German govt excludes residential property from Reits legislation

The German government has approved its draft Real Estate Investment Trusts (Reits) legislation, but has controversially excluded residential property from its ambit.

According to the draft Reits legislation, which received German government approval earlier this month, flats and housing portfolios have been excluded. A Reit is a vehicle that invests the pooled capital of investors in real estate to earn profits for its shareholders, enjoying certain corporate and trade tax advantages.

Head of DLA Piper Frankfurt's capital markets practice group Martin Heinsius told The Lawyer: "This is nonsense. This exclusion will create problems because it will prevent potentially lucrative exit scenarios for municipalities. The city of Berlin, for example, is in a bad financial state and could have benefited from the advantages of the Reits legislation as it owns several companies that own residential portfolios."

The new draft German Reits legislation, which is scheduled to come into force on 1 January 2007, stipulates that portfolios will only qualify for Reit status if they consist of more than 50 per cent commercial property, resulting in most residential portfolios being excluded.

The Social Democratic Party, which requested the exclusion of residential portfolios from the legislation, feared that residential tenants' protection would be compromised if residential portfolios were included in the legislation.

Heinsius said: "This is not a valid argument as tenants are well protected by German civil law. Maybe when the Reits legislation is introduced and is successful the government might change its mind and broaden the legislation to include residential property."