Real Estate Investment Trust

A real estate investment trust ( REIT ) [ ˈriːt ] is

• a capital collection point for capital investments in the real estate sector
• a company that acquires, manages and sells property in domestic and foreign real estate, according to German law excluding existing rental residential real estate,
• a corporation,
• in Germany always a stock corporation.

REITs differ from other forms of business, namely real estate funds and real estate stock corporations, in a number of special features that are intended to make them attractive to capital investors. In Germany , the stock corporation is prescribed as the legal form .

purpose

When REIT structures were introduced in the USA in 1960, the legislature pursued the purpose of creating a transparent and fungible real estate investment vehicle modeled on, for example, pension funds, in order to enable broad groups of investors to invest in real estate. The indirect real estate investment should be just as easy as investing in stocks, for example. REITs can therefore be interpreted as "low-threshold" investment offers. REITs can be characterized as capital collection points that create a link between the capital market and the real estate industry. From the point of view of the real estate industry, the advantage of a fungible REIT market is the inflow of liquidity.

features

Business activity

REITs generate their profits from renting and leasing their own real estate and land, from interest income and from profits from the sale of real estate. Your assets consist mostly of real estate, stakes in other real estate companies and mortgage loans. In many REIT regimes, REITs are subject to certain business restrictions, such as: B. in real estate trading. In Germany, the extensive exclusion of residential properties should be emphasized.

legal form

Depending on the national regulations, REITs can have different legal forms . In the USA, Australia and Canada this can be a trust or in the USA a corporation. Belgium has chosen the form of a mutual fund , while the Netherlands and France require a limited company. The REIT does not have to be listed on the stock exchange, but stock exchange listing is the rule. German REITs have to be listed stock corporations under the REIT law.

Tax transparency

A very important feature of REITs, which was and still applies in almost all REIT regimes worldwide, is the tax exemption at company level. This can extend to the entire profit or only to the distributed profit. The profits distributed are subject to income tax for dividend recipients. The tax exemption is not a privilege, but merely ensures that the indirect investment is equated with the direct real estate investment. In Germany, REITs are therefore basically on a par with open and closed real estate funds, which are also tax-transparent. Compared to real estate stock corporations, which are subject to corporation and trade tax, German REITs have an advantage in this respect.

High payout ratios

Another universal characteristic of REITs is that large chunks of profits are paid out instantly. Most REIT regimes provide for payout ratios of around 90%. The dividends are then subject to income tax at the recipients. The high immediate distributions are intended to ensure sufficient tax revenue despite the tax exemption at company level. For investors, the advantage of the high payout ratio is a steady and easy to plan dividend inflow. REIT shares can therefore be characterized as pronounced dividend shares, assuming corresponding distributable profits.

transparency

In order to ensure that they are attractive to a wide range of investors, REITs are often subject to particularly strict corporate governance regulations. In Germany, due to the mandatory stock exchange listing, the parent companies of REIT groups are obliged to prepare consolidated financial statements in accordance with IFRS , which are considered to be particularly information-oriented and thus guarantee a high level of transparency. In addition, the particularly strict disclosure requirements for listed companies, such as reporting during the year and ad hoc reports, must be observed.

Types of REITs

REITs are divided into two types of equity REITs and mortgage REITs. Hybrid REITs are a hybrid of the two.

Equity REITs

Equity REITs have fixed assets , i.e. real tangible assets . Mortgage REITs are to be distinguished from these, which only hold securities on real estate and earn from the accruing interest. Equity REITs earn income through rental income from the investment properties.

In principle, equity REITs can cover all types of real estate that is related to a plot of land or the buildings erected on it. The best-known division of equity REITs comprises the following categories:

• Hotels (Lodging REITs)
• Residential REITs
• Student dormitories
• Office buildings (Office REITs)
• Healthcare REITs (hospitals and nursing homes)
• Retail (Retail REITs)
• Industrial and logistics building
• Data centers
• Rental warehouse
• Prisons
• Forests (Timber REITs)
• Agricultural land
• Infrastructure
• Casinos
• Land ( heritable building rights )

Mortgage REITs

In contrast to equity REITs, mortgage REITs, also called mREITs, do not invest in real assets, but in securities based on real estate. “Mortgage” is the English word for a mortgage and these are used to secure the securities of the Mortgage REITs. Mortgage REITs therefore do not own any real real estate, but only securities derived from them.

