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Spain and Ireland look to Reits for roads out of real estate crises, says EPRA

Spain and Ireland, the two eurozone countries worst affected by real estate crises that have damaged their banking systems and plunged their economies into recession, are both implementing new Reit regimes in 2013, according to the European Public Real Estate Association (EPRA).

Madrid and Dublin see real estate investment trusts listed on the equities markets as one of  the most effective and transparent ways of recapitalising their property sectors.

Philip Charls, chief executive of EPRA, says: “The Spanish and Irish governments have realised that the best way to attract domestic and international capital into their real estate markets and so underpin banking systems that are laden with property debt, is to make the sector attractive to investors. Reits have shown they can perform this role when they were instrumental in solving the US savings and loan crisis in the early 1990s. Also in Europe they have proved very effective in channelling investment into top quality energy-efficient buildings for businesses, retail outlets and housing, in our cities in the last ten years, particularly in France and the UK where best-in-class Reit structures have been put in place.”

On 20 December, the Spanish Parliament approved an amendment to the country’s existing Reit regime – Sociedades Cotizadas de Inversión en el Mercado Inmobiliario (SOCIMIs), which reduces the tax payable on profits by these listed companies to zero provided 80 per cent of their earnings are distributed to investors who are then taxed on the dividend payments. The previous flat tax-rate payable by the property entity itself proved to be unattractive to investors and stopped the formation of SOCIMIs. This has now been removed, bringing Spanish Reits into line with the standard international model.

The experiences of past financial and real estate crises suggest the most efficient market restructurings are achieved through fresh equity and debt-restructurings rather than selling debt at steep discounts to face value. Spanish banks have made EUR80bn in provisions for their toxic real estate assets and bad loans.

Mayra Merchán, general manager of the Association of Spanish Rental Property Companies (ASIPA), says: “The Spanish real estate investment industry has been cooperating closely with the government, and consulting with EPRA at the international level, to come up with a best-in-class Reit model that will help Spain solve the property market crisis that lies at the heart of its economic problems. We believe the recent adjustments to the SOCIMIs legislation will create an attractive listed real estate investment vehicle for domestic and international investors alike, drawing urgently needed capital into Spain’s economy, creating jobs, and helping to tackle the mountain of debt in the financial system.”

In Ireland, Finance Minister Michael Noonan announced during the country’s 2013 Budget presentation on 5 December that he would make provision for the establishment of Irish Reits this year. Commercial and residential property values in Ireland have started to show signs of stabilising after the record crash of 2006/2007 and yield levels are becoming attractive for international investors.

With Irish banks severely constrained in the credit they can offer to the property sector, international investment capital of the type that could be channelled through Reits is required to help sustain the momentum of the incipient recovery in the market.

On 24 January, a morning conference entitled “Introducing Irish Reits” organised by the Reits Forum, an industry body grouping together parties interested in the development of the Reit market in Ireland, will be held at Dublin’s Convention Centre.

Philip Charls, chief executive of EPRA, says: “These encouraging developments in Spain and Ireland – which are at very different stages in the economic restructuring process – and similar moves underway in Italy, suggest we could be starting to see the beginnings of a ‘Reit Renaissance’ in the EU.

"Europe is punching well below its weight in terms of the size of its listed real estate industry in comparison with the US and Asia, mainly because the conditions for these companies to thrive aren’t yet in place in the EU’s largest economy – Germany. Europe’s rapidly ageing populations need the long-term stable dividend income that the listed real estate sector can provide from rents to support its pension plans. You only have to look at France, where Reits have created tens of thousands of new jobs and have been the biggest growth success story on the French stock exchange in the last ten years, to see what can be achieved.”

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