REITs Can Enrich Germany's Range of Investment Opportunities

Real Estate Investment Trusts (REITs) usefully complement the range of investment opportunities on the German real estate market. They allow a professional investment management, are more fungible than direct real estate investments and have a different risk-return profile than open and closed-ended real estate funds.

Institutional investors are particularly interested in REIT investments. The inclusion of properties in REITs might be effectively supported through favourable fiscal conditions when realising hidden reserves.

These are the finding of an expertise, carried out by the Centre for European Economic Research (ZEW) in cooperation with the Department of Real Estate of the European Business School (ebs) on behalf of the Federal Ministry of Finance. Against the backdrop of a broader international comparison on the design of legal and fiscal framework conditions as well as on the performance of REITs, the study develops a best-practice proposal for a German REIT concept.

To achieve broad market acceptance among private and institutional investors, the following design features are recommended: German REITs should trade as joint-stock companies, which are subject to the accounting rules of AGs, but also have to comply with rather extensive disclosure requirements to assure greater transparency. As a fundamental principle, they should strive for stock market listing: Going public, however, should not be an obligation, since the required capital market conditions are not yet sufficiently developed in Germany. REITs should generate revenues primarily through property-related activities and then distribute a high degree of them (e.g. 90 per cent) to the investors. In return, these revenues should be exempted from trade and corporation taxes at REIT level. The taxation of real estate revenues is fully shifted towards the investor's level: Domestic investors are assessed at the personal income tax rate or the full rate of corporation tax.

Taxing foreign investors poses a particular challenge. If the person can claim benefits under a corresponding tax treaty, a foreigner's dividend income from domestic REITs can usually no longer be taxed effectively. The analyses by ZEW and ebs made it clear that, in this context, it is difficult to find a design option, which at the same time meets economic targets, avoids all legal and fiscal risks and is quick to apply. The study includes extensive examinations of the advantages and disadvantages of three possible design options for the taxation of foreign investors. This also involves the proposal of reclassifying dividend income as income from the letting or leasing of real estate, which is currently being discussed.

The study can be ordered at a cost of EUR 49 at www.zew.de/REITS or www.ebs.de.

Should you require copies for the press, please contact our press and public relations department at ZEW.

Contact

Dr. Peter Westerheide (ZEW), Phone: +49/621/1235-142, E-mail: westerheide@zew.de 

Prof. Dr. Stephan Bone-Winkel (ebs), Phone: +49/06723/123569106, E-mail: stephan.bone-winkel@ebs.de