EPRA’s efforts to spread the REIT regime to Central and Eastern Europe are paying off. In May this year, the Polish Ministry of Finance brought forward an official draft bill for a local REIT legislation which the government is eager to turn into legislation by January 2019.
However, after lengthy discussions the Polish government has made a surprising shift regarding limitations of the REIT framework. A translation of the draft bill reveals that Polish REITs will only be able to invest in residential properties for rent, dormitories and nursing homes (with more than 50% of the space used for housing needs) under the new legislation. Income of REIT and subsidiaries from (i) rental of residential real estate; (ii) sale of residential real estate; (iii) disposal of shares in subsidiaries and; (iv) dividends, and profits from subsidiaries, will be exempt from taxation until the payment of dividends to investors.
According to EPRA, the exclusion of commercial real estate is a disappointment as a limited regime of this form is unlikely to be successfully taken up by the market. Nevertheless, the Brussels-based organisation prefers to have a less efficient regime in Poland rather than none at all. To make it a success, it is important that it is open for improvements, EPRA said. ‘The lesson from the Spanish REIT regime experience, which started from zero and after improvement developed into one of the top markets, could serve as a roadmap here. We will continue our work on this together with our partners of the REIT Polska Association.’
Improvements in Hungary
Meanwhile Hungary has made amendments to its REIT regime to make it more attractive to companies incorporated in Hungary as well as REITs with registered offices elsewhere in the European Economic Area. The fiscal and operating rules first introduced in 2011 were too strict to attract Hungarian firms and did not deliver on the hopes associated with it. An easing of taxation terms in addition to simplification of the rules of foundation and operation have stirred much stronger interest here after the legislator changed the main conditions at the end of 2017.
EPRA was invited to Budapest in June to the Figyelo Conference on trends in real estate markets, which was also attended by the Hungarian Minister of Innovation & Technology. EPRA discussed the success of REITs in Europe, and met with company representatives from freshly set up REITs. Three companies have already used the opportunity to convert, with additional ones in the pipeline.
The government in Budapest has now specified that REITs must be listed on the stock market. Other legislative changes introduced in 2017 allow not only companies incorporated in Hungary to apply for the status but also REITs with registered offices elsewhere in the European Economic Area.
The new law stipulates that a company intending to operate as a REIT must have at least HUF 5 bn (€15.7 mln) initial equity capital and may engage only in the sale and purchase, leasing and operation of real estate. Provisions related to free float have also been modified: companies must now have at least 25% of registered equity in free float with no single shareholder owning directly or indirectly more than 5%. At least 25% of total equity must be introduced to the stock exchange. In return for exemption from corporate income tax and local business tax, a Hungarian REIT must pay out a dividend equivalent to at least 90% of disposable income.
This is an abridged version of an article that first appeared in the EPRA Industry Magazine