German controversial and REITs

The controversial caused several delays and the Financial Minister more and more feared that he will miss to introduce REITs parallel to London for January 2007.

In late September 2006 Steinbrück presented a draft for a REITS regulation. The chairman of the Social Democrats in the parliament, Mr. Struck, was called to bring his colleagues to an agreement. The government planned to solve the problems within October and pass the legislation until December. Parallel Steinbrück presented stricter regulations on REITs and announced legal regulations to limit mortgage on over-takings of housing stocks by Private Equity Funds.

Meanwhile the financial business reacted to these delays. One of the major Private Equity Funds at German housing markets – Fortress, 150.000 former public housing units – constructed a so called “synthetic REIT”: The former public housing stocks will be transferred to a holding in Luxembourg (tax reduction) and then brought to the German stock exchange. Even Morgan Stanley’s Immeo uses French REITs to “exit” their direct investment.

The financial lobby consequently tried to argue for REITs as a more social alternative to Funds and foreign REITs. But even this did not convince the critiques.

In their letter to the Minister Ruhr Tenants even highlighted some alternatives to the introduction of REITs:

“It is true, that the wild assumption of housing enterprises by Private Equity Fund can have more unfavourable consequences for housing than REITs under good regulations. It however would be the wrong answer to react to this challenge with an instrument, which creates substantial additional incentives for the privatisations. Correct answers could include the creation of legal adjustments for Private Equity Funds. In this regard is the German Treasuries’ plans for regulations which prevent the overloading of the acquired enterprises with high debts is a correct direction. Because of the leverage effect Private Equity Funds realize high yields on their investment by reducing own capital fund to a minimum and refinancing the buying by cheap external mortgage which gets paid by the permanent cash flow from the rents. A restriction of these debt loads on the one hand would protect the capacity for investments and on the other hand would decrease attractiveness for speculative investors. Further regularizations, in particular in case of former public companies could be possible. Also a special taxation of large buys in favour of revolving funds for social town development could be conceivable as well.”

In October 2006 the German Federation of Tenants, the umbrella organisation of institutional landlords GdW, the trade unions, the umbrella of consumers’ associations, a majority of SPD, the Leftparty (PDS) an partly the Greens opted against REITs. The Conservatives, the Liberals, parts of the Social Democrats, the financial lobby and industries were in favour of REITs.

In October the working group of financial experts of Social Democrats in the parliament made clear, that a majority will not follow the REIT draft. Even the national housing minister now claimed that REITs would be dangerous for housing. The Treasury in this situation had no other chance than to react. Speakers of the Treasury announced that they will review the draft in order to exclude housing from REITs. The financial lobby and some conservatives heavily attacked this turn in media while tenants associations and the left Social Democrats welcomed this step and called for strict exclusion of housing.

Finally, at November 2006, German ministers approved a reviewed draft for REITs legislation, which excludes existing real-estates with more than 50 % of housing space from REITs. It does allow REITs for new housing constructions. Now the legislation has to pass the parliaments (Bundestag and Bundesrat). The government plans to allow REITs at first January. Conservative members of parliament and financial lobbyist strictly criticized the exclusion of housing. It is still possible the legislation will be changed within the negotiations.