Germany enters the REIT universe with a big bang

Abstract

On 30 March 2007, the law allowing German real estate investment trusts or G-REITs went into effect. G-REITs are listed corporations that invest in real estate but are not subject to corporate taxes. G-REITs, however, must distribute most of their income annually. Instead of the G-REIT being subject to a corporate tax, the investor pays taxes on the dividend. With 73 per cent of companies in Germany owning real estate, the market capitalisation of G-REITs looks to grow drastically over the next few years. With perhaps half of Germany's listed companies interested in G-REITs, many may begin to take advantage of the G-REITs’ flexibility in using real estate to generate funds in a tax efficient manner. As G-REITs are tax transparent, they offer investors a competitive edge over fully taxable corporations. Although these tax savings may add up to increased profits, under German law G-REITs must derive 75 per cent of their income from rental activities including property management and development. UK-REITs and G-REITs are currently competing for international investors, having been enacted around the same time. The UK market will need to know what the competition looks like. In addition, a great deal of international real estate investments within the European Union are managed and routed through London, so UK fund and real estate managers will need to familiarise themselves with the benefits of G-REITs. This paper discusses the effects tax transparency will have on G-REITs, restricted activities, effects of the listing requirement and the outlook for G-REITs.