Real estate plays a critical role in all aspects of our everyday lives. Listed property companies and Real Estate Investment Trusts (REITs) serve businesses and the society by actively developing, managing, maintaining and improving the built environment - where we all live, work, shop and relax. Furthermore, they play a crucial part in providing retirement security to millions of people, by offering pension funds and insurance companies stable and competitive assets to invest in.
REITs can act as guardians to our cities’ assets, covering everything from offices to retail, and increasingly healthcare and retirement facilities. They represent hundreds of thousands of European jobs and are notable contributors to GDPs. REITs allow anyone, from retail to large institutional investors, to place money in real estate held by publicly quoted companies, the same way as investing in other industries through purchasing shares. Instead of investing in individual properties, investors in a REIT are able to earn part of the income produced by the underlying bricks and mortar.
Recognizing that the purpose of a REIT is to allow collective investment in real estate, the profit generated is not taxed in the hands of the REIT but at shareholder level when the profit is paid out as a dividend. Legally, a REIT is obliged to distribute on average 90% of its taxable income as dividends. A robust regulatory framework of EU legislation, national parliamentary supervision and local financial markets regulators, is governing the sector for this purpose. In addition, most companies are internally managed by professionals who are directly accountable to the shareholders by way of reporting and performance metrics. With this longstanding and successful concept, REITs represent a liquid, transparent and professionally managed asset class which allows for diversified exposure to real estate returns over the medium to long-term and high cash dividends. The total market cap of European REITs in the sector’s gold standard, the FTSE EPRA Nareit Developed Europe index, accounts for over EUR 132 bn - representing a five-fold increase since 2008.
History shows that the implementation of REIT regimes has supported the expansion of property markets around the world and REITs have become a key component of the listed real estate markets. Having all this in mind, we are welcoming the fact that more countries in Europe are reflecting on the introduction of national REIT legislation.
Where Does Poland Stand?
The commercial real estate market in Poland is one of the most significant and attractive in Europe. For the past 30 years it has been developing dynamically but with minimal participation from Polish investors. It is estimated that local capital is less than 5% of the overall investment volume here, whereas the share of domestic capital on the commercial real estate market in CEE countries ranges from 20% to 40%.
According to various resources, an estimated EUR 64 bn has been invested in commercial real estate in Poland over the last two decades, and the Polish commercial real estate market is dominated by foreign capital, including pension and investment funds as well as foreign REITs. This confirms the attractiveness of the Polish market and its macro scale stability. To date, fund structures in Poland limit the ability of Polish investors to invest in the real estate sector. This is further reinforced by low interest rates causing a faster outflow of savings from banks. Polish REITs could help retain capital of Polish investors in Poland and serve to build Polish capital and increase its share in the real estate market.
Proposed legislation creating the possibility to invest in REIT-type funds is therefore a new instrument allowing people previously excluded from this market due to the required capital commitment to invest in commercial real estate. Such a way of managing individuals' savings also serves the sustainable economic development of a country, builds civic participation and complements the basic pension system.
The development of REIT legislation in Poland has been ongoing since 2016. As of 2021 the Ministry of Development Labor and Technology, in cooperation with the Ministry of Finance, has been leading the process. The PM has issued ORDER No 41 of 26 April 2021, appointing an Inter-Ministerial Team to develop regulations for REIT entities. The Team will consist of a group of representatives from leading ministries, financial institutions, supervisory authorities and advisors.
Where Does Romania Stand?
The Romanian market has been trembling for years in the direction of REITS. The local investors’ vibe is: ready, steady, go! After an attempt catered from outside the real estate industry, which unfortunately didn’t turn out as expected, the Association of Real Estate Investors in Romania has now initiated an exercise to carefully curate this legislative initiative. This is done alongside international and local reputed consulting companies with extensive experience and knowledge in the industry, that were part of the driving force team that made it possible for this piece of legislation to be implemented in other countries.
The curation of the project relies on a vast amount of resources and knowledge currently invested in this first stage of nurturing the political will. This first step is a crucial one, that determines how easy the entire process will be in the long run. We are happy to say that the current political alliance that is governing Romania includes people with stamina and knowledge to understand the benefits for the entire market, if such structures are implemented. The immediate goal is to have an inter-ministerial committee in place to develop the REIT legislation, which will consist of ministries, financial institutions, pensions funds, the stock exchange, supervisory authorities and advisors.
For Romania this mechanism will make it possible to attract foreign capital, as well as retain local capital here by directing it towards Romanian REITs rather than going outside. A friendly legislation may sway REITs with property outside of Romania to become listed here, which will translate into taxes and benefits for the Romanian budget. The market believes Romania is ready to welcome REITs and we are looking forward to announcing further steps on the initiative.
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