Policy implications of structural options in the development of real estate investment trusts in Europe. Lessons from the American experience
| DOI | https://doi.org/10.1108/14635780210435065 |
| Published date | 01 August 2002 |
| Date | 01 August 2002 |
| Pages | 388-405 |
| Author | Robert D. Campbell,C.F. Sirmans |
| Subject Matter | Property management & built environment |
JPIF
20,4
388
JournalofPropertyInvestment&
Finance,Vol.20No.4,2002,
pp.388-405.#MCBUPLimited,
1463-578X
DOI10.1108/14635780210435065
ACADEMICPAPERS
Policyimplicationsof
structuraloptionsinthe
developmentofrealestate
investmenttrustsinEurope
LessonsfromtheAmericanexperience
RobertD.Campbell
DepartmentofFinance,HofstraUniversity,Hempstead,
NewYork,USA,and
C.F.Sirmans
CenterforRealEstateandUrbanEconomicsStudies,
UniversityofConnecticut,Storrs,Connecticut,USA
KeywordsRealestate,Trusts,Equity
AbstractThisisapolicypaperthatexaminesthemostimportantissuesthatmustbeaddressed
indesigningtheinstitutionalstructurefortax-advantagedpublicrealestatecompaniesinEurope.
TherealestateinvestmenttrustformofcorporatestructurewasfirstcreatedintheUSAin1960.
InEurope,therealestateinvstmenttrust(REIT)regimehasbeenauthorizedonlyinThe
Netherlands,andveryrecentlyinBelgium.However,theestablishmentofREIT-likepublic
investmentvehiclesisunderdiscussionintheUK,andinseveralContinentalEuropeannations.
AdvocatesofEuropeanREITsbelievethattheseinvestmentvehicleswouldreducecostsofcapital,
improveliquidityinlocalrealestatemarkets,andpromotemoreefficientallocationofcapital.
EuropeancountriesthataremovingtowardtheestablishmentofREITsfaceaseriesofimportant
decisionsregardingthefeaturesoftheinstitutionalenvironmentinwhichthesefirmswilloperate.
Thispapersummarizesthemostimportantdecisionsthatmustbemade,andconsidersthepolicy
implicationsofeach.WeconcludethattheUSmodelshouldnotbeadopteduncriticallyinEurope;
instead,structuraloptionsshouldbeconsideredcarefully.Problemsofinternationaltaxationare
identified,andthepossibledevelopmentofapan-EuropeanREITstructureisdiscussed.
Introduction
Realestateinvestmenttrusts(REITs,pronounced``REETs'')areaspecialform
ofcorporationcreatedbytheUSCongressin1960toencourageliquidityandto
improveefficiencyofcapitalallocationintherealestatesector.Similarto
EuropeanunittrustsandUSclosed-endmutualfunds,butdifferentfrom
Europeanlistedpropertycompanies,REITsarenotrequiredtopaytaxeson
netincome,aslongasitisdistributedtoshareholders,whereofcourseitis
taxedattheshareholderlevel.ThusREITsallowindividualsandinstitutions
tomakeequityinvestmentsinrealestatewithoutincurringthehigh
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The authors gratefully acknowledge research assistants Rosemary Alonge, Steven Artuso, and
Milena Petrova for their valuable assistance in preparing this manuscript.
Academic papers:
Real estate
investment trusts
389
transaction costs related to direct investment, while at the same time avoiding
the burden of double taxation. The tax advantage comes at a considerable cost
to REITs, since it requires the acceptance of a restrictive institutional structure
designed to limit unfair competition with taxable corporations.
To date, REIT-like public property companies have been authorized in only
two European countries: Belgium and The Netherlands. But in recent months,
the idea of creating similar investment vehicles has been seriously discussed in
many other European countries. The primary motivations for these discussions
vary, but all relate to the central issues of market liquidity and the efficient
distribution of capital. In countries such as Germany, Finland and Sweden,
REITs have been considered as an appropriate vehicle for privatising the
ownership of the large quantities of rental housing that are in the hands of
government and government-related non-real estate corporations. In the UK
advocates advance the view that UK REITs are essential to provide the
liquidity and market depth needed to allow UK property firms to stem the
outward flow of UK real estate into the hands of direct foreign investors. Liz
Hamson of Property Week summarizes the situation this way:
UK property company culture comes under fire for failing to respond to the shift towards a
more client-driven international market, losing ground to active management US companies
in particular. Securitisation is seen as a potential life-line for the ...sector (Hamson, 2001).
Policy makers in European countries that are creating tax-advantaged real
estate companies face a series of decisions regarding the institutional
restrictions that will be placed on these firms in order to prevent abuses of the
tax privileges, and to minimize ``unfair'' competition with taxable firms. In the
US, we have seen that REITs can be very effective in increasing real estate
market liquidity and promoting more flexible allocation of capital. At the same
time, these companies are associated with a variety of operational problems
caused by the special restrictions imposed upon them. The purpose of this
paper is to clarify the structure of US REITs, and to suggest guidelines for
European policy-makers to follow as they consider the central issues related to
the formation of REITs, including the question of whether or not they should be
allowed to exist at all.
What are US REITs?
Three key elements are of essential importance in the structure of REITs are:
(1) Their assets and revenues are closely restricted to real estate, plus a
limited portfolio of securities.
(2) Although they are usually public companies, they can avoid paying
corporate taxes, so that their owners are not subject to the double
taxation normally associated with public corporations.
(3) They are required to distribute essentially all of their accounting
earnings, so that they become taxable at the investor level.
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