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G-reit expectations

Gregor Watt reports on a massive potential market opening up now that Germany has brought in Reits.

Germany has just been added to the realm of Reits.

Like the UK, the legislation allows Reits to benefit from an improved tax status, providing that at least 75 per cent of all yields come from property and at least 90 per cent of income is distributed to shareholders.

The German government’s decision to introduce Reits brings the number of countries that permit investment in property through tax-efficient investment to 23. The managers of the many new international property securities fund managers have warmly welcomed the German move.

Scottish Widows Investment Partnership investment director of real estate securities Ian Hally says: Germany is Europe’s biggest property market but has a very small quoted sector, with relatively few liquid and tradeable real estate companies. “The German Reit market will be the one to watch this year and will be an interesting market for investors. The dynamics in Germany will be different to the UK and we expect the G-Reit market to grow significantly in size over the next few years.”

Henderson Global Investors head of property equities Patrick Sumner says: “Germany has the biggest property stock in Europe but it is under-represented in the listed arena. The G-Reit should encourage the listed German property sector to grow significantly.”

Standard Life Investment UK Global Reit fund assistant fund manager Svitlana Gubriy says: “The German property market is one of the biggest in continental Europe and I would expect a lot of property will come to the listed market.”

As well as opening a new avenue for funds investing in property securities, Sumner says G-Reits should benefit the wider economy. “It will improve the liquidity and transparency of the market and bring a more entrepreneurial approach to property ownership, which will, in turn, improve the efficiency of the broader economy – to the advantage of everyone,” he says.

Hally says the large amount of property owned by German firms will prove significant in the introduction of Reits, as many companies will look to benefit from the opportunity.

Hally says: “Unlike the UK, where conversion has been led by big, listed real estate companies, we expect G-Reits to see significant growth from the corporate sector. As many as 73 per cent of German companies own property – much higher than the UK and the rest of Europe – and the Reits legislation paves the way for firms to establish their own Reits or sell their properties into a Reit. This could see Germany become one of the most significant Reit markets.”

As the new legislation stands, the rules governing Reits in Germany are more restrictive than in other countries, particularly on some of the permitted investments, but Sumner says he expects these restrictions to be relaxed as the new funds bed in.

“The initial rules seem unnecessarily restrictive but our experience of the French SIIC regime and the UK’s newly introduced Reit rules is that once legislators get comfortable with Reits and the tax benefits they bring – in terms of exit taxes and ongoing revenues from withholding taxes – they seem to be happy to work with the property industry to liberalise the rules.

The new legislation is retrospective so the new tax regime applies from January 1 but, unlike the UK, there has not been an initial rush to convert.

Gubriy says many property companies own large amounts of residential properties and this will cause delays: “We do not expect an immediate effect to the existing listed property companies in Germany. Most of them cannot qualify because of restrictions on residential property.”

Existing property companies will have to restructure, so they can qualify for Reits status and this is going to take time.

Gubriy does expect new Reits to be quicker to mar-ket. He says “We will see new Reits being launched, as companies sell non-core property into Reits.”

So far, no property firms have converted to Reit status, although it is just a matter of time before they do so. Among the first tipped to convert is fund management firm Deutsche Capital Management. DCM is considering floating part of its euro 1bn property fund in a Reit but this may not be until June.

Although the investment opportunities will take time to appear, the industry says the timing of the introduction of Reits has coincided well with the state of the German economy.

Sumner says that it is an interesting time in the property cycle “with consumers growing in confidence as employment starts to grow again and key office markets, such as Hamburg and Munich, showing early signs of recovery”.

Hally says: “We identified last year that Germany was seeing the first shoots of economic growth coming through and we continue to see opportunities within the German residential, retail and office markets.”


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