Basically, mortgage REITs invest in home loans and have a business model similar to that of a bank. However, they are subject to less regulation than a bank and can also use a different refinancing structure. This enables significantly higher profitability, but also involves considerably higher risks and fluctuations.

Mortgage REITs buy packages of loans called mortgage-backed securities (MBS). It bundles a large number of loans from private households that are secured with mortgages on the financed property. If the borrower cannot pay his loan installment, the loan can be repaid through a foreclosure auction.

Loans to private households are usually concluded with long terms, because a family can usually not pay off a property in a few years. Often terms of up to 30 years are agreed. Mortgage REITs buy these loans from the lending banks and refinance themselves with loans that they take out more cheaply. In order to obtain cheaper loans, an mREIT chooses shorter terms, sometimes even only annually. Such a strategy is called maturity transformation . The REIT earns from the difference between the long-term contracts for which it receives interest and the short-term loans for which it has to pay interest.

history

As early as 1956, a REIT-like structure was introduced in New Zealand with the property trust . However, the first "real" REIT regime was introduced in the USA in 1960 ( Real Estate Investment Trust Act and Real Estate Investment Trust Tax Provision ). At that time, US REITs already had all the main characteristics of REITs. In 1969 the Netherlands followed with the Fiscale vouching setting , and in 1971 Australia ( Listed Property Trust ). In the 1980s and 1990s, the global REIT market developed very slowly. From the turn of the millennium there was a worldwide wave of REIT laws, with East Asian countries such as Japan, South Korea, Singapore and Hong Kong playing a pioneering role. In 2003, France became the first major European country to introduce a REIT regime. The development of the French REIT market, which has been very positive from the beginning, has been observed very closely in Germany and also had an impact on the legislative process in Germany. In 2007, three other large European countries, Germany, Great Britain and Italy, introduced REIT regimes. REIT structures currently exist in more than 20 countries around the world.

country	designation	Abbr.	introduction
United States	Real Estate Investment Trust	REIT	1960
Netherlands	Fiscale slip setting	FBI	1969
Australia	Listed property trusts		1971
Canada	Real Estate Investment Trust	REIT	1994
Belgium	Société d 'Investissement à capital fixe en immobilier	SICAFI	1995
Japan	Real Estate Investment Trust	J-REIT	2001
Korea	Korean Real Estate Investment Trust	K-REIT	2001
	Corporate restructuring REIT	CR REIT	2001
Singapore	Singapore Real Estate Investment Trust	S-REIT	2002
Thailand	Thai real estate investment trust	Thai REIT	2002
France	Sociétés d 'Investissements immobiliers cotées	SIIC	2003
Hong Kong	Hong Kong Real Estate Investment Trust	H-REIT	2003
Malaysia	Malaysian Real Estate Investment Trust	M-REIT	2005
Great Britain	Property Investment Fund	PIF	2007
Germany	German real estate investment trust	G-REIT	2007
India	Indian real estate investment trust	I-REIT	2019

German REITs

In Germany, indirect real estate investment took place until the end of the 1990s, mainly in the form of open and closed real estate funds. The segment of listed real estate stock corporations has only been playing an increasingly important role since the beginning of the new millennium. a. in the listing of a number of companies in the MDAX and SDAX.

Discussion about the introduction of the "G-REIT"

The Finanzstandort Deutschland (IFD) initiative, supported by the financial industry and the state ( Federal Ministry of Finance ), had been calling for REITs to be introduced in Germany since the end of 2003 ("G-REIT", German REIT ). This could mobilize real estate assets tied up in the company, thereby supplying liquidity and at the same time increasing the attractiveness of the German financial market . In order to enable companies to bring in their real estate without taxing the uncovered hidden reserves , a reduced taxation of the capital gains incurred was required ( exit tax ).

The CDU / CSU and SPD had agreed in the coalition agreement that they wanted to “ create framework conditions for new asset classes in Germany ”; this also includes " the introduction of real estate investment trusts (Reits) on the condition that reliable taxation is ensured for investors and positive effects on the real estate market and location conditions can be expected ". However, since April 2006 there has been resistance in parts of the SPD parliamentary group to the introduction of listed real estate companies.

