Movement on REIT regimes in CEE

A new REIT regime in Poland by 2019

In May this year, the Polish Ministry of Finance brought forward an official draft bill for a local REIT legislation. After lengthy discussions and surprising shifts regarding limitations of the REIT framework, the government is now eager to make the law applicable by January 2019. EPRA members interested in Poland as a future market, together with the EPRA Public Affairs team, have been following developments closely. Having received the translation of the draft bill, the key aspects are:

  1. 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).

  2. Income of REIT and subsidiaries from

    1. rental of residential real estate,

    2. sale of residential real estate,

    3. disposal of shares in subsidiaries and,

    4. dividends, and profits from subsidiaries, will be exempt from taxation until the payment of dividends to investors.

  3. Revenue income from the rental of real estate will be taxed at a rate of 8.5%. However, this rate is applied on the condition that this income is allocated to the payment of dividends. Keeping additional accounting records will be a condition for taking advantage of preferential taxation rules.

  4. REITs will operate only in the form of joint-stock companies with a share capital of at least PLN 50 million (EUR 11.6 million). The company must have its headquarters and management in Poland. REIT shares must be admitted to public trading on the Polish stock exchange (this solution is controversial regarding compliance with EU treaty provisions).

  5. The regulations regarding the obligation to pay dividends to shareholders on an annual basis were amended; the profit to be paid may be decreased for financing costs, CAPEX and real estate tax, amongst others. Subsidiaries may not pay dividends if the profit is reinvested over a two-year period.

  6. Broad information obligations have been introduced: REITs will publish revenue levels, average rental rates and the number of lease agreements, among other information.

The exclusion of commercial real estate is, of course, a disappointment as a limited regime of this form is unlikely to be successfully taken up by the market. Nevertheless, we prefer to have a less efficient regime in Poland rather than none at all, but to make it a success, it is important that it is open for improvements. 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.

Improved REIT law in Hungary

Another market that has understood the power of an improved REIT regime is Hungary. 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.
Tobias Steinmann,
EPRA Public Affairs Director, at the Figyelő Conference, June 2018, Budapest
Photo credit: Pictorial Collective
Tobias Steinmann,
EPRA Public Affairs Director, at the Figyelő Conference, June 2018, Budapest
Photo credit: Pictorial Collective
EPRA was invited to Budapest in June to the Figyelő 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 billion (EUR 15.7 million) 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.