By Michele Lerner
Following the lead of Germany and the United Kingdom, the Italian government is considering REIT legislation, known as Societa per Investimenti Immobiliari Quotati (SIIQ). The legislation guidelines were decided upon in December 2006, but the regulations are still pending implementation.
Michael Haddock, director of CB Richard Ellis (CBRE), says that one incentive to establish REITs in Italy is the perception that the country is losing out on the flow of inward investment capital because of the lack of a REIT approach. “There are some indirect investment funds that will invest only in REIT-like vehicles and not in conventional listed property companies,” Haddock says. “The lack of a REIT structure is putting Italy at a potential disadvantage.”
Haddock says Italian real estate owners and developers also are influencing the government’s decision. “Domestic players want REIT legislation because it reduces tax leakage and results in higher stock market valuations for their existing holdings of listed property securities,” he says.
Pending Regulations
Bellenda |
According to Sara Bellenda, co-manager of the Henderson Horizon Global Property Equities Fund, once the SIIQ legislation is approved, the basic rules of Italian REITs will be similar to U.S. REIT laws. “The company must be listed in Italian markets, at least 85 percent of profits must come from rental income and there is a 20 percent exit tax based on latent capital gains,” Bellenda says. “The major difference is that there is still capital gain taxation upon disposal of assets, but this may change.”
Michele Gusmeroli, a manager with Studio Legale Tributario, an Italian law firm associated with Ernst & Young International Tax Services, says that a single shareholder may not own more than 51 percent of an Italian REIT and the company must be at least 35 percent publicly owned.
Additionally, revenues of a SIIQ should come from the lease of their real estate assets, says Pietro Del Bufalo, a partner with Lovell’s law firm in Rome. “If SIIQs distribute at least 85 percent of the profits generated, they could take advantage of a favorable tax regime on the distributed dividends.”
SIIQ Incentives
Gusmeroli |
While some analysts believe the proposed tax imposed when property companies shift to a REIT structure actually could impede growth of SIIQs, Gusmeroli says the tax structure could be an incentive for REITs. “The favorable entrance substitute tax, which is 20 percent rather than the combined 37.25 percent for regular and corporate taxes imposed on income derived from rental property, is likely to increase SIIQ attractiveness,” Gusmeroli says. “Most existing real estate companies are considering converting into a SIIQ once legislation is passed, because the tax regime is a reason to convert.”
Haddock says that most real estate companies in Italy will at least consider changing to a REIT structure. “Tax-transparent status opens substantial new sources of capital, and any listed company would need a good reason not to adopt REIT status,” he says.
Strengthening the Real Estate Market
Del Bufalo |
CBRE anticipates a number of Italian IPOs based on the forthcoming REIT legislation. The company estimates that the market capitalization of listed real estate in Italy will reach EUR 20 billion in 2010 ($27 billion), up from EUR 5 billion ($6.8 billion) today. A significant amount of real estate is owned by corporations as well as banks and insurance companies. It is logical for these companies to sell their real estate via an IPO and recycle the capital back into their core businesses, according to CBRE.
Additionally, the company expects to see a series of externally managed REITs. For example, Pirelli Real Estate is already a manager of real estate funds, so managing REITs would fit within their strategy.
Italian REITs will be open to both retail and institutional investors, groups that Gusmeroli says will derive the most significant tax benefit from REITs. “The pending SIIQ legislation will be an instrument targeted to retail investors, who should be attracted by the fact that they would receive dividends steadily each year,” Del Bufalo says. “They would be a domestic investment. The same feature could attract institutional investors, especially those seeking a solid and low-risk alternative investment vehicle.”
Haddock says that an increase in the size of the listed real estate sector in Italy and the availability of those assets to investors might result in an increase in international investors in the country. “International investors in the direct property markets are generally underweight in Italy,” Haddock says. “This is not necessarily through choice, but it reflects the opacity of the direct market in Italy and the difficulty of investing directly in the market.”
He also says real estate securities represent an alternative opportunity for investors to gain exposure to the Italian market and enables them to do so with less difficulty than the direct market. “When details of SIIQ regulations began to filter in late November 2006, real estate companies share prices soared,” says Georg Augustin, a partner with Studio Legale Tributario. “In the last few months, real estate investors have been targeting units of real estate investment funds with good rent portfolios, which are good candidates for conversion into SIIQs.”
The future reaction of investors and property owners to Italian REITs will depend on how many companies actually make the conversion to become an SIIQ.