The German Tenants' Association (DMB) expressed the fear that the approx. 3 million apartments that are still held directly or indirectly by the public sector in Germany would come under even more pressure to privatize and that the return orientation of REITs would increase Rents, conversions into condominiums and depletion of the company's assets. In this context, reference was also made to examples from abroad.

The left-wing parliamentary group in the Bundestag rejects the introduction of real estate investment trusts.

Regulatory framework

Basic data
Title:	Law on German real estate joint-stock companies with listed shares
Short title:	REIT law
Abbreviation:	REITG
Type:	Federal law
Scope:	Federal Republic of Germany
Legal matter:	Commercial law , corporation law
References :	4121-5
Issued on:	May 28, 2007 ( BGBl. I p. 914 )
Entry into force on:	January 1, 2007
Last change by:	Art. 11 G of June 22, 2011 ( Federal Law Gazette I p. 1126, 1173 )
Effective date of the last change:	June 26, 2011 (Art. 15 para. 1 G of June 22, 2011)
GESTA :	D041
Please note the note on the applicable legal version.

In Germany, the Bundestag passed the law on the creation of German real estate stock corporations with listed shares on March 23, 2007, which the Bundesrat also approved on March 30 (law of May 28, 2007, Federal Law Gazette I p. 914 ). Since January 1, 2007, tax-privileged real estate stock corporations have been permitted in Germany.

The German REITs are listed stock corporations , so that in principle the provisions of the Stock Corporation Act and the Commercial Code (HGB) apply. The special features of the REIT-Aktiengesellschaft are regulated in the REIT Act (REITG). According to Section 1 (1) REITG , the purpose of the company is limited to acquiring, holding, managing and selling property in domestic and foreign real estate, with the exception of existing rental residential real estate. In addition, shares in real estate companies can be acquired, held and sold.

In addition to being listed on the stock exchange , stock corporations must meet the following additional requirements in order to obtain REIT status:

• Minimum distribution ( Section 13 REITG )
• Focus on real estate investments ( Section 12 REITG )
• Minimum spread of REIT shares ( Section 11 REITG )
• Exclusion of real estate trading ( § 14 REITG )
• Minimum equity ratio of 45% must not be undercut ( Section 15 REITG )

German REITs are obliged to distribute at least 90 percent of their distributable profit to shareholders ( minimum distribution ). The profit, carefully calculated in accordance with the Commercial Code (i.e. excluding hidden reserves), serves as the basis for assessing the minimum distribution.

Investment focus on real estate

REITs must have a clear investment focus on real estate . The lower limits for the share of income from REITs from real estate in total income and the share of real estate assets in total assets of the REIT-AG are each 75 percent ( Section 15 (1) and (2 ) REITG ), whereby the assets are valued according to the International Financial Reporting Standards ( IFRS ) and not HGB is relevant. Up to 25% of the part of the income of German REITs that is tax-exempt at company level does not have to come from real estate at all. The legislature has rejected alternatives such as restricting the tax exemption to income from “formative” (i.e. real estate-related) activities “in order to safely exclude the application of the parent-subsidiary directive and the merger directive ”. In an international comparison, a comparatively large proportion of non-property-related income is thus privileged.

Minimum spread of shares

The REIT stock corporations are obliged to ensure a minimum diversification in the long term in order to "also give small investors the opportunity of a fungible investment in real estate assets" (free float regulation). At least 15% of the shares must be permanently in the hands of shareholders who each hold no more than 3% of the shares. In addition, the direct participation of a single shareholder is limited to 10% of the share capital (maximum participation). Finally, at the time of admission to the stock exchange, at least 25% of the REIT shares must be in free float (initial free float quota).

Business restrictions

Core business holding real estate

Finally, the REIT status also depends on whether the business activity has a " focus on passive property management " ( Section 14 REITG ): "The core business of the REIT-Aktiengesellschaft is holding and managing your real estate, not trading it." The regulations allow half of the REIT portfolio to be turned over within 5 years and the entire portfolio within 10 years . This means that “a flexible reallocation of the portfolio” remains possible.

Extensive exclusion of existing residential properties

While in the first by the Federal Ministry of Finance submitted the draft bill no particular restrictions on the investment of REITs in residential property were provided investments are excluded in so-called "Existent" as adopted law. "Otherwise negative effects on the rental housing market to the detriment of tenants and the public sector and problems for sustainable urban development and social housing policy would be feared" (Section A.2.8 of the explanatory memorandum). However, REITs are allowed to invest in apartments that were built after December 31, 2006.

