Spain Regulate for Property Revival
November 12th, 2008
Spain last month drafted new regulation that would permit the creation of real estate investment trusts. The motive behind the establishment of Sociedades Cotizadas de Inversion en el Mercado Immobiliario, or Reits, is to help revive the country’s residential real estate market, which has stalled over the past 12 months after registering a multi-year surge in demand and prices.
Previously, Spain classified such businesses as real estate collective investment schemes that could get tax breaks only when half their assets were invested in rental residential real estate. Further, they had to hold assets for a minimum of three years.
Under proposed rules, Reits will be tax-exempt under the Spanish Corporate Income Tax law, provided they invest three-quarters of assets in lease-related residential properties. They must also pay out at least 90 per cent of rental proceeds and capital gains on asset sales to investors. They also must have at least €15m (£12m, $19m) of working capital.
The listed entities will have to comply with the disclosure and transparency requirements imposed by the securities regulator Comision Nacional del Mercado de Valores, also known as the CNMV. These companies may be allowed to trade on Mercado Alternativo Bursatil, which places lower administrative burdens on companies. The MAB is the equivalent of the London Stock Exchange’s Alternative Investment Market.
Madrid law firm Cuatrecasas believes the new structure is potentially “a more dynamic vehicle” for investing in the Spanish real estate market than the existing collective investment schemes. Partner Jesus Mardomingo and senior associate Jorge Canta told clients in a recent memo that the new structure would help spur the country’s rental market. Further, it presents an attractive opportunity for retail investors to benefit from this asset class without assuming the high cost of buying physical properties, they noted.
Still, it remains to be seen if investors will flock to such investments. Spanish residential real estate sales have dropped off more than 40 per cent over the past 12 months as banks have adopted stricter lending criteria and credit has become scarcer.
Developers, meanwhile, are loaded with debt at a time when buyers have disappeared. With unemployment rising, the transaction levels of new residential real estate properties are expected to drop off even more into 2009.
In such an environment, buyers looking for deals are choosing to wait on the sidelines for potentially better prices down the road. At the same time, new construction has ground to a halt, dampening the growth prospects of developers
One recent example of trouble in Spain’s large real estate market was Martinsa Fadesa, a leading domestic listed real-estate company that in July was pushed into insolvency proceedings due to liquidity problems. Like its peers, it employed a large amount of leverage to finance a large number of deals. Banks were happy to provide financing on the back of rapid appreciation in the value of its properties. But when prices started dropping and financing began getting scarce, it did not have enough money to meet liabilities and its business screeched to a standstill due to the liquidity problems. Martinsa was established in 2007 as a result of a merger of two large players. Numerous other Spanish real estate companies face similar liquidity woes.
Asset managers do not have high hopes for the new structure. Market anxiety will keep investors at bay, they say.
“The real estate market in Spain, like in many other parts of the world, faces very tough times,” says a Madrid asset manager. “It will be a while before people start lining up to invest in Reits.”
However, the government seems eager to have the structure in place in the hope that some of the existing companies will re-classify themselves as Reits and start buying properties.
The proposal is open for comment. One of the sticky issues is that investors owning more than 5 per cent of the float will not get tax breaks. Mr Canta says that is unfavourable for large private banking investors and would like to see that amended in the final version, which is expected by year-end. The parliament is likely to enact this regulation during the first half of 2009.
Story from The Financial Times
