German REITs that are good to invest in
German REITs Info
The actual German real-estate-investment-trust market is gaining momentum, as the global economy struggles to recuperate from the financial crisis and investors take a new curiosity about the euro zone’s economic engine.
Because of bad timing-the law allowing REITs in Germany was passed shortly prior to the crisis-and the dominance of open-ended funds, only four German REITs can be found. But international investors have shown demand for German real property. Germany had its first initial public offering from a REIT in July and experts expect more soon.
“I’m relatively bullish on the potential of the German REIT market within the next five years, ” said John Lutzius, a London-based controlling director with Green Street Advisors, an independent research and consulting firm that targets publicly traded real-estate securities. “Real-estate investors are excited about the great, strong economic conditions in Germany, and they’re looking for methods to invest. ”
Until this year, German REITs had been leading the home sector’s recovery from the downturn. The German REIT index has outperformed the entire REIT index for developed European countries since the sector flattened in 2008, according to the European Public Real Estate Organization.
This year, though, the German REIT index has been trailing the broader REIT index along with the overall market. In the latest market rout, the German REIT index fell 26% from July 26 towards the close of trading Monday, while the DAX index for German born stocks fell 19%.
The U. S. has had a law allowing REITs because the 1960s, but the German government only passed legislation allowing the actual investment structure in June 2007. While REITs can own industrial property in Germany, they can only own residential property constructed since 2007, and 90% of net profits must be paid to shareholders annually.
Experts say they are losing some of the hold, as several have seen problems related to devaluations throughout the downturn and are being forced to liquidate. Others are still succeeding, but the liquidations have opened up a gap in the actual real-estate finance markets that REITs have capitalized on.
In the actual meantime, more foreign investors are entering the market, some through REITs based outside Germany which are investing in German property. Dundee International REIT, a Canadian firm that completed an IPO a week ago, is looking at acquiring a large portfolio of German commercial property, according to the European Public Real Estate Association.
“I think there is a rising movement toward REITs, ” said Tobias Just, head associated with sector and real-estate research with Deutsche Bank. “We’ve seen the very first new REITs being listed, and there is a movement towards the listed real-estate segment. ”
“Germany has been outperforming Europe within the last two years, and it’s likely to do so next 12 months. And this is likely to be beneficial to real-estate need, both commercial and residential, ”
Prime Office REIT-AG(Gyerman) experienced an IPO of 34. 5 million shares. An earlier version of the story incorrectly said 35. 6 million shares. Also, Morgan Stanley increased its shareholding from the REIT to 5. 25% at the end of July.
REITs Gear Up in Germany
Plans by Germany’s new center-right coalition to overhaul regulations for real-estate investment trusts are required to unleash a round of REIT listings that could include a number of Germany’s biggest publicly traded property firms.
Negotiators for the center-right coalition of Angela Merkel’s Christian Democrats and also the pro-business Free Democrats have agreed to scrap rules that forbid German REITs from owning residential property and also to extend tax benefits aimed at encouraging institutional and corporate home owners to sell assets to REITs by granting a 50% exemption upon capital-gains tax owed on such transactions.
The changes are a part of draft agreements in coalition talks that followed elections Sept. 28 and aren’t binding until passed into law.
“We’ve agreed to take a new consider the REIT law and to eliminate bureaucratic hurdles and that includes allowing REITs to possess residential property and extending the exit-tax exemption, ” said Leo Dautzenberg, the official with the Christian Democrats on the financial-policy negotiating team.
So far, Germany’s REIT industry appeared to be dead in the drinking water. The law took effect in 2007 just as European property markets were going to tank and included hurdles that made it unattractive for numerous firms.
Only two German REITs exist, Alstria Office Reit AG as well as Fair Value Reit AG, with a combined market capitalization associated with €481 million ($711 million) and combined property property of €2 billion.
“The financial crisis is the reason why we do not have more REITs today, ” said Frank Schaich, chief executive official of Fair Value Reit, which focuses on office, logistics as well as retail property.
A revision of the REIT law to include residential REITs could open the door for offerings by numerous big property companies such as Gagfah SA, Deutsche Wohnen AG and Colonia Property AG.
The German property market appears to be improving, a good encouraging sign for REIT listings. Investment in German commercial home is rising and prices have steadied.
