Real Estate Investment Trusts in Europe

Market Expansion and Requirements

Dr. Priscilla Mifsud Parker | 06 May 2019

Real Estate Investment Trusts in Europe

Real Estate Investment Trusts, or REITs, have become more appealing to global investors seeking to diversify their portfolios. REITs are structured in a way that allows for a broader range of investors to participate in real estate investments. Moreover, as the market and success of REITs grows globally, more nations are seeking to pass REIT legislation and expand investment. 

Several EU Member States already have a flourishing REIT industry with more nations set to create REIT regimes over the next couple of years. In particular, Malta, with its booming property market, offers clear benefits for smaller-scale investors looking to capitalise in large-scale real estate projects. As part of the 2019 budget, the Maltese Government pledged to create a legal framework to permit REITs in the country, and work is fast proceeding towards its implementation. 

This article provides a brief discussion of the relatively recent expansion of REITs globally, and particularly in the European Union (EU). The article then compares REIT legislative frameworks in EU countries, with a focus on capital, legal and other requirements in the different jurisdictions.  

REIT Global Expansion

Established in the United States (US) in the 1960s, a REIT is a special purpose entity that allows investors to add real estate exposure to their investment portfolio. The REIT owns, operates or finances certain real estate that generates income for investors by acquiring immoveable property then leasing space and collecting rent from its tenants. This bulk of this income is then distributed as dividends to shareholders. The success of REITs in the USA has encouraged a number of countries in Europe to follow a similar path. In addition to the 14 EU Member States that have REIT systems, countries such as Portugal, Sweden, Luxembourg and Malta are all considering passing REIT legislation in the coming year. While broadly similar in concept, all the existing regimes have their unique requirements, benefits and restrictions. 

REIT Capital Requirements 

Most EU REITs follow the general framework of the original system established by the US decades ago, and the general principle for US REITs is that there is no minimum capital requirement. However, 90% of the taxable income must be distributed to shareholders, and US REITs are subject to general debt/equity considerations that usually apply to other corporations. Some EU REITs have adopted the US strategy, while others have not. 

For example, initial capital investment requirements among EU nations range from zero to €40 million. Countries such as the United Kingdom (UK) and Ireland have no capital requirements, however, there are specific financing restrictions. In these two countries, a REIT must have a profit financing ratio where the profits are at least 1.25 times the cost of financing. This also has a bearing on potential taxes, as in Ireland where, if the financing ratio is not maintained, the REIT is subject to a corporation tax of 25% to achieve a 1.25:1 ratio. 

Conversely, REITs established in countries such as Spain and Finland require a minimum capital of €5 million, while in Belgium and France this rises to some €15 million. On the far end of the spectrum, the minimum market capitalization for listing REITs on main segments of the Italian market is of €40 million.

Other EU REIT Requirements 

In general, REITs set up in diverse EU countries have similar requirements when it comes to their legal form. Most nations require that REITs be formed as public joint stock companies or limited liability companies, and are largely permitted only within their respective country. Belgium, Bulgaria, Finland, France and Hungary all require that REITs be formed as public entities. Italy, Spain and Ireland, for example, also require that the REIT be domestically owned with restrictions on foreign ownership. 

Requirements in the Netherlands are a little more flexible in that they allow for non-Dutch entities to be offered as REITs as long as the entity is established under the laws of an EU Member State. Additionally, the UK and Ireland allow for REITs to form either under a group of companies with a parent company, or a single company listed REIT. Nonetheless, Irish and UK REITs must be established within their respective countries. 

While the US requires that REITs be formed as a corporation or an association taxable as a corporation (or an entity that may elect to be treated as an association), such as a limited partnership or limited liability company, REITs may operate either publicly or privately. Many EU countries have chosen not to follow this model. 

In addition to legal form requirements, EU REITs also differ in terms of profit distribution. Most countries require at least 50% of REITs operating income to be distributed including Belgium, Bulgaria, Finland, France, Germany, Ireland and Italy. In countries including the UK, Netherlands and Hungary REITs need to distribute all profits. 

Although each EU nation has different requirements for their REIT systems, increasing economic confidence and a continued influx of capital from global investors provide optimism for real estate investment in the EU. This is particularly the case in countries with thriving real estate markets, such as Malta where a transparent REITs legislation would permit smaller investors currently excluded from the market to actively participate. 

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