Real-Estate-Investment-Trust

A real estate investment trust (REIT [ ri ː t ] is an investment vehicle whose corporate purpose is to manage properties for the purpose of return to achieve, to act or to finance. Compared to other real estate investment vehicles, including real estate funds and real estate companies, REITs are characterized by some of features which should make this a vehicle for the widest possible group of investors attractive.

• 4.1 Discussion on the introduction of the "G -REIT "
• 4.2 Regulatory framework 4.2.1 minimum distribution
• 4.2.2 Investment Focus Real Estate
• 4.2.3 Minimum dispersion of shares
• 4.2.4 Restrictions on the activities 4.2.4.1 core holding of property
• 4.2.4.2 Extensive exclusion of residential properties in the portfolio

• 4.2.6.1 Exemption from corporation and trade tax
• 4.2.6.2 Exit Tax
• 4.2.6.3 Taxation of shareholders

Purpose

With the introduction of REIT structures in the United States in 1960, the purpose was of the legislature pursues to create a transparent and fungible property investment vehicle modeled after about pension funds to broad investment community regardless of income or real estate knowledge (indirect ) investments to allow in investment properties. Herein still one of the main purposes of REITs can be seen even today. The indirect real estate investment should be similar to this easily possible such as investing in stocks. REITs can thus be interpreted as " low-threshold " investment deals for real estate investors interested. REITs can be characterized as capital collection, which establish a link between the highly liquid and fungible capital market and the real estate industry. From the perspective of the real estate industry thus the advantage of a fungible REIT market is the inflow of liquidity.

Features

Operations

REITs derive their income from the letting and leasing of its own properties and land, from interest income as well as gains on the sale of real estate. Your assets consist primarily of real estate, investments in other real estate companies and mortgage loans. In many REIT regimes REITs certain restrictions on the business activities are subject to such the real estate. In Germany especially the substantial exclusion of residential properties is emphasized.

Legal form

Depending on national regulations, REITs may have different legal forms. In the United States, Australia and Canada, this may be a trust or a corporation in the USA. Belgium has chosen the form of an investment fund, while the Netherlands and France impose a limited 'surplus society. The REIT does not have to be necessarily listed on the stock exchange, but the listing is the rule. German REITs must qua REIT Act be listed corporations.

Tax transparency

A very important feature of REITs, the world was in almost all REIT regimes and applies the exemption provided at company level (tax transparency). This may extend depending on the REIT regime to the whole gain or only on the distributed profits. Distributed profits are subject to the dividend recipients of the income tax. The tax exemption is not a privilege but merely ensures that the indirect to the direct real estate investment is equated ( in which indeed there is no intermediate entity that could be taxed ). In Germany REITs are characterized grds. also the tax- transparent open and closed real estate funds equal. Compared to real estate investment trusts, which are subject to corporate income tax and trade tax, German REITs are so far the advantage.

High payout ratios

Another universal feature of REITs is that a large part of the profits will be distributed immediately. Most REIT regime provide payout ratio of approximately 90 %. The dividends are then subjected to the beneficiaries of the income tax. Due to the high immediate dividends sufficient tax revenue to be ensured despite the tax exemption on company level. For investors, the advantage of the high payout ratios in a steady and good planning paid dividends. REIT shares can thus be provided appropriate distributable profits, characterized as pronounced dividend stocks.

Transparency

To ensure the attractiveness wide circle of investors, REITs particularly strict corporate governance rules are often subjected. In Germany, the parent companies of REIT corporations are due to the mandatory listing obliged to prepare consolidated financial statements in accordance with IFRS, which are considered particularly information -based and are thus ensuring a high level of transparency. In addition, the particularly stringent disclosure requirements for listed companies, such as the periodic reporting and ad - hoc reports to note.

History

A REIT-like structure was introduced in New Zealand with the Property Trust early in 1956. The first "real" REIT regime, however, was introduced in 1960 in the USA (Real Estate Investment Trust Act and Real Estate Investment Trust Tax commission). Already at that time showed U.S. REITs to all essential characteristics of REITs. In 1969, the Netherlands followed with the Tax Advice Beleggingsinstelling, 1971 Australia ( Listed Property Trust). In the 1980s and 90s, the global REIT market developed very slowly. From the turn of the millennium, there was then a worldwide wave of REIT laws, with particular East Asian countries such as Japan, South Korea, Singapore and Hong Kong played a pioneering role. Was introduced in 2003 in France as the first large European country a REIT regime. The very beginning of a very positive development of the French REIT market has been watched very closely in Germany and also had an impact on the legislative process in Germany. In 2007, led by Germany, Britain and Italy three other major European countries REIT regime. Currently REIT structures exist in more than 20 countries.

German REITs

In Germany, the indirect real estate investment has taken place by the end of the nineties, mainly in the form of open and closed-end funds. The segment of listed real estate companies only since the beginning of the new millennium, however, plays an increasingly important role, which is reflected inter alia in the listing of a whole number of companies in the premium indices MDAX and SDAX of the German Stock Exchange.