REIT candidates also are pressurized to convert soon. There are 10 listed pre-REITs, or companies along the way of becoming a REIT. Under German rules they must convert to some REIT and list within three years. For most, the time for you to decide runs out next year.
Some already are convinced. Hamborner AG, a listed property company having a €251 million portfolio of office and retail properties, is moving ahead using its REIT plans.
“We’ve fulfilled all the conditions to convert to a REIT and are preparing to do so in 2010, ” said Hans-Richard Schmitz, co-head from the company.
Companies hit by the financial crisis may not match the criteria to convert to a REIT. In Germany, a REIT should maintain a 55% equity share and distribute 90% of it’s profits to shareholders. With the collapse of property values, few companies still have much equity on their books.
All eyes are on potential REIT entries of residential-property companies. The existing law excludes REITs from having residential property in Germany built before 2007. REITs could personal new housing or any housing abroad, but the law locked them from the privatization of municipal housing companies, which sold blocks of open public housing to private-equity investors.
The restriction was the political cost that Ms. Merkel’s previous partners, the left-leaning Social Democrats, demanded as a swap for passing any REIT bill. The Social Democrats thought it might stop private-equity firms, who it dubbed “locusts, ” from getting control of public housing and raising the rent on bad and working-class tenants.
“In Germany, the problem is that housing is recognized as a social commodity and not an economic commodity, ” stated Stephan Rind, CEO of Colonia Real Estate, Germany’s third-largest openly traded residential property group and asset manager, with €2. 1 million in assets under management, behind No. 1 Gagfah and Deutsche Wohnen.
Inside a joint venture with private-equity group Oaktree Capital Management LP, Colonia have been considering bundling residential housing into a REIT that was likely to have more than €1 billion in property assets.
“As long as residential property is not allowed this isn’t possible, ” Mr. Rind said. Colonia has no REIT programs, but Mr. Rind doesn’t rule it out.
Luxembourg-listed Gagfah, having a €9. 5 billion property portfolio, could convert to a REIT when the rules are changed to include housing.
“We would consider this, ” said a Gagfah spokeswoman.
Private-equity firm Fortress Investment Team LLC owns 60% of Gagfah. Fortress wasn’t available for remark.
Deutsche Wohnen is unlikely to convert to a REIT at any time soon. Deutsche Wohnen already benefits from a huge loss carried forward from the balance sheet technicality related to the acquisition of public housing within the 1980s. The upshot is that the company has a greatly reduced goverment tax bill.
“This situation will continue for a number of years, so I don’t really see the advantage of REIT status for us, ” said Helmut Ullrich, the corporation’s chief financial officer.
Deutsche Wohnen’s largest investor is Oaktree Funds Management, which holds about 27% of the company. Oaktree rejected to comment.
German Real Estate Investment Trusts – Particular features concerning the securities prospectus
The success of the new capital market item, the REIT, will also largely depend on how IPOs of REIT exercise in practice.
In this context, the preparation of securities prospectuses with regard to REIT is of particular interest.
General requirements for a prospectus
REIT can only be admitted to trading with an organised market in an EU Member State or in a country that’s party to the Agreement on the European Economic Area. Based on the requirements of the German Securities Prospectus Act (Wertpapierprospektgesetz), the party filing a credit card applicatoin for the admission of securities to be traded on a good organised market in Germany must generally publish a prospectus.
To be able to facilitate comparability and to simplify the preparation of prospectuses, securities prospectuses themselves must include particular minimum information the inspiration for which are stipulated in the Council Regulation (EC) Absolutely no. 809/2004 (Prospectus Regulation). The description must, in a form that may be easily analysed and understood, include all necessary information to enable the reader to create an objective judgement regarding the assets and liabilities, the budget, the profits and losses, the prospects of the issuer as well as each guarantor, and the rights relating to such securities. The prospectus should be clearly structured and organised, with parts of such structure and organisation being directly stipulated within the Prospectus Regulation. If the issuer opts for a one-part rather than three-part prospectus (which is usually the case), such prospectus must incorporate a clear and detailed table of contents, a summary, a statement of the risk factors relating to the particular issuer and type of securities along with the details to be provided under the other information components that constitute the main layouts/templates and modules of the Prospectus Regulation. In addition towards the requirements laid down in the Prospectus Regulation and the German born Securities Prospectus Act, the securities prospectus, in practice, is prepared based on the specifications contained in the CESR recommendations.
