REITs without housing, in Germany

Knut UNGER, 2006

At the moment, it seems that the proposed legislation on REITs without housing will pass the parliamentarian decisions. The exclusion of housing from REITs is ratreh strict and the German legislation even includes a couple of other restrictions.

• G-REITs are restricted to real properties in Germany and abroad with the exception of existing rental housing stocks. These are real estates with a portion of more than 50 % rental housing space which had been constructed before January 1st 2007.

• At least 15 % of shares must be owned by small shareholders (less than 3 % of shares). At the start up of a public REIT at least 25 % must be owned by the small shareholders. No shareholder is allowed to control more than 10 % of the shares, including shares hold for clients.

• A G-REIT is not allowed to trade real estates with a market value more than half of the total real estate value within 5 years.

• New mortgage of a G-REIT is limited to 60 % of the capital stock.

Under these and other conditions G-REITs enjoy an exempt of corporate taxes. For a period of … years the tax on sale of existing real-estate is only 50 % of the standard (normally real-estates are undervalued in the balances).

The achieved compromise with the exclusion of rental housing from REITs is an important progress in the struggles in defence of social housing markets. But it is not a final victory.

Remaining risks for Germany are:

• Loss of tax receipts.

• Transformation of public non-housing real estates into REITs (schools, hospitals, city halls, prisons, stations…) and promotion of methods like Private Public Partnership (PPP) or Sale- and Lease Back.

• REITs as housing developers.

• Further comodification of the real estate markets and increasing pressure which even will have affects on housing markets.

• The present REITs regulations allow the start up of the sector. We have to expect that the financial sectors will continuously lobby for liberalisations.

In a comment, Steven Wechsler, President of NAREIT, said that the ban on housing will not be fatal for the G-REIT. “However, those set to be worst impacted by the exclusion of housing are tenants in Germany, since they will not be able to benefit from the extended service and improvement in accommodation associated with REITs.” According to Wechsler, since the introduction of REITs in the USA over 50 years ago, the prospect of tenants facing the negative consequences feared by opponents of REITs has never been realized. He branded the arguments, namely excessive increases in rent and deterioration in residential portfolios, as “fantasy”¹.

In this article the author has tried to proof that the “fantasy” is bloody reality.

Wechsler even observes that REITs represent a trend of internationalisation, which from Wechslers’ point of view is “a logical development”: “No one thinks to question that McDonald’s sells burgers across the world. So why shouldn’t a real estate company operate at global level, too?” Ultimately all participants, including tenants and investors, would benefit from the professionalisation of the market, which is accompanied by the strong participation of international investors, Wechsler said. He pointed out that some US REITs already own large real estate portfolios in Germany. He believes without a doubt that others will follow suit, particularly as new proposed U.S. legislation is adopted that will make cross-border investment easier.

For us this means, that the struggle for the defence of a socially orientated real estate sector will continue. We are only at the beginning.

In this context priorities in Germany include:

• Continuation and intensification of the struggle against the privatisation of public housing stocks (about 3 million units in Germany, see other case reports).

• Regulation on investments by Private Equity Funds, i.e. legal limitations on mortgage (already proposed by the federal Treasurer)

• Legal restrictions on international and synthetic REITs (US-REITS, Frenach REITs, British REITs) either through harmonized national legislation or European and international treaties.

• Specific legislation on public real estates, which limit the interest on sell outs and promote a modern renaissance of public property for social needs.