EPRA, ZIA unite to denounce German watchdog’s understanding of REITs

REFIRE recently published an interview with the CEO of German property industry lobbying group ZIA, Dr. Andreas Mattner. Part of that interview covered areas of common interest where the German lobby seeks closer collaboration with European-level organisations – such as EPRA, the European Association for Public Listed Real Estate.- which has long been campaigning for a stronger listed sector in Germany, where it has traditionally been very underdeveloped.

The two groups had plenty of reason to beef up their alliance even further this month, with both uniting in criticism of new proposals by Germany’s financial watchdog BaFin to define German REITs as ‘investment funds’, a category which would automatically bring them under the scope of the Europe-wide Alternative Investment Fund Managers Directive (AIFMD).

According to EPRA, the classification of German REITs as funds would be more damaging to the sector than the additional burden of any compliance they would face. EPRA’s combative CEO Philip Charls said: “The G-REITs in existence today are essentially the same as other German corporate businesses, with their focus being to operate in the commercial property sector. To reclassify them as 'funds' is not only the wrong conclusion, and contrary to the objectives of AIFMD, but would, if implemented, be detrimental to the future growth of the German listed property sector and the efficiency of the broader domestic real estate industry – and so too its critical role in supporting the German economy.”

German property association ZIA (Zentraler immobilien Ausschuss) also criticised BaFin's approach - which would apply the regulations to all German companies with a "fixed investment strategy" and only give exemptions to those with an exclusively corporate strategy.

“But the remit of a REITs does not amount to an investment strategy,” said ZIA president Andreas Mattner.

ZIA warned that a number of points in BaFin's proposals “remain unclear” and that the line between an investment strategy and a corporate strategy is very fine. One area of uncertainty highlighted by ZIA concerned whether the new regulations would apply to non-REIT real estate listed companies (Immobilien-AGs) and limited companies (GmbH).

According to EPRA, the confusion between REITs and real estate funds is rooted in the potential for the underlying business activities of both to be broadly similar. The association argued “the critical identifying features of a fund – as opposed to commercial operating businesses – arises from the relationship and engagement with its investors”.

It continued: “In this respect, the relationship between a REIT and its shareholders and the operation of the corporation is no different to any other publicly listed company – whether in the real estate sector or not. G-REITs are perpetual operating companies and simply have a business strategy with the flexibility to be changed from time to time by their management, attracting a positive or negative reaction from shareholders and the market in general.

"REITs worldwide develop and operate property as long-term businesses with constantly evolving strategies. Their corporate structures and business operating models convey unique attributes that set them apart from the fund sector and have been proven to deliver significant benefits to the quality of the built environment in other developed markets around the globe."

EPRA finance director Gareth Lewis painted an equally stark picture.  “If BaFin insisted in reclassifying G-REITs as funds, it will be forcing these businesses into a sector where they don’t belong – nullifying the unique attributes that a healthy listed property sector brings and limiting the future growth of the Germany listed real estate industry”.

He added: “This will have real social and economic implications for Germany in areas ranging from job creation, to investment and development in its cities and particularly sustainability – where listed property companies are leading the way in cutting energy and water consumption and managing waste in buildings across Europe.”

Private equity groups and other investors were also quick to join in the chorus of criticism of the BaFin’s proposed categorisation of German REITs.  In an interview with trade publication PropertyEU, Russell Platt, the co-founder and senior partner of London-based Forum Partners, said the move would be ‘misguided’ and could have unintentional side-effects. 

“It would be a huge mistake”, he said. “First of all, REITs are public companies, not private funds. The AIFMD rules have been drawn up to address concerns about the level of transparency and disclosure of non-listed vehicles. Public real estate companies are already subject to control by securities regulators. These very stringent rules have been put in place precisely to avoid conflicts of interest and to protect the rights of shareholders (which the AIFMD is also seeking to do).”

He said he thoroughly agreed with EPRA’s view that the move, if unchecked, would seriously damage the growth of the German listed sector. “The proposal could have a potentially chilling effect on Germany’s public real estate market,” he said. “The German public real estate market is already very small. This proposal would draw assets back into the private domain.”

Regulators like BaFin need to be educated about the nature of REITs, Platt added. “They don’t appear to have a clear idea about these structures. For an investor, having a stake in a listed company like DIC Asset means having a share of the assets and the management team which operates them. REITs are not funds, they are not a passive collection of assets. They are a business like any other.”