Particular features of the REIT prospectus
A REIT prospectus, too, must meet these common requirements. In addition, the particular REIT-specific features, examples of that are provided below, must also be observed.
- a) Description from the market value of the real estate portfolio
The REIT Behave provides, for example, for strict asset and income requirements: At the conclusion of each fiscal year, at least 75 per cent from the assets of the REIT, after deduction of the distribution responsibility and reserves, must compose immovable assets; the earnings of the actual REIT are strictly prescribed; real property trading is subject to strict limits and also the minimum equity base of the respective REIT is stipulated legally. The observance of such thresholds and the assessment of the probability of whether measures to guarantee the observance of such thresholds will become necessary is of essential importance to investors in REIT. Therefore, the corresponding fair values and the relevant value ratios must be contained in the prospectus. In terms of structure, the above figures are to be contained in the chapter of the prospectus entitled explanation and analysis of the budget and business development” (so-called “MD&A – Management Discussion as well as Analysis” or “OFR – Operating and Financial Review”).
- b) Description from the distribution obligation
A REIT must distribute at least 90 percent of the annual net income as defined in the German born Commercial Code (Handelsgesetzbuch) to its shareholders. Such high minimum distribution rate helps to ensure that the activities of the REIT are subject to adequate taxation from shareholder level. Another aspect that is of particular interest towards the investor is the obligation of the REIT when determining profits pursuant towards the German Commercial Code, to carry out scheduled depreciation exclusively on the linear basis, and the special treatment of capital gains. Such obligation must be disclosed in the securities prospectus included in the dividend policy.
- c) Description of taxation
In the description from the taxation in Germany, the issuer must address the particular options that come with a REIT, i. e. the exemption of the REIT from corporate income tax and trade tax along with the non-applicability of the 50 per cent-exemption system (Halbeinkünfteverfahren) and of Section 8b (1) from the German Corporate Income Tax Act (Körperschaftsteuergesetz) at shareholder level particularly. Circumstances resulting in the loss of such tax privilege should also be set out in this context.
- d) Risk elements
In addition to the general risks from the nature from the issuer’s business, additional REIT-specific risks must be disclosed. If what’s needed of the REIT Act are not met, there is a risk how the tax privilege may be lost, but potential (penalty) payments or compensation claims from the shareholders must also be described. Moreover, it is advisable to indicate in the prospectus the risks related to the lack of working experience in application of the REIT Act by the competent supervisory as well as tax authorities (cf. the prospectus of Fair Value REIT AG, for instance). Thus, investors are made aware of the fact which no tangible legal practice has yet been established.
The distribution obligation to which the REIT is subject means that the REIT has the capacity to re-invest only a small proportion of the profits generated. What’s needed relating to the equity base of a REIT restrict the options of obtaining bank loans. Therefore, in the event of a higher demand for capital, REIT can only finance growth by method of capital increases which are time-consuming, dependent on the mood about the capital market and bear a dilution risk for existing investors. Such growth risks should be disclosed, as well as any potential related liquidity shortages from the REIT.
- e) Valuation report
Pursuant to the Prospectus Legislation, the national regulatory authorities have discretionary powers to demand that issuers participating in certain business activities, including real estate companies, provide additional prospectus info, for instance a valuation of assets. Such discretionary powers are further specified by CESR recommendations which also form the foundation for the administrative practice pursued by the German Federal Monetary Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht; BaFin). According in order to these recommendations, in the event of share issues by property companies, the supervisory authorities are fundamentally required to request the valuation report. The simplest way is to insert the valuation report at the conclusion of the securities prospectus, either before or after the monetary statements.
The valuation report must be prepared by an impartial expert. Such expert must state the dates of inspection from the properties and all details relevant for valuing the material qualities. In addition, the reference date for the valuations must be specified and such date ought not to be more than one year before the publication date. In the prospectus the issuer must make sure no material changes have occurred since the reference date. The prospectus must only include a directory of the expert report, which is generally the case in exercise.
Conclusion
This article shows, by way of example, the additional issues that emerge regarding the preparing REIT prospectuses. Some of these issues result from what’s needed set out in the REIT Act. Since it has not yet been possible to determine a standard prospectus market practice for REIT, issuers will be much more dependent on a close cooperation with BaFin than for additional issues. This should not, however, have a negative effect about the fundamental success of the new investment class of REIT.