In its current study Deutsche Immobilienunternehmen am Kapitalmarkt (German real estate companies on the capital market), HSH Nordbank AG has reduced its projection of market potential for G-REITs through 2010 from between €30 and €60 billion (forecast at end-2005) to between €15 and €40 billion. Apart from the decision to exclude residential properties, this was also attributable to the numerous statutory restrictions of the G-REIT.
"By limiting the flexibility of real estate corporations that would be eligible to switch to REIT status, the potential stock-market capitalization of G-REITs is likely to be diminished," commented Peter Rieck, deputy Chairman of HSH Nordbank. Since G-REITs are particularly suitable for non-German and tax-exempt investors wishing to invest in German real estate and since new REIT issuers will enter the market in the shape of fund initiators, HSH Nordbank nevertheless expects an appreciable market volume.
Only a small number of existing companies will switch to REIT status
Under the current underlying conditions, the real estate companies eligible for a switch to G-REIT status are those investing in commercial real estate in Germany, not providing third parties with services and whose gearing is modest to conservative. At present, only a small number of companies are eligible for a switch to REIT status, such as Polis Immobilien AG or Alstria Office AG. HSH Nordbank expects a large number of existing real estate corporations that are looking into the possibility of converting to REIT status to decide not to switch. This is due to the following reasons:
- their entrepreneurial flexibility is curtailed, especially for foreign and service operations and for financing against the backdrop of the current business models;
- the corporate tax reform. As corporate taxes are reduced, the tax burden on corporations will fall in any event;
- loss carryforwards can, in practice, not be utilized following a switch, and reserves are fully taxable pursuant to paragraph 6 b) of the German Income Tax Act following a switch. Many real estate corporations today take advantage of the option afforded by § 6 b) of the Income Tax Act to avoid the taxation of gains on the disposal of real estate by acquiring new properties. These reserves would be written back in the event of a switch to a REIT.
The majority of REITs will be newly established
Rather than converting their own status, a more interesting, less complicated and thus faster option for real estate corporations is to issue subsidiaries as G-REITs. This is what IVG Immobilien, DIC Asset and TAG, to name but a new, have plans to do. These subsidiaries are not weighed down by group operations and tax problems and are able to focus on investments in commercial real estate in Germany.
These REIT subsidiaries would find it easier to acquire corporate real estate, as the sellers are eligible for the reduced exit tax rate. Several initiators of closed-end funds, such as IC Immobilien AG and Hannover Leasing, have also announced plans to issue REITs.
Opportunity for conventional property stocks
The large number of statutory restrictions to which REITs are subject, such as those imposed on the borrowing of funds, on trading in real estate and other services also provide opportunities for conventional property companies that is not transparent from a tax aspect. Over the past three years, the growing interest in real estate equities has led to a threefold increase in market capitalization of stocks listed in the German Property Stock Index (DIMAX). HSH Nordbank expects this growth to slowed down in the wake of the launch of REITs.
"Further growth of the segment involving conventional real estate corporations is suggested by the fact that a large number of real estate corporations plan not to switch to REIT status in order to continue their business strategy without their stockholders suffering any tax drawbacks," commented Claudio Lagemann, Head of HSH Nordbank AG's real estate business.