Bringing REITs under AIFMD seen counterproductive for Portugal

David Brush ©

Bringing REITs under the European Union’s AIFMD directive would be counterproductive in Portugal, which has announced their introduction, says a senior executive of Spain’s largest REIT/SOCIMI.

David Brush, chief investment officer of Merlin Properties, says REIT investors may be put off by the excessive regulation imposed by the EU Alternative Investment Fund Managers Directive. “That debate has been had in other markets and they came down in favour of the market,” he told the Portugal Real Estate conference in Estoril last month. “Frankly I would say to the regulators that if you put the REITs under that regime, don’t bother – you already have private funds. If you want to attract foreign capital and new capital then create a REIT regime that will indeed attract capital… If you do it the other way, don’t waste your time.

A senior official from the Portuguese finance ministry announced at the conference that Lisbon would next year introduce legislation creating real estate investment trusts (REIT), particularly to attract capital, also foreign, into its housing sector. But Brush warned that the socialist-led government in Lisbon would, if it places newly-created REITs under the EU AIFMD, “use a lot of political capital to create something that won’t be used.

Merlin, which now manages over €10bn of assets, was founded only in early 2014, and has had a meteoric expansion from beginnings with a portfolio mainly of bank offices around Spain worth some €1.3bn. Its investors include the two large Swiss banks, plus funds managed by high-profile US-based investor George Soros, and others.

Manuel Puerta da Costa, a board member of APFIPP – Portugal’s national association of pension and real estate funds – told the conference the body has been discussing REITs for years, and clearly supports their introduction. “This is also a opportunity for managers in Portugal, and many have set up structures to enable transfer of some assets into a different legal entity,” he said. REITs should attract more domestic capital into domestic real estate, also from smaller savers. “From the whole of the savings held by Portuguese funds, only a small part is dedicated to the domestic economy and much of this is focused on debt investment,” he added.

Even if members are not actively asking for conversion into REITs, “they are thinking about the subject and how fund management companies can improve and also deliver something useful to the REIT regime,” Puerta said. “They are not pushing for this but they are thinking about it.

Brush added that Merlin from the start focused on establishing a REIT/SOCIMI structure attractive to investors. This included being internally managed, focused on more than one asset class but not too many, and reaching a size that provided investor trading liquidity. “We set out to be narrowly enough defined but not so narrowly that we couldn’t reach what we wanted to achieve,” he said. This excluded residential and hospitality. “We do really only offices, warehouse-logistics and retail, from high street to shopping centres.” Merlin is focused on Iberia but has less than its originally targeted 20% allocation in Portugal only because the Spanish portfolio has grown so fast.

Brush said the Spanish experience was that, in 2014, the vast majority of investors in REIT/SOCIMIs came from outside the country. This was very similar to early days of the US REIT regime where, “the REITs’ role in reliquifying the market played a huge role in the recovery.” He added that the Merlin share register is now however very different from its beginnings however.

“To say that REITs are tax free is a misnomer,” said Brush, who is American. “You are passing on the tax obligation to the end user, so we pay transfer tax and many others … But we need to change the nomenclature because there’s a significant amount of tax paid.” He noted that the excitement about Iberian markets is due to their relatively early-stage recovery, even if Portugal is introducing REITs later in the cycle that Spain. “It would have been beneficial for Portugal to introduce REITs a year or so ago; the market is more evolved than it was in Spain when REITs came in. But that doesn’t mean there isn’t interest.”

Comparing the various national real estate cycles to a football game, he said the US, like most major European economies, is late in the cycle, in injury time. Yet Spain and Portugal are still ‘playing in the first half’ and should attract US-based capital. “There’s a lot of rotation of capital that wants to reduce exposure to US REITs and rotate into Europe,” Brush said.

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