Sector remains cautious after BaFin ruling on German REITs status
Experienced real estate investors in Germany are still scratching their heads as they try to second-guess financial watchdog BaFin’s interpretation of what constitutes an ‘operational’ business.
Much may depend on the outcome, as the German real estate industry attempts to assess the effectiveness of months of lobbying work devoted to clarifying the status of German REITS in light of the pending new laws under the EU’s AIFM directives. The new German Kapitalanlagegesetzbuch (KAGB) legislation is due to take effect on July 22nd.
The issue has been hinging on whether REITs or other listed real estate companies would fall under the new legal framework. In what seems to be a reversal of its earlier stance, BaFin has now declared that REITs will have to be judged on a case-by-case basis when applying the new law. Specifically, it said in a statement that any real estate company operating in the sector without accumulating money from investors into a so-called Investmentvermögen with a view to investing it “along a specified strategy” will not be required to adhere to the new regulations.
BaFin said in an interpretative statement that property management, project development – including the sale of a property the company has developed itself – facility management and consulting on sales and financing would be defined as “operational activities”. It added, “The question of whether a REIT qualifies as Investmentvermögen cannot be answered in general but – similar to the case of listed real estate companies – can only be decided according to the specific situation in any single case.”
Attempting further clarification, the statement said: “Listed property companies, whose main business is project development (conception, acquisition, property development and subsequent sale of the self-developed property) or facility management, realtor and valuation activity or finance advisory in connection with the purchase or sale of a property, are operationally active and thus not investment wealth. The same is true for listed property companies that operate their properties themselves (e.g. operation of a hotel or nursing facility).” Companies that work with third-party operators are also unaffected as long as operative decisions remain within the company.
Since the beginning of the year, BaFin has received over 300 submissions from the European Public Real Estate Association, German property association and lobbying group ZIA and major listed property investors, expressing concern that REITs should be subject to this law.
ZIA’s president Andreas Mattner described the decision by the BaFin as “practical”, although he envisages some difficulty pinpointing the difference between an investment and a business strategy. Nonetheless, he said, “We are glad that we could convince BaFin to find a distinction between funds and property companies that is more practical. This is the right way; but further clarifications still need to be made.”
Philip Charls, the CEO at European Public Real Estate Association EPRA, also welcomed the revised BaFin stance, saying that it reflected the recent guidance provided by the European Securities and Markets Authority (ESMA) and supports EPRA’s view that Germany’s REITs should be judged against the criteria for identifying funds in the same ways as any other real estate company.
“The position that the BaFin has adopted on REITs reflects the updated ESMA guidance and aligns Germany closely with France and the UK by adopting a ‘case-by-case’ approach on whether REITs or property companies fall under AIFMD. Other EU countries will take note as they examine their own implementation of the directive”, he said.
However, EPRA too said it remained concerned about BaFin’s view that developing property for sale is an ‘operational’ business (outside the scope of the AIFMD), whereas the business of managing property for long-term leasing activity is not.
Olivier Elamine, CEO of Hamburg-based Alstria Office REIT and an EPRA board member, said: “Putting aside the huge contribution that listed property companies make to the real economy through their development and refurbishment programmes, the business of managing and leasing property for the long-term is an intensive operational business.
”The ongoing management of increasingly shorter and more flexible leases and active engagement with occupiers to reduce the operational energy use of buildings during the property lifecycle are just two examples of the important role that property companies perform in servicing the accommodation needs of Europe’s business and citizens. We struggle to understand why this business would not be recognised as an ‘operational’ business.”