Spain's real estate crisis solution may lie in US Savings & Loan REIT model
Philip Charls, Chief Executive of the European Public Real Estate Association (EPRA) said: “REITs helped to solve the 1990s Savings & Loans banking crisis in the United States as property companies went public to access fresh capital and de-leverage the US real estate industry. This was a very similar situation to Spain’s real estate crisis today, with one crucial difference – the Spanish government has not yet passed the legislation to create a REIT structure that would attract domestic and international investors and their urgently needed capital. The alternative Is to allow in the debt piranhas, who will strip Spain’s real estate and bank loan portfolios of any value they can extract.”
Spain introduced a new regime for property investment (SOCIMI) in 2009, but EPRA criticised the structure at the time and said the legislation did not justify having a REIT label attached to it, as it departed too far from the standard European model. The SOCIMI regime implemented an 18% flat rate for qualifying net income, payable by the property entity itself, rather than external investors through dividends.
REITs help the banking system as access to public equity allows the deleveraging of the financial sector, Rogier Quirijns, Portfolio Manager and Head of European Research for US-based specialist global real estate securities investment manager Cohen & Steers, said in a presentation at the meeting.
He added that the most efficient market restructurings are done through fresh equity and debt-restructurings rather than selling the debt at a discount to the growing number of loan investors and funds circling the Spanish real estate market. Spanish banks have made EUR 80 billion in provisions for their toxic real estate assets and bad loans.
REITs are also positive for government revenues because as real estate is de-leveraged more taxable income becomes available and investors pay tax on dividends.
Quirijns said that alongside the difficulties in the Spanish commercial property market, REITs might also be able to unlock the country’s structural housing mortgage problems. Residential REITs in the US attract large institutional investor capital flows looking for steady returns.
Spanish residential mortgages differ from the situation in the United States as they are 're-coursed', meaning the debt is attached to the individual borrower rather than the underlying property as in the US – the source of the infamous 'jingle mail', when home owners return their keys to lenders if they can no longer afford the mortgage. But Quirijns said it should be possible to create a Spanish residential REIT structure that allowed for this difference.
Rogier Quirijns, Portfolio Manager and Head of European Research for Cohen & Steers concluded: “REITs can be a terrific avenue to facilitate the ‘Great Deleveraging’ in Europe generally and to get Spain’s economy and investment market, in particular, back on track. There is no time to waste, no mañana – it’s now or never.”
-- Note to editors --
The European Public Real Estate Association – is the voice of the publicly traded European real estate sector. With more than 200 active members, EPRA represents over EUR 250 billion of real estate assets and 90% of the market capitalisation of the FTSE EPRA/NAREIT Europe Index. Through the provision of better information to investors, improvement of the general operating environment, encouragement of best practices and the cohesion and strengthening of the industry, EPRA works to encourage greater investment in listed real estate companies in Europe.
Three stock market-listed property companies will enter the leading global index for listed real estate, Passing the Index eligibility criteria, boosting its combined real estate asset value coverage by about EUR 4.2 billion. Their combined rental revenues over 2011 amounted to approx. EUR 281 million.
Hamborner REIT AG (Germany), ANF Immobilier (France) and Fastighets AB Balder (Sweden) will be added to the FTSE EPRA/NAREIT Developed Europe Index as of March 19, 2012.
Spanish tax reform undermines real estate market
New Spanish legislation to restrict interest deductions for taxation purposes could further reduce the flow of international capital into domestic commercial property. Another missed opportunity, says EPRA. The much-criticised SOCIMI regime implemented an 18% flat rate for qualifying net income, payable by the property entity itself, rather than external investors through dividends.