German Cabinet Approves REIT Bill

by Ulrika Lomas, Tax-News.com, Brussels

03 November 2006

The German cabinet has approved a draft bill to introduce real estate investment trusts (REITs) from 2007, although it is feared that the exclusion of residential property from the legislation will prove unpopular with investors.

Under the terms of the bill, only residential property that has been built after January 1, 2007, when REITs are due to be introduced, or where more than 50% of the use is for commercial purposes, can be sold to a REIT.

Funds are also required to list on the stock market and maintain a permanent free float.

REITs are proving popular with both governments and investors all over the globe. Countries with REIT legislation in place include the USA, the UK (from 1st January 2007), Hong Kong, Malaysia, Singapore, Japan, Australia, and the Netherlands. Typically, a REIT is a fund, publicly listed or not, which holds real estate assets, and is tax-transparent (pass-through) as long as it distributes 90% of its gains and profits to its shareholders. Usually, 75% of a REIT's income must come from property investments.

The German government hopes that the new vehicles will spark an investment boom by encouraging firms to sell their property holdings, thus freeing up capital to be spent elsewhere.

However, analysts fear that the proposals are too restrictive, especially the decision to leave out residential properties, a decision likely forced on Chancellor Angela Merkel to ensure support for the bill from the Social Democrats (SPD) in her coalition cabinet.

SPD members fear that the sale of residential properties to REITs could force up rents, making householders worse off.

Unlike in the UK and the US, the number of householders owning their home is a small proportion of the overall market, although, by contrast, considerably more German companies, about 73%, own property, compared with just 25% in the US.

Under another restriction, German REITs must ensure that investors directly hold no more than 10% of the fund, a measure designed to limit their use as a vehicle for tax avoidance.

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