REIT here, REIT now?

The work on adapting Polish law to allow REITs has been in progress for over a year now. However, this is not the first attempt to tackle the issue. As early as 2007, the Construction Ministry was pushing for their introduction. Unlike the current bill, the idea at the time was for REITs to support residential development. The latest concept, however, would entail the complete exclusion of residential properties as the subjects of investment for Polish REITs.

The Warsaw Stock Exchange (WSE) is at the centre of the current efforts to bring in REITs. “The WSE has taken on the role of a coordinator of the work clearing the way to allow companies involved in the leasing of commercial properties to function as REITs,” says Izabela Olszewska, the managing director responsible for development at the WSE. “Our aim is to make the proposals we come up with as good for market players as possible. We are at the stage of examining the approaches adopted in other countries. The concept for REITs we are developing is based on those used in France, Belgium, Ireland and Spain. We have been looking closely at these and wondering which could work best in Poland. We also are in discussions on this topic with Polish market players, such as representatives of the real estate sector. We are now formulating our proposals and presenting them to the decision-makers,” he adds.

The Ministry of Finance will probably take care of the further work on the bill. We have found out that the Ministry has pushed for the bill amending the income tax on corporate bodies act and the act on investment funds to be included in the legislative programme of the Polish Council of Ministers.

Is the game worth the candle?

The profits that can be made from the leasing of commercial properties in Poland and the directions they will flow in are at stake here. And they are certainly worth fighting for. According to JLL’s calculations, as cited by the initiators of the bill, the total revenue from leasing commercial properties in Poland amounts to app. PLN 13 bln. The effective profitability in this sector should not fall below

10–20 pct, assuming the potential gross profit is subject to national tax of around PLN 1.6–3.2 bln. Advocates of the bill argue that this profit is to a large extent optimised in terms of tax and is mostly tax-free in Poland, while the estimated value of the taxes lost amounts to app. PLN 1 bln. “The Americans, French, Germans and British can earn from their Polish properties. The Polish budget does not benefit from this because of tax optimisation policies,” argues Izabela Olszewska.

In an official justification of the amendments to the bill, it is estimated that national REITs could ultimately amount to app. 25 pct of the above-mentioned gross profits, app. PLN 0.4–0.8 bln. It was additionally projected that individual investors will constitute app. 30 pct of the shareholding structure of stock exchange listed Polish REITs and will receive app. PLN 120–240 mln per year in the form of dividends, which will be subject to a local tax of 19 pct. For the Polish budget the expected benefit would be PLN 25–50 mln of annual tax from the dividends paid to local retail investors. Furthermore, the authors of the bill argue that an ‘import’ effect could be expected with regard to taxes on the revenue from properties in Poland. The assumption is that this effect in Poland will amount to app. PLN 100 mln of the tax on the dividend for foreign entities per year.

However, this is not the end of the benefits listed by those proposing the changes. “The Polish capital coming from institutional and individual investors alike is not involved in the development of the nation’s commercial property market. Polish pension funds cannot derive direct benefits from it, either. Indirect investment by Poles in commercial properties through dedicated investment funds amounts to only 1 pct of all the assets managed by the Investment Fund Companies (TFI). We support an approach aimed at the introduction of 
domestic capital to the Polish commercial property market,” says Izabela Olszewska, who does not hide her view that the stock exchange itself could benefit from the introduction of such entities. “New dividend companies on the WSE could attract some interest. However, it should be remembered that the shares of REITs are instruments meant for people who want to make a long-term investment and are looking for a continuous and relatively safe source of revenue,” emphasises the managing director responsible for development at the WSE.

Representatives of the real estate market are also looking forward to the introduction of Polish REIT equivalents. “Such investment vehicles are an effective, stable and long-term tool for the allocation of capital. REITs have been successfully operating on the markets of Western Europe and the United States for many years,” remarks Tomasz Trzósło, the managing director of JLL in Poland. “The creation of Polish REIT-like funds would be a considerable boost for the market, activating local capital and could also potentially draw in foreign capital. I believe that it would give Polish investors the chance to take advantage of the investment opportunities on the real estate market. The Polish capital would also benefit from the interesting possibilities in terms of real estate portfolio sales, complete or partial, as well as the acquisition of capital for further development. At the moment such possibilities are limited and the development of the REIT act in Poland would provide a good chance for the faster growth of many Polish development and investment companies, particularly considering the fact that Poland is still in its infancy in terms of investment and there are very few companies involved in this,” argues the head of JLL in Poland.

