U.S. investment in German REITs.

• Author: Seinsche, Gerlinde
• Position: Real estate investment trusts

Investment in German real estate has increased significantly, in part because the German market is perceived as less inflated than others. In response to such demand and to offer an internationally recognized investment vehicle, on Nov. 2, 2006, the German government issued a draft bill for the introduction of German real estate investment trusts (G-REITs) (expected to take effect retroactively, as of Jan. 1, 2007).

Legal Framework

A G-REIT must have the legal form of an Aktiengesellscht, a stock corporation. Its statutory capital must be at least 15 million. All shares must have voting rights and may be issued only if the issue price is fully paid in.

The activities of a G-REIT are limited to acquiring, owning and managing (including renting activities and related services) domestic or foreign real estate or certain real estate rights. The G-REIT may own interests in real estate management companies and holding partnerships. It must not be considered a real estate dealer (i.e., its gross proceeds from the sale of immovable property within a five-year period must not exceed 50% of the average assets of immovable property within the same period).

To obtain G-REIT status, the corporation's registered and head offices must be in Germany and listed on a stock exchange in either a European Union (EU) country or a member of the European Economic Area. The listing must occur within three years after registering as a pre-G-REIT with the Federal Agency for Taxes. No shareholder may hold 10% or more of the shares.

At least 75% of a G-REIT's assets must consist of immovable property (after distribution of profits and reserves), and at least 75% of its income must come from rental or leasing activities and from the sale of immovable property. A G-REIT must return 90% of its distributable profits to shareholders. The G-REIT'S articles of association may provide for debt financing, but only for up to 60% of the company's assets and only at market rates.

Accounting

G-REITs have to prepare (group) accounts in accordance with the German Commercial Code and International Financial Reporting Standards (IFRS). For instance, the amount of distributable profits is determined under the German Commercial Code. To maximize distributable profits, G-REITs are generally required to apply straight-line depreciation of 2% per year. On the other hand, the G-REIT is allowed to allocate half of its capital gains resulting from the sale of immovable property to reserves, thus reducing distributable profits. These reserves must be dissolved at the end of the second year following...