Up to 10 real estate companies will elect status as Societes d'Investissements Immobiliers Cotees, or SIICs, under legislation recently established in France, according to Olivier Mesmin, a partner with Paris-based HSD Ernst & Young. The legislation was initiated by the Federation des Societes Immobilieres et Foncieres (FSIF), a group consisting of the largest publicly traded French real estate firms.
"The SIIC tax regime is inspired by foreign legislation such as the U.S. REIT regime, Dutch FBIs or the Belgian SICAFI," Mesmin explains.
To qualify as an SIIC, a firm must have as its primary objective the acquisition or construction of income-producing real estate or the direct or indirect holding of shares in companies seeking the same objective. The firm must also be publicly traded on the French stock exchange and have a minimum market capitalization of 15 million euros. An SIIC is exempt from paying taxes if it distributes at least 85 percent of its rental income to shareholders annually. It must also pay out at least half of its capital gains to shareholders within two years of realization.
Companies may file for SIIC status for fiscal year 2003 up to Sept. 30, 2003. Although the final version of the legislation signed into law last December is very close to the version initially proposed in spring 2002, some resistance was met along the way. "When we negotiated with the Ministry of Finance for the first time in September 2002, the reaction was pretty negative," Mesmin says, referring to himself and the FSIF. At the time, France's budget was not balanced and the Ministry was desperate to find revenue to close a projected 1.6 billion euro deficit.
"In November, the Ministry came back and asked us to explain the workings of the exit tax mechanism and how much money it represented," Mesmin adds. When a firm elects SIIC status, it is subject to a 16.5
percent exit tax on latent capital gains
existing on the date of entry into the tax regime. The amount of the tax may be paid over four years in four equal payments.
Collectively, the tax owed by the firms likely to become SIICs was sufficient to close the budget gap, Mesmin says. The Ministry of Finance was on board.
Now the question is will the rest of the
European Union follow France's lead.
"The adoption of the SIIC structure thrust the European REIT debate back into the spotlight," says Fraser Hughes, research director of the European Public Real Estate Association, an industry group based in the Netherlands. Hughes cites a battery of statistics to make his case for the continued implementation of REIT structures across Europe.
For starters, discounts in net asset values (NAV) for publicly traded companies operating under non-REIT regimes are significantly greater than firms operating as REITs. For example, the discount in NAVs for French companies was minus 26 percent for the 12-year period ending in 2002. Australian and U.S. firms, meanwhile, traded at premiums of 2 percent and 4 percent, respectively.
The best performing countries as measured by average annual return for the same period were nations with REIT structures. Returns in the U.S. were 10 percent and in the U.K., where there is no REIT structure, total returns averaged 1.1 percent. The U.K., in fact, may be the next battleground for the implementation of REIT legislation, Hughes says.
"The market there is in a critical phase," Hughes cautions. "The listed property sector has seen approximately GBP (Great Britain pound) 11 billion go private in the past four and a half years."
Meanwhile, the capitalization of offshore real estate vehicles, such as limited partnerships and property unit trusts, has increased from GBP 2 billion to GBP 16 billion during the same time, Hughes says. The U.K.
government neither regulates nor receives revenue from these arrangements.
"If the government does not seriously consider a REIT structure, then the U.K.-listed real estate sector will continue to shrink at the expense of offshore vehicles," Hughes says.
Passage of legislation creating tax-transparent real estate entities in the U.K. and other countries on the continent is the first step toward the realization of a pan-European structure. "The next challenge is harmonizing the tax laws of each country to allow citizens of other countries to invest on a basis similar to how they can invest in real estate companies in their resident country," says Tony
Edwards, NAREIT's senior vice president
and general counsel.