Mixed blessing

Any major reform tends to bring with it grounds for concern, in this case one particular issue is the fact that any entity exempt from tax is now to be included in the tax system. “The concerns surrounding the introduction of this measure are mainly related to the tax exemption aspect. The tax administration’s main anxiety is that untaxed revenue might start leaking out of the country. And we are dealing with the opposite situation in Poland and across Europe, i.e. the tightening of tax systems,” stresses Katarzyna Kopczewska, a partner of the Baker & McKenzie law firm. “In the transition period this might result in a decrease of CIT tax proceeds. It might seem obvious that if you exempt something from tax, the tax revenues from this field of activity decrease. However, this has a transitional nature. The revenues will emerge when the dividends are paid, since in Poland tax is imposed on the revenue generated by Polish investors in Poland,” adds Katarzyna Kopczewska.

However, the proponents of the bill reject that allegation, arguing that the tax office’s revenue from the CIT tax on the revenue from the leasing and sale of real estate is close to zero now anyway. “You can also expect that the encouragement of local investors to invest in the property market through REITs will indirectly contribute to an increase in revenue from other sources, because it will accelerate the activity on this market. For example, from the taxes, both income and VAT, paid by construction and development companies and their subcontractors and workers. Also from the taxes on the income from the sales of goods and services performed by using commercial properties or the real estate tax on newly-built or modernised facilities,” explains Izabela Olszewska.

Investors operating on the Polish real estate investment market also have a few reservations about the bill. “It is not ideal from the point of view of tax policy because it focuses directly on retail tenants, whose capital resources are relatively small. The market will not be able to cope with the demand without institutional entities,” argues Przemysław Krych, the CEO of Griffin Real Estate. “There could be more support for institutional investors. First of all, in terms of taxes. I think that open pension funds will be the ones that will mostly invest in REITs (provided that they still exist) as well as investment fund companies. In the case of the latter, it would be worth drawing up a bill that would be transparent in terms of tax, down to the level of share unit holders,” adds Przemysław Krych. Maciej Dyjas, the co-CEO of Griffin Real Estate, points to another aspect: international investors rely on bilateral contracts. This is how it works on the largest market, in the USA, where bilateral contracts regulate the method of taxing the revenue generated from REITs in individual countries. When it comes to foreign investors, in some countries it is better to receive a dividend from an ordinary public company and in others it is better to get the dividends directly from the property. There is also the question of what a REIT actually is. Is it a public company that you get a dividend from – or is it in fact a tax transparent investment in the property itself? For the needs of one country a treaty can define this as a public company, while in another it is a real estate investment,” says Maciej Dyjas. For the regulation of these issues it would be useful to sign bilateral contracts with the countries whose capital is invested in Poland most.

Smaller but realistic risk

The principles of ‘social capitalism’, i.e. the involvement of individual investors in the real estate market, played a central part in the conception and development of REITs in the USA. “Today, in Poland, if the proverbial John Smith wants to invest in real estate, he can buy a studio but he needs to have e.g. PLN 100,000. After this, he needs to take care of renting it, managing it, etc. The idea behind REITs is to allow John Smith to buy share units in the asset for e.g. PLN 5,000, 10,000 or 20,000 and gain real estate market exposure in this way. Poles have great sums deposited, but they do not have the attractive products they can invest in. If Polish REITs were created, I do not see any reason why people wouldn’t move their savings to secure real estate assets to provide them with steady incomes,” believes Maciej Dyjas.

As is the case with every investment product, REITs are also not free from risk. If the idea proves to be workable, it will be very important to provide a suitable level of security to investors, particularly individual ones, who have invested their savings hoping for a steady and decent profit. In principle REITs gather properties in their portfolios, they lease them to have a stream of revenue and manage them independently or with a professional manager. They pay a regular dividend to their shareholders, which constitutes 70–90 pct of the profit. Like all other similar tools, they are on the market and subject to its fluctuations. “The crisis of 2008 showed that even such a seemingly safe segment as real estate could be risky in certain conditions,” Katarzyna Kopczewska reminds us. “Various jurisdictions use different approaches that provide different levels of security. I mean, providing professional real estate management. It needs to be remembered what lies behind the investment. It is important that the quality of the leases, which are after all the basis of a REIT’s revenue, is managed by professionals. The management element is of key importance from the point of view of investors, particularly private ones who in particular require protection. It is a field which needs to be developed by the legislator. The regulations do not need to be as deep as in the case of closed investment funds, but they should resemble those in Hungary, where appropriate experience is required from REIT managers, which would increase the trust in this form of investment,” argues Baker & McKenzie’s expert.

However, it seems that such regulations will not be introduced as a new act but are to be implemented at the level of the Warsaw Stock Exchange. “Like all stock exchange-listed companies, REITs will be subject to the control of the Financial Supervision Authority. In order to obtain the status of a REIT, you will need to fulfil the requirements concerning its legal form, the subject of its operations, its source of revenue and the amount of regularly paid dividends,” explains Izabela Olszewska.

