EU REIT: The way forward

Michael MacBrien looks at what changes need to be made before the EU REIT
can truly flourish

The EU REIT seems like a good idea: any investor can see the advantage of a single, tax-efficient pan-European property investment vehicle. But how might it happen? How might the EU pull it off? It’s hard enough getting REITs in individual countries. And isn’t tax harmonisation at EU level particularly difficult? The answer is that EU tax policy is on its way, but not for everyone.

The European Property Federation (EPF) works with the European Commission, Parliament and Council on property-relevant EU legislation. Our work helps us to see what’s coming, and we see a union emerging from crisis with the capacity to focus on policies where there’s real EU added value. The changes are happening now.

It’s this leaner, more focused Europe that is giving the EU REIT a chance, because EU tax policy is part of the shake-up.

Tax matters
Tax is a prime example of everything that’s wrong with EU policy today: too much harmonisation where it’s not needed, not enough where it is. Why should the EU stop states from having low VAT rates on renovation and repair of housing
or on rent?

Why should it reserve this privilege for social housing? What possible interstate “distortion of competition” could there be for something as immobile as housing services? In my view, that’s the kind of thing that has to go.

On the other hand, where there are major cross-border aspects to a business, the whole purpose of the EU is to work towards a level playing field where companies compete, not countries. The EU REIT is key to that.

The “tax harmonisation” aspect to the EU REIT shouldn’t be a very big obstacle, because the goal should be to coordinate only the essentials, leaving each member state the freedom to adapt the other aspects to its particular taxation, housing and savings policies.

Europeans simply need to agree that no tax should be paid at company level on rental income or on capital gains if the capital gains are re-invested in property or distributed to shareholders as dividends. The origin of company income, or who the REIT is open to, or how much of the net income should be distributed, only need a flexible EU framework. Many important aspects such as gearing or the exit tax are eminently local in nature and should not be covered by the EU at all.

Still, some countries don’t want any kind of tax approximation because they see tax as fundamental to their national competitive advantage. For others, tax equates with national sovereignty just as the currency does.

The solution: enhanced cooperation
The solution is an EU Treaty provision called “enhanced cooperation”: on a proposal from the European Commission and under the control of the European Parliament, some states go ahead and harmonise, but those who don’t want to don’t have to.

With enhanced cooperation, everybody wins. Countries with sovereignty concerns can stay out, but the beauty of the system, enshrined in the Treaties, is that they can change their minds and join at any time.

The process has already begun. The pioneer enhanced cooperation, now coming onto the assembly line, is the common consolidated EU corporate tax base. That makes sense: how can you compare tax “rates” if the tax bases differ? The next logical step would be the corporate tax rates themselves, very likely not a single European rate but a band keeping divergence within limits, just as was done years ago for VAT. This, too, will have to be done through enhanced cooperation.

The way forward
This is the context in which the EU REIT can flourish. As work on the corporate tax base accelerates and the question of corporate tax rates comes out of the closet, the EU REIT starts to draw attention because of the major benefits it would bring: spreading property investment to small and disadvantaged countries and regions; combating overheating of prime property markets; empowering small investors; helping to compete with non-European funds and stimulating housing finance.

The challenge is that there’s still a lot of work to do to help people and politicians understand the benefits
of REITs, indeed, to help them understand what a REIT is! The whole property industry needs to come together on this, and national and European universities, think tanks and the press have to take part in the research and debate.
We’ve made progress, both on the research that’s needed to underpin the EU project and on bringing together a coalition to take this forward.

Research
Research is being completed by a real estate finance team at the University of Maastricht. It shows the price the European market is paying for not having an EU REIT:

• Legal structures for REITs in the EU differ so much, and so seemingly randomly, that it hurts competition among property companies from different countries, and between property companies and other property investors, especially when investing in other EU member states.

• Diverse legal and tax treatment makes pan-European investment unnecessarily difficult, so most property companies stay within their own country, and diversify across real estate products. That means deep product specialisation hardly occurs, since that would require pan-European scale. This situation contrasts very badly with the US.

• Lack of property product specialisation in the EU hurts the performance of European property companies, and therefore hurts investment returns of their shareholders, private and institutional investors, like pension funds.

• International investment reduces risk of a property portfolio much more strongly than that of a bond
or a stock portfolio. International diversification is especially important for investors with small home markets. The current situation impedes international investment, so smaller member states are hurt.

The EU REIT Coalition: up, running and open to pension funds
Now that the industry knows what the problem is, and what it needs to do to put it right, it needs to unite to take this forward. An EU REIT Coalition has been formed comprising EPF, the European Landowners’ Organization (agricultural and forestry land), RICS, TEGoVA – The European Group of Valuers Associations, and ULI Europe.

That’s a good start, but the Coalition needs to expand, winning the support of the industries that in fact own so many of our property companies: banks, insurance companies, pension funds.

The European Banking Federation and the European Mortgage Federation are already active observers in the Coalition. It will be a tremendous accelerant if the pension funds come on board as well.

The door is open. Join us at Barcelona Meeting Point* on 7 November where the research will be made public and the campaign will be presented by the Coalition and debated with industry leaders. This is the way forward.

*Barcelona Meeting Point: www.bmpsa.com

Written by Michael MacBrien, Director General of the European Property Federation: www.epf-fepi.com