It is still early days in Germany and the UK, but real estate portfolio companies could opt for REIT status in the US, France and Spain to achieve tax advantages and give sponsors another exit route.
“There are a significant number of property portfolio divestments taking place in Germany, as state bodies and large corporates dispose of their property estate,” said Oliver Felsenstein, a partner at law firm Lovells. “The proposed German REIT may allow investors to build portfolios and structure an exit with advantageous risk/return characteristics.” Germany has by far the largest real estate portfolio in Europe – worth over €7trn, according to Lovells. Around €390bn of these assets are held by institutional real estate investors but some big sales are expected as the introduction of the legislation approaches.
Utility giant E.ON wants to divest its Viterra real estate portfolio by this summer. The assets could sell for up to €5bn. Private bidders are believed to include Fortress, Terra Firma and Whitehall, a real estate fund backed by Goldman Sachs.
The sale is likely to generate strong interest if last year’s transactions for Gagfah and GSW are anything to go by. Gagfah attracted more than 40 bidders before developing into a two-horse race between Terra Firma and Fortress. Fortress eventually sealed a deal valued at US$4.5bn.
Deutsche Bank is thought to be advising on the Viterra disposal, and talk of an innovative structure has emerged in the last few weeks. The innovation being considered for the deal is thought to involve investors being asked to make firm commitments at a guaranteed price, as part of a dual-track sales process that would also involve private buyers.
A first draft of the proposed G-REIT legislation, which is based on the recommendations of the German real estate industry, is expected to be published this month. The G-REIT will not be subject to the German Investment Act, but will follow international precedents. A minimum dividend payout of 90% of available income is required, while operational income from renting and leasing of properties will be available for distribution regardless of potential losses on disposals. G-REITs should also be able to promote their businesses actively through project development.
To avoid withholding tax exemptions, the German Federal Ministry of Finance has proposed that no single shareholder should be able to hold more than 10% of the shares in a G-REIT. This has been criticised by the German real estate industry, which argues that such restrictions would make G-REITs unattractive to institutional investors.
“In the USA, the conundrum has been solved by introducing special provisions for investments in REITs into the US double tax treaties. It is possible that the Germans will go down the same route,” Felsenstein said.
Plans for a UK REIT structure were announced on March 16, but the proposals are not as advanced as in Germany. Commentators say the UK vehicle will be fairly flexible, in line with international precedents.