiss of life’ by an opportunity fund is that a small SIIC can grow substantially and the free float of this company rises over time when the opportunity fund sells its stake. This can all take place in a relatively short period of time, and is probably quicker than an IPO process. Some successful new kids on the block are Foncière des Régions, Société de la Tour Eiffel and Altaréa.
Liquidity or traded value has also increased significantly (244%), demonstrating the improved ability to trade the stock in the market. Paradoxically, volatility of the FTSE EPRA/NAREIT France index has fallen from over 19% at the end of 2002 to 12.5% today.
France’s largest SIIC is currently Gecina, at the head of a diversified portfolio valued at €8.8 billion. The portfolio is spread between office and retail property (60%) plus 40% residential. Recently, Spanish developer Metrovacesa acquired 68.5% of Gecina through a public bid and indicated its intention to implement a more aggressive asset management strategy. Metrovacesa plans to redevelop part of
the commercial portfolio to realize higher rental values, and to divest a significant part of the residential portfolio.
The fourth-largest French SIIC, Société Foncière Lyonnaise (SFL), is also majority-owned by a Spanish company after a successful public offer in July 2004. Although Inmobiliaria Colonial acquired 95.1% of SFL at that time (to gain exposure and management in the French market) it has, since the acquisition, reduced its holding to below 80%. In April this year, Juan-Jose Brugera, chief executive of Inmobiliaria Colonial, stated that they would again reduce their stake in SFL in order to demonstrate to the market that SFL would continue as an autonomous company within the group, with appropriate governance and a free-float to enable index-inclusion.
Probably the best-known SIIC internationally are Unibail and Klépierre (second and third largest in the sector respectively). Unibail focuses on three distinct business lines: offices, shopping centres and exhibition-convention complexes. Klépierre owns more than 220 shopping malls in continental Europe with a lettable floor area totalling over 1.5m m2. Both of these companies have demonstrated management skills in their sector, an enviable track record and a large and liquid free float.
Besides these French companies, a number of other companies have opted for the SIIC structure for the French portion of their cross-border portfolio. These include Dutch companies Rodamco Europe, Corio, Vastned Retail and Eurocommercial Properties and UK firms Hammerson and CLS Holdings. Due to
the existence of the SIIC status, the French subsidiaries of these companies are exempt from tax on income and capital gains provided that the distribution criteria are respected.