Real estate investment trusts come to the fore as property crisis persists

Owning a bit of a tower block in Madrid, a luxury hotel in Barcelona or a chalet in the Costa del Sol is possible for a small investor through the Spanish equivalent of a Real Estate Investment Trust (REIT), a Socimi, or Real Estate Investment Corporation. The legislation governing these vehicles was overhauled at the end of last year, and Socimis are looking to listing in the Spanish Alternative Stock Market (MAB) at a time when the real estate market remains in a slough after a massive bubble burst in 2008. To alleviate the impact of the downturn in the property market on the banking sector, the government has set up Sareb, an asset management corporation — or so-called bad bank — to absorb their toxic real estate assets with a view to selling them to third parties.

The REIT set up under the name of Promociones, Renta y Mantenimiento Socimi by the Pavón Olid family is seeking to list in the MAB, although sources close to the deal say the operation is not imminent as the family continues to assess legal and tax aspects of the listing. Market sources say they expect other well-heeled investors with real estate assets, or funds set up to acquire property assets from banks, to follow suit because of the attractive tax treatment of Socimis.

Legislation governing the operations of Socimis was first developed in 2009 but the industry failed to take off because of the crisis and the restrictions imposed upon them. Under the reform introduced in December of last year, there is zero tax due on the rental income derived by Socimis from the real estate assets they own. “The Socimi is not taxable; it is the partner in the Socimi that pays tax on dividend income,” explains Jordi Domínguez, a partner specializing in tax affairs at the consultant Lathan & Watkins.

The reform of the Socimi was aimed at bringing the legislation in line with that governing REITS in France, Britain and Germany. Although the first REITS were set up in the United States in the 1960s with a view to enhancing the liquidity of the real estate market, the best-known ones for Spanish companies are those in France, which go by the name of Siics. In the absence of established domestic REITs, a number of Spanish companies acquired Siics during the property boom, including Metrovacesa, Colonial, Sacyr Vallehermoso and Realia.

Legislation governing Socimis came in 2009 but the industry failed to take off

Under current legislation in Spain, 80 percent of the revenues of a Socimi must be derived from rentals, but it does leave the door open for such companies to undertake real estate development projects. Previous regulations set diversification rules, which were eliminated by the reform.

Prior to the change in legislation, Socimis had to have at least three properties, none of which accounted for more than 40 percent of the company’s total assets. The rule that prohibited setting up a Socimi with only one property no longer applies. That also applies to the rule that put a ceiling on external funding of the Socimi of no more than 70 percent of the company’s assets. “Despite the fact there are still no companies listed, there is a lot of noise,” explains the chairman of the MAB, Antoni Giralt. “I have about two or three meeting daily on this matter.”

During the property boom, the sector asked for a legal framework for REITs to be set up along the lines of the one now in place. It was assumed that many property developers would transfer their rental business to REITs, and for real estate companies such as Colonial that focused on the rental business to become REITs. The idea was that such companies would not have to go across the border into France in order to have a REIT. However, after accumulating losses in the wake of the bursting of the property bubble, companies have built up tax credits that constitute one of the few positive aspects of their businesses at the moment, and as such are reluctant to risk giving them up if they convert into Socimis.

“Socimis are investment alternatives to reorganize property assets in a tax-efficient way and represent an opportunity as they allow professional management of assets,” says Anna Gener, the director of consultant Aguirre Newman’s business in Barcelona.

“I have about two or three meetings daily on this matter,” says a market chairman

However, wealthy families might be reluctant to put their property assets into a Socimi that has to list. The head of corporate finance at Riva y García, Montse Rius, argues that by listing such families gain in transparency and can optimize their capital structure. When funding is required to acquire more property they can then do so through a capital increase. “Family companies and listed companies are not contradictory concepts,” Giralt says.

The other stumbling block in developing the system of Socimis is the question of returns on investment. Montse Rius explains that investing in such companies can be “very attractive” for investment funds because of the dividends they pay. Socimis are obliged to distribute 80 percent of their earnings in the form of dividends. In the case of earnings being derived from the transfer of property, the dividend payout rate is 50 percent, with the balance required to be reinvested. However, the sector reckons that international investors will demand a return of between 8 and 15 percent, which is what REITs elsewhere offer. The returns in Spain are currently below those levels. The average return on housing is at its highest since 2004, but is still only 4.28 percent, according to the Bank of Spain. Rentals from commercial property in prime locations in Madrid and Barcelona produce a yield of around 6 percent. Given that raising rents in the current recessionary environment is a difficult proposition, the solution would seem to lie in further falls in property prices.

Socimis at the moment will not be formed from real estate companies, a large part of whose assets are in the hands of creditor banks and the Sareb. “The natural vehicle for acquiring property assets from the Sareb are the Socimis,” says Lathan & Watkins’ Domínguez. The director of property investments at Banco Sabadell, Simón Castellá, says that banks that have rented property on their balance sheets might be interested in selling it later to international investors when confidence in the market returns.

“For the moment, Socimis will be very useful for reorganizing holdings of wealth,” says Colonial corporate director Carmina Ganyet. “We will see later if they also serve to bring about consolidation in the sector, and if they give rise to the big real estate companies of the future.” At present Socimis would appear to have a problem of size. The Socimi of the Pavón Olid family plans to seek a listing on the MAB with assets valued at only 15 million, a small amount when compared with other countries or the real estate companies in Spain before the crisis.