When will the first Polish REIT be ready?

A crystal ball would be useful for answering this question. The bill to change the legislation is at a very early stage, so it is difficult to establish if and when it will come into force. However, there are some grounds for the belief that it could be successfully done. “The moves to reverse fiscal policy are a significant obstacle, since it is now being tightened rather than relaxed, but the activation of Polish capital is one of the pillars of Morawiecki’s plan. It seems to me that this has never been emphasised to such extent until now,” says Katarzyna Kopczewska. “There is more and more talk about REITs and there is more action being aimed at them. Statements concerning the establishment of such entities have been made by a few investors, such as Griffin and Capital Park,” she adds. The first few parties are now apparently willing to enter the Warsaw trading floor. “The first candidate is already in place,” reveals Izabela Olszewska, but without disclosing the name of the entity. But she did tell us that the potential interested parties are divided into two groups: the first includes institutions already active on the market and that would like to be transformed into REITs, while the other includes newly-established entities. She also claims that she is very hopeful about such companies. “A number of reports have described Poland as an interesting and promising market for commercial real estate investment. So far Polish investors have not been able to benefit much from this. Now there is a chance to change that situation,” argues Izabela Olszewska.

What a Polish REIT could be like*

Legal status

Polish REITs are to be called real estate lease market companies (RELMCs). They are to have the legal status of joint stock companies that will at the same time be public companies whose shares have been admitted for trading on the regulated market. Furthermore, the company must be headquartered or managed within the territory of the Republic of Poland (i.e. it has to be a Polish tax resident). Furthermore, its share capital should amount to a minimum of PLN 60 mln and the company should also have unlimited time for its operations. In order to obtain RELMC status, it is necessary to notify the appropriate tax office manager. The real estate lease market company is to be distinguished exclusively by its unique tax status and will not constitute a new kind of entity in legal and civil terms.

Assets

At least 70 pct of the assets of RELMCs should be real estate, shares or stocks in subsidiaries or shares in other real estate lease market companies, while the obligations of the company in terms of the leasing of properties may not exceed 70 pct of the value of its assets. RELMCs should have diversified real estate portfolios, with the suggestion being that the company is required to have a minimum of three properties or a holding in them. Only properties located in Poland are to be taken into consideration. Such a company will be able to invest in office buildings, retail facilities and warehouses; however, residential buildings and apartments as well as land will be excluded. Furthermore, this kind of company will have to make a profit of no less that 70 pct of its gross profit from the lease of real estate (as rent) or the paid sale of a property or part-property. A requirement is also to be introduced that at least 80 pct of its profit is to be paid to shareholders.

Tax exemptions

Tax exemptions are planned in terms of the revenue of RELMCs generated from the leasing of real estate as well as the paid sale of a property or part-property. RELMCs’ revenue generated from the payable sale of shares in subsidiaries are also to be exempted from tax. Taxes will not have to be paid for the revenue of the RELMC attributable to the dividends paid by their subsidiaries. A subsidiary of a RELMC can be: a joint stock company, a limited liability company or a limited joint-stock partnership with real estate constituting a stipulated amount of its assets, in which the RELMC has no less than 95 pct of the shares or stocks in the share capital.

Transition period

The authors of the bill have included the provision of a three-year transition period, during which a RELMC will not have to fulfil all the statutory requirements. After this period, in the case of any failure to comply with all the conditions, the RELMC will have to pay due tax including interest for delays.

*these are preliminary proposals that could be changed in the course of the legislation process

Radosław Świątkowski

president of the board at REINO Partners

We won't wait

REINO Dywidenda Plus, which was established and is managed by us, was founded in order to become the first stock exchange listed company of a dividend nature on the real estate market. The first Polish REIT created from scratch. Following the success of our author’s REINO Dywidenda FIZ fund, which was raised exclusively from Polish investors, it was time for a vehicle operating as a company, the structure of which corresponds better to the typical REIT model. Our experience confirms that Polish investors expect such products. REINO Partners was founded in order to clear the way and be one of the leaders on the market of solutions for local investors. This is why we decided not to wait for the Polish act on REITs. We want to list the company on the WSE as soon as possible and purchase more properties – exclusively commercial properties of high international standard, which generate continuous revenue. We believe that the quality of assets is crucial in terms of the success of the first Polish REITs and selling them to Polish investors. We also believe that a considerable increase in the proportion of Polish capital in the ownership of commercial properties will benefit the market and the entire economy. We are very glad of the fact that the WSE perceives Polish REITs in a similar way – as a breakthrough and a great chance. 25 years after the transformation it is high time for Polish investors and Polish pensioners to start earning securely from one of the most attractive European commercial property markets.