Accounting and determination of profits

The REIT-AG's accounting and profit determination are based on the HGB accounting rules. Special profit determination rules apply with regard to depreciation and capital gains. Only straight-line depreciation is permitted ( Section 13 (2 ) REITG ). This results in an increase in the distributable profit in cases where higher depreciation rates are permitted under tax law. The limitation of debt (external financing) to 55 percent of the company's assets anchored in the REITG is intended to ensure sufficient protection for creditors ( Section 15 REITG ).

Parent companies of REIT groups are obliged to publish consolidated financial statements in accordance with IFRS . This eliminates the obligation to prepare consolidated financial statements under the German Commercial Code. The obligation to prepare individual financial statements in accordance with HGB remains unaffected.

taxation

Exemption from corporation and trade tax

The G-REIT is not subject to corporation tax or trade tax ( Section 16 REITG ).

Exit Tax

The so-called exit tax represented a special tax incentive for the establishment of a G-REIT or for the conversion into one. Profits from the sale of land and buildings to a REIT or pre-REIT were exempt from tax at 50% under certain conditions (cf. § 3 No. 70 EStG). The following essential prerequisites had to be met, whereby a refusal of the tax exemption was also provided for in the event of subsequent non-compliance:

1. Belonging to the fixed assets of a domestic business asset on January 1, 2007 for at least 5 years
2. Conclusion of a legally binding mandatory contract after December 31, 2006 and before January 1, 2010
3. Membership in business assets for at least 4 years

This was intended to provide incentives for the REIT sector to develop as quickly as possible. In particular, companies that want to permanently reduce their tied-up assets in real estate were offered a tax-attractive exit instrument.

The exit tax regulation applied to transfers between January 1, 2007 and December 31, 2010. In the case of incorporations or conversions from January 1, 2011, the profits resulting from the transfer to a REIT are fully taxed.

Taxation of the shareholders

Distributions and other remuneration of a G-REIT are only taxed by investors. If the units are held as private assets, the income is to be taxed at the source with 25% capital gains tax plus solidarity surcharge and any church tax, and thus generally compensated, see withholding tax . In the case of shares in business assets, the income from capital assets is to be allocated to commercial income (see Section 20 (8) EStG). However, the partial income method does not apply (see Section 19 (3) REITG). If the shares are held by a corporation, the benefits for investment income i. S. d. Box privilege not granted, so that 100% are taxable here as well (cf. § 19 Paragraph 3 REITG). Exceptions to the above rule are given in cases in which the company is charged at least 15% tax (cf. § 19a REITG). For reasons of equal opportunities, distributions from foreign REITs should be treated in the same way for tax purposes. The exclusion of the partial income procedure or dividend privilege also applies in the event that the shares of a REIT stock corporation or the shares in a foreign REIT are not held directly but by means of an investment fund (see Section 2 (2) InvStG).

A major problem with REIT legislation is the taxation of shareholders. The distributions from REITs arrive at investors as income from capital assets and not as income from renting and leasing . Double taxation agreements (DTA) now regularly assign the taxation right for investment income to the state in which the taxpayer is resident. Germany thus loses the right to tax if foreigners (for tax purposes) acquire shares in German REITs. In the UK, this problem has been addressed by limiting direct participation to 10 percent. The aim was at least to avoid the reduced dividend taxation under the DTA. After a split into a REIT-AG and a special fund had initially been discussed for Germany , the law now provides a solution similar to that in Great Britain.

Pre-REIT

A pre-REIT is a stock corporation domiciled in Germany whose corporate objective is limited to the principles of REITs, meets some requirements of the REIT law and is not yet eligible for the capital market, but is registered with the Federal Central Tax Office . The pre-REIT also falls under the exit tax regulation, but the benefit is limited to 3 years. The basic requirement is therefore the legal status of a stock corporation and the seat in Germany (also of the management of the corresponding company). The focus on real estate must also be clearly defined in the company statutes and approved by the respective general meeting.

