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REIT on time - property firms go public

Having been a popular form of investment for years in Western Europe and overseas, real estate investment trusts have finally arrived in Hungary. The first in the region to introduce REITs, Hungary hopes they will boost activity and investments in the country’s property market, which has suffered badly during the crisis.

Parliament passed the legislation to allow the establishment of real estate investment trusts (REITs) in Hungary in mid-July.

Regulated property investment companies, as they are known locally from the Hungarian acronym “szit” in the legislation, will be exempt from corporate taxes and local business taxes, but will have to pay out 100% of realized profit from property development and management activities to shareholders as a dividend, which will be taxed at the normal rate.

All of the profits of the REITs’ so-called project companies will belong to their owners. Companies eligible to adopt this form must be public companies limited by shares and rent or manage their own property in Hungary. They must have startup capital of at least HUF 10 billion. Property owned by the companies must account for at least 70% of total assets.

The legislation also defines what other types of assets may be included in the portfolio. Insurers’ and lenders’ ownership stakes and voting rights in REITs are limited to 10%. They must also have a free float of at least 5%.

Great expectations

Market players in general welcome the new legislation and expect increased market activity to result from it.

“Investors know that REITs, in addition to offering tax benefits, offer stable and reliable returns on investment,” said Gábor Tomcsányi, board member of Fortis Private Equity Zrt, the co-owner of real estate developer SCD Group.

Noah M. Steinberg, president-CEO of property developer WING said, “Investors have increasingly seen Hungary as a positive investment target. The new law might further strengthen investors’ confidence.”

REITs are likely to attract fresh capital – what is more, they target investors who could not have been involved before, such as small investors and private banking clients.

As for enlivening market activity, industry insiders say that the appearance of REITs will generate greater demand for high-quality properties with stable yields.

“We expect that in most cases, already completed projects will be integrated into REITs so that these companies will be mostly in charge of facility management,” Tomcsányi said.

Due to the multiplier effects of the construction industry, REITs could also create thousands of new workplaces in the medium-term. Launching and preparing REITs for listing is also expected to secure the jobs of hundreds of highly qualified financial experts and accountants at lending institutions, brokerage companies, real estate agencies and accounting firms.

Only the big ones

Bank financing in the real estate industry has not yet picked up to the extent the market had expected, and the current economic environment is hardly conducive to investments either. While REITs do not offer a solution to the latter problem, they do offer several advantages due to the fact that they operate as public companies.

“Partly, operating as a public company has a certain marketing value,” Tomcsányi said. “But beyond that, this form of operation is attractive because of the tax breaks, reliability and transparency. In one word, this form of operation is rather safe.”

Real estate agency DTZ Hungary agrees: REITs will greatly contribute to creating a regulated and transparent property market in Hungary, will strengthen credibility and also the trust of foreign investors, the company said in a press release reacting to the law.

However, despite the numerous advantages the new company form holds, market players agree that firms will not be standing in line in large numbers to transform into REITs. “Due to the strict criteria REITs must meet, only large companies can fulfill the requirements,” DTZ said.

Tomcsányi expects the appearance of three to five REITs in the next few years. “This is a really good opportunity for developers. Those willing to undertake the transparency that comes with a listing and have the adequate portfolio will appear on the market.”

SCD is certainly among them: the company has already begun preparations. “The IPO could take place as early as next year,” Tomcsányi added.