REITs a poor remedy for Spanish property slump
MADRID/LONDON (Reuters) - Spain's real estate investment trusts will do little to attract foreign investors or soothe its catatonic property sector before an expected economic rally in 2011, even if they do help detoxify distressed banks.
"We should have had them (REITs) two or three years ago. They are locking the door after the horse has bolted," said CB Richard Ellis' (CBG.N) Iberian research head, Edward Farrelly.
Spanish lawmakers will likely approve the introduction of the REIT, a quoted property company that distributes most of its profits as dividends in exchange for tax breaks, this autumn.
The government hopes REITs, called SOCIMIs in Spain, will coax wary investors back to the nation's recession-mired housing market and jolt the engine room of its economy back to life.
SOCIMIs have been devised to promote investment in Spain's residential rental sector, which totals about 10 percent of its housing stock and also stoke demand for the 15 billion euros of real estate saddling bank balance sheets.
This burden has grown six-fold since end-2007, according to estimates from consultant DBK.
Experts, however, are more cynical in their views, warning some would-be REIT buyers will need far greater incentive than tax concessions to ignore Spain's spiralling economic woes.
"This isn't a market you need to be in at the moment. Spain is big ... but commercial property investors just don't need to take on that level of risk right now," said Simon Robson-Brown, a manager at ING Clarion, the property securities arm of ING.
The fundamentals of the Spanish market were still too weak for ING Clarion to contemplate a return in the near term, he said, noting a liquid, transparent REIT regime made the return of commercial property investors more likely in the longer term.
In the meantime, Spanish property prices are still falling, demand for office and retail space is shaky and thousands of new-build homes remain empty.
On average Spanish commercial property prices have sunk 30 percent since their peak, against a 45 percent drop in Britain. Spanish house prices are seen falling an average of 32 percent from their 2007 peak, against 24 percent in the UK.
The European Commission said Spain will be the last of its members' to exit recession, probably in 2011.
Investors are not the only ones uncertain about the merits of the SOCIMIs -- banks and existing real estate companies are still unsure how they will utilise the new law, if at all.
Pedro Marazuela, a property fund head at Ahorro Corporacion, the financial services group for Spain's 46 unlisted savings banks, said there is no plan for a SOCIMI containing assets from multiple savings banks under Ahorro's umbrella.
Valencia's Bancaja was also mulling whether to establish a REIT structure, which offers an 18 percent tax rate on the REIT itself rather than the standard 30 percent corporate rate.
Carlos Dieguez, a property specialist with law firm Broseta Abogados, said so far banks had shown more interest in forming REITs than property companies, in part because forming a subsidiary was easier than converting the whole company.
Metrovacesa MVC.MC, Spain's biggest real estate firm said it was waiting to study the final text of the law, while a spokeswoman for rival Colonial (COL.MC) said the REIT regime had no major tax advantage while markdowns continued.
Henderson Global Investors' head of Iberian property, Manuel Martin, said that company was still studying possible conversion of existing funds present in Spain into REITs.
He is unsure if all listed property firms will become REITs.
"Some will have bigger corporate debts than will be allowed under the new rules, some will want to have greater flexibility in development. They may well create subsidiaries if some of the rules are not attractive".
Marazuela thinks ordinary Spaniards may be SOCIMIs' biggest investors, as they will pay no tax, while corporate investors, like pension funds, will be charged 12 percent.
"The foreign investor is not going to be especially active. I think it is going to be far more a retail product focused on (bank's) deposit holders," Marazuela said.
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