G-REITs - Real Estate Investment Trusts in Germany

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Germany introduced a law allowing for their equivalent to Real Estate Investment Trusts (G-REIT) effective January 1, 2007.

Interestingly, the REITAG law was not actually passed until March 2007, and The G-REIT Act was enacted June 1, 2007, but the Ministry of Finance made it retroactive to that January 1.

Germany is the largest real estate market in Europe, so the potential is large. About half of that is residential property, and so the other half is commercial real estate.

G-REIT Requirements are Different From U.S. Real Estate Investment Trusts

A G-REIT must be a corporation listed on a recognized stock exchange, and must have an office and management registered in Germany. Dual-resident corporations are not allowed. And neither are privately held corporations.

They must also distribute at least 90% of distributable profits to shareholders. This includes ordinary income and capital gains (calculated according to the Commercial Code which permits only linear depreciation.). The distribution must be made within 13 months after the end of the annual period. This means that G-REIT shareholders could wait over a year to receive their dividend checks.

They must abide by a "widely held stock regulation." That is, at least 15% of shares must be held permanently, an 85% free float maintained. No one shareholder can own more than 10%.

They can have only one class of voting shares, and cannot issue preference shares.

German REITs Must Stick With Real Estate

Their primary business must be real estate. They must derive at least 75% of their income from real estate, and at least 75% of their assets must be real estate.

And their real estate business must be the acquiring, holding, administering and operation of properties, not trading them. Within a five year period, a maximum of 50% of a REIT's properties can be sold. The entire portfolio can be turned over in ten years. They may not be a real estate dealer. Sale and leaseback arrangements are allowed.

However, the sale of real estate services is not allowed, except through ownership of REIT-service companies which do not have G-REIT status. That can be a maximum of 20% of a G-REIT's income.

They do have a gearing restriction. The amount of leverage they can use is 55%. This means they must maintain at least 45% equity in their properties, or loan to value ratio.

A GREIT Cannot Invest In German Residential Properties Built Before 2007

German REITs that meet these requirements are exempt from corporate income and trade taxes, under the REIT-Gesetz law on German real estate stock companies with publicly listed shares.

The dividends they pay out are subject to personal income taxation without applying the half-income assessment method. Starting 2009, their dividends are taxed at flat rate of 25% plus applicable solidarity supplements and church taxes.

The G REIT law excludes German residential property constructed prior to 2007, so these companies will not be active in apartment buildings until they've had time to build some themselves or buy some built after 2006, or foreign residential properties. The German Social Democratic Party did not want tenants facing market driven rental demands.

Real estate companies that convert to the GREIT structure must pay a 20% tax on unrealized capital gains.

Only a Few German Real Estate Investment Trusts

The Deutsche Borse set up three separate indexes for G-REITs -- the RX REIT All Share Index contains all G-REITs listed on the Prime Standard and the General Standard. The RX Real Estate Index contains up to 30 REITs and real estate companies from the General Standard. The RX REIT Index contains up to 20 of the largest and most liquid REITs from Prime Standard. This means that German Real Estate Investment Trusts will be excluded from the main Dax and MDax indices. The German real estate industry does not like this approach.

It's also required by German law that German Real Estate Investment Trusts put their nature in their name. Their company name must include "REIT-Aktiengesellschaft" or "REIT-AG."

G-REITs must be publicly listed on a recognized EU stock exchange within three years of their formation. There are no private German Real Estate Investment Trusts.

Within restrictions to prevent abuse, G-REITs are permitted to take advantage of sale and leaseback agreements. Where a company or store, for example, owns the building they're occupying. They sell it to the REIT and begin paying the REIT rent for staying there.

The first G-REIT was alstria Office REIT-AG (FSE:AOX), which became a REIT in April 2007.

In December 2007, Fair Value REIT-AG (FSE:FVI) followed.

Since then, the financial crisis has limited the number of other companies taking advantage of this structure.

The third company to become a G-REIT is Hamborner REIT AG, based in Duisburg. It was the first G-REIT to have converted from a long-established, public company. German law makes this process difficult, but it completed the process in January 2010.

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