Market situation

Before the REIT law came into force, forecasts of the future market success of G-REITs were sometimes quite optimistic. In some cases, medium-term market capitalizations in the high double-digit or even triple-digit billion range were assumed. These forecasts have proven to be far too optimistic. Currently (as of 11/2019) there are only five G-REITs, these are listed in the RX REIT Index ( DE000A0MEN90 ) of Deutsche Börse:

• alstria office REIT AG
• Fair Value REIT AG
• Hamborner REIT-AG
• German consumer REIT-AG
• German industrial REIT-AG

The aggregate market capitalization of these five companies is in the region of four billion euros (as of April 2020). The German REIT market only plays a marginal role internationally.

US REITs

The US REIT market is by far the largest national REIT market worldwide. There are several hundred US REITs with an aggregated market capitalization in the high three-digit billion US $ range.

According to the investment focus, there are three legal types of REITs in the USA:

• Equity REITs that mainly invest in real estate
• Mortgage REITs that invest primarily in real estate loans
• Hybrid REITs that invest in both

US REITs do not necessarily have to be listed. There is a large over-the-counter REIT market ( private REITs ). In the US, REITs are only exempt from corporation tax to the extent that they distribute dividends to their shareholders from the profits. The minimum payout ratio for a US REIT is 90% of taxable income. Undistributed profits are therefore subject to US tax. It should be noted, however, that US REITs can make distributions that exceed their tax result (up to 100% of their cash flow), so that the profit distribution often even exceeds the tax result.

literature

• Ralph L. Block: Investing in REITs. Princeton 2011, ISBN 978-1-118-00445-6 .
• Jan F. Bron: The G-REIT. Baden-Baden 2007, ISBN 978-3-8329-3159-9 .
• A. Striegel (Ed.): REITG. Erich Schmidt Verlag, Berlin 2007, ISBN 978-3-503-10324-9 .
• Guido Quass, Roman A. Becker: The REIT-AG according to the law on German real estate stock corporations with listed shares. In: AG . 52nd vol. 1, 2007, pp. 421-435.
• Jürgen Schäfer (Ed.): REITs, market overview, structure and management, investments in REITs, practical guide. CH Beck. 2007, ISBN 978-3-406-56127-6 .
• Mike Wienbracke: The German Real Estate Investment Trust (REIT). In: NJW . 2007, p. 2721.
• Kilian Wimmer: The taxation of the G-REIT. Passau / Saarbrücken, 2006, ISBN 3-8364-0244-0 .

Web links

Commons : Real Estate Investment Trust  - Collection of pictures, videos and audio files

• Text of the REIT Act (REITG)
• Text of the "Law on the Creation of German Real Estate Stock Companies with Listed Shares (REITGEG)"
• Comparison of REITs from the EU (PDF, 1.3 MB)

Individual evidence

1. ↑ REITs Atlas: The REITs Atlas . ISBN 978-1-70672-182-6 , pp. 6 .
2. ↑ REITs Atlas: Understanding REITs and Real Estate Stocks . ISBN 3-7519-1717-9 , pp. 190 .
3. ↑ The REITs Atlas . ISBN 978-1-70672-182-6 , pp. 182 .
4. ↑ REITs Atlas: Understanding REITs and Real Estate Stocks . ISBN 3-7519-1717-9 , pp. 199 .
5. ^ Christian Maxberg: REITs in Asia . Ed .: REITs Atlas. ISBN 979-86-4162897-4 , pp. 134 .
6. ↑ Coalition Agreement Section II.3
7. ↑ Ortwin Runde, Florian Pronold, Nina Hauer: REITs: Tax policy sin and wrong way of housing policy. ( Memento of September 27, 2007 in the Internet Archive ) Position paper. October 12, 2006.
8. ↑ Rejection of the introduction of REIT by the Left Party (PDF, 92 kB)
9. ↑ § 1 No. 1a i. V. m. Section 3 (9) REITG.
10. ↑ The new REIT law Company and capital market law requirements for companies ( Memento of the original from January 30, 2012 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF, 62 kB) 
11. ↑ boerse-frankfurt.de ( Memento of the original from August 11, 2014 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. 
12. ↑ boerse-frankfurt.de ( Memento of the original from March 27, 2014 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. 
13. ↑ boerse-frankfurt.de ( Memento of the original from March 27, 2014 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. 
14. ^ Deutsche Konsum REIT-AG
15. ↑ Deutsche Industrie REIT-AG

Please note the information on legal issues!