Discussion about the introduction of the "G -REIT "

The of the financial industry and the government ( Ministry of Finance ) led initiative Finanzstandort Germany (IFD ) had since the end of 2003, the introduction of REITs in Germany demanded ( " REIT " German -REIT ). This could bound in the business property assets to be mobilized, the companies are thus supplied liquidity and at the same time the attractiveness of the German financial market be increased. To enable the company to transfer its property without taxation of hidden reserves, a reduced taxation of capital gains accruing demanded ( "exit tax" ).

CDU / CSU and SPD had agreed in the coalition agreement that they want to " create the conditions for new asset classes in Germany "; this belongs also " the introduction of real estate investment trusts ( REITs ) under the condition that the predictable taxation ensures the investor and the likely positive effects on the property market and site conditions ." However, was formed in April 2006 in parts of the SPD parliamentary group resistance to the introduction of listed real estate companies.

From the German Tenants' Association (DMB ), concern was expressed that the approximately 3 million homes that are still held directly or indirectly by the public sector in Germany, would come under even more pressure for privatization and that the yield - orientation of REITs to rising rents, would lead conversions in condominiums as well as a wealth consumption of enterprises. In this context, it was also referred to foreign examples.

The Left Party in the Bundestag rejects the introduction of real estate investment trusts.

Regulatory framework

In Germany, the Bundestag on 23 March 2007, the law establishing German real estate companies decided with listed shares, which the Federal Council on 30 March also agreed (Act of May 28, 2007 Federal Law Gazette I, p 914). Since 1 January 2007, the tax-favored real estate investment trusts are therefore admissible in Germany.

The German REITs are listed companies, so that in principle apply the provisions of the Companies Act and the Commercial Code (HGB). The peculiarities of the REIT stock corporation are governed by the REIT Act ( REIT Act ). According to § 1 paragraph 1 of the REIT Act, the corporate purpose limited to, with the exception of Bestandsmietwohnimmobilien to acquire ownership interests in domestic and foreign real estate, hold, manage and dispose of property. In addition, shares may be acquired in real estate companies, are held and sold.

Apart from the listing public companies must meet the following additional conditions for obtaining REIT status:

• Minimum distribution (§ 13)
• Focus on real estate investment (§ 12)
• Minimum spread of REIT shares (§ 11)
• Exclusion of the real estate trade (§ 14)
• Minimum equity ratio of 45 % must not be exceeded (§ 15)

Minimum distribution

The German REITs are obligated to pay 90 percent of its distributable profits to shareholders to distribute ( minimum payout ). After the Commercial Code carefully ( ie excluding undisclosed reserves ) serves as the basis of assessment of the minimum distribution determined profit.

Investment Focus Real Estate

REITs must have a clear investment focus on real estate. The lower limits for the proportion of the income of REITs from real estate to total income and the share of real estate assets in the total assets of the REIT -AG are each at 75 percent ( § 15 para 1 and 2 of the REIT Act ) which for a valuation of the assets according to the International Financial Reporting Standards (IFRS) and not according to the German Commercial Code shall prevail. Up to 25 percent of the part of tax- exempt at the company level of the income of REITs therefore do not have to come from real estate. Alternatives such as limiting the tax exemption on income from " formative " (that is, property-related ) activities, the legislature has rejected " by the application of the Parent -Subsidiary Directive and the Merger Directive to exclude certain ". In international comparison, so that a comparatively large proportion of non- real estate related income is privileged.

Minimum spread of shares

The REIT companies are obliged to ensure a minimum degree of diversification across time in order to " open up small investors the possibility of investing in real estate assets fungible " ( float control). Permanently at least 15 percent of shares in the hands of shareholders must be located, each holding not more than 3 percent of the shares. Furthermore, the direct involvement of a single shareholder to 10 percent of the share capital limited ( maximum contribution ). Finally, at least 25 percent of REIT shares must at the time of listing in free float ( initial free float ratio ).

Restrictions on the activities

Core holding of property

Finally, the REIT also depends on whether the business a " focus on the passive property management " has ( § 14): " The core business of REIT stock corporation is the holding and management of their property, not trade with them. " The arrangements shall allow for that within 5 years, half of the REIT portfolio and within 10 years the entire portfolio is turned over. This remains " a flexible reallocation of the portfolio " possible.

Extensive exclusion of residential properties in the portfolio

While in the draft bill previously submitted by the Federal Ministry of Finance no particular limitations on the REIT grounds were provided in residential real estate, according to the adopted Act investments in so-called " Bestandsmietwohnimmobilien " are excluded. " Otherwise a negative impact on the rental housing market to the detriment of the tenants and the public sector and problems for sustainable urban development and social housing policy would be feared " (paragraph A.2.8 of the reasoning part ). The REIT may, however, invest in homes that have been built after 31 December 2006.

Accounting and profit determination

Accounting and profit determination of REIT -AG depend on the HGB accounting rules. Special profit determination rules apply in respect of depreciation and capital gains. Depreciation and amortization are basically on linear 2 percent limits (§ 13 paragraph 3). This results in an increase in the distributable profit in cases where tax purposes higher rates of depreciation are allowed. The REIT -AG may, where appropriate to the extent of depreciation even more than the determined HGB distribute profits ( additional payout ). This design is apparently arose out of the feeling that the HGB accounting rules compared with the existing foreign REITs valuation rules are too restrictive. Given the volume of depreciation at a real estate company arises from the possibility of additional payout a large scope for dividend design, which include distributions from the substance are possible. For an adequate creditor protection is enshrined in the REIT Act limiting the debt ( debt) 55 percent of the company's assets provide (§ 15).

Parent companies of REIT corporations are required to publish consolidated financial statements in accordance with IFRS. Thus, the obligation to draw up consolidated financial statements HGB omitted. The obligation to prepare individual financial statements according to HGB remains unaffected.

Taxation

Exemption from corporation and trade tax

The G- REIT is not subject to corporation tax or trade tax (see § 16 Section 1 of the REIT Act ).

Exit Tax

The so-called " exit tax " introduced a special tax incentive establishing one G- REITs or for conversion into such a dar. profits from the sale of land and buildings to a REIT or pre-REIT were under certain conditions 50 % tax-free provided (see § 3 No. 70 Income Tax Act). The following essential requirements had to be met, which, even after subsequent non-fulfillment of a refusal of an exemption was provided:

Thus, incentives should be set to the fastest possible deployment of the REIT sector. In particular, companies that want to reduce their assets in real estate bond permanently, an attractive tax exit instrument was offered.

The regulation for the exit tax applied to transfers between 1.1.2007 and 31.12.2010. For start-ups or conversions from 1.1.2011 therefore subject incurred during the transmission of a REIT profits in full taxation.

Taxation of shareholders

Distributions and other payments of a G- REITs are thus taxed exclusively at shareholder level, ie among investors. If the shares are held as private assets, income, with 25 % capital gains tax plus solidarity surcharge and possibly church tax at source should be taxed and thus settled in principle, refer withholding tax. If it is shares as business assets are the capital income as previously subsidiary attributable to the business income (see § 20 Section 8 Income Tax Act). However, is not the partial-income method applied (see § 19 paragraph 3 of the REIT Act ). If the shares are held by a corporation, the benefits for investment income is as defined Participation exemption not granted, so that here are 100% tax (see § 19 paragraph 3 of the REIT Act ). Exceptions to the above rule, in cases in which the Company is loaded with at least 15% tax, given (cf. § 19a REITG ). " For the sake of equal opportunity " to distributions from foreign REITs are the same tax treatment. The exclusion of the partial-income method or dividend Privileges shall also apply in the event that the shares of a REIT company or units in a foreign REIT directly, but by means of an investment fund ( mutual funds ) are kept (see § 2 para 2 Investment Tax Act ).

A major problem of the REIT legislation, the predictable taxation at the shareholder level represents the distributions of REITs come from investors as capital income and not as income from renting and leasing. Double taxation agreement (DTA ) have now but regularly the right to tax capital gains to the State in which the taxpayer is a resident. This means that Germany will lose the right to tax if ( fiscal) foreigners acquire shares in REITs. In the UK, one is addressing this problem with a restriction of direct participation to 10 percent. This was done to avoid at least the reduced dividend taxation under the DBA. After even a splitting into a REIT -AG and a special fund was initially discussed for Germany, the law now provides for a similar solution as in the UK.

Pre-REIT

A pre-REIT is a corporation headquartered in Germany whose corporate objective is limited to the principles of REITs, met some requirements of the REIT Act and not the capital markets is, however, is registered for tax with the Federal Central Office. The pre-REIT also falls under the exit tax rules, however, favoring is limited to 3 years. The basic requirement is therefore the legal status of public limited companies and the headquarter in Germany ( also the management of the relevant entity). The focus on real estate must be clearly defined in the company's Articles of Association and are approved by the respective shareholders' meeting.

Market situation

Before the entry into force of the REIT Act partially existed rather optimistic forecasts of the future market success of G- REITs. It was partly assumed medium market capitalizations in the tens or even hundreds of billions range.

These forecasts have so far proven to be far too optimistic. Currently (as of 3/2014 ) exist only three G- REITs that are listed in the RX REIT Index of Deutsche Börse:

• Alstria office REIT -AG
• Fair Value REIT- AG
• Hamborner REIT -AG

The aggregate market capitalization of these three companies moves in the order of one billion euros. The German REIT market internationally plays with only a marginal role.

U.S. REITs

The U.S. REIT market is the world's by far the largest national REIT market. There are a few hundred U.S. REITs with an aggregate market capitalization in the high three -digit billion U.S. $ range.

After the investment focus, a distinction in the U.S. legally three basic types of REITs:

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

U.S. REITs need not necessarily be listed. There is a great off-exchange REIT market (Private REITs). In the U.S., REITs are exempt from corporate income only insofar as they pour out of the profit dividends to its shareholders. The minimum payout ratio for a U.S. REIT 90 % of taxable income. Undistributed profits are therefore subject to taxation in the United States. It should be noted, however, that U.S. REITs may pay dividends that exceed its taxable income ( up to 100% of their cash flow ) so that the distribution of profits often exceeds the taxable result.