Polishing diamonds or chasing our tails

The new bill prepared by the Ministry of Finance has received a substantial response from the real estate sector, which has generally praised the changes to the government’s plans, while also pointing out some slip-ups. The new law should come into force on January 1st, 2018, but the government will be working on the new act in the months leading up that date. We asked some of the major real estate market players what they think about the new proposals, what they would change in the bill, and how the real estate market in Poland could be affected by the emergence of REITs.

Radosław Świątkowski

co-founder and managing partner, Reino Partners

The publication of a new version of the bill is not in itself something positive. However, the final bill should cover entities registered in Poland. Otherwise, REITs with Polish capital will never be established. The Polish real estate market will continue to be dominated by foreign companies – the only difference being that the entities will invest additional capital from Polish investors raised on the Polish stock exchange, which will be a smaller stake. Such a scenario would not have anything to do with Polish REITs. The planned limitation of their legal form to joint stock companies is of concern, as it could result in the improper development of Polish REITs. Under such a scenario they would mostly be set up by developers (which are usually already listed on the WSE) and foreign companies. I don’t think this was the original intention, particularly if you look at the goals of the Capital Development Programme. The lack of the option to establish REITs in the form of closed investment funds (FIZ) is surprising. With such a bill, investors of a published fund that fulfils all the criteria of a real estate rental market company will be discriminated against in terms of a tax, exclusively due to the legal form they possess. Meanwhile, closed investment funds will be the only legal form in which it is possible to operate as a REIT in euros, which could turn out to be of key importance for the success of Polish REITs based on commercial properties. The lack of a total exclusion of development projects (which considerably increases the risk borne by the entire portfolio), or of rigorous criteria for increases in capital, is also a worry. REITs are for passive rather than strategic investors. The capital limit should be high, but this should be equity rather than the share capital. The proposed variant does not protect investors. On the contrary, it only results in the bigger payment of civil law transaction tax in Poland, thus higher costs for establishing REITs.

Marcin Juszczyk

board member, CFO, head of investment, Capital Park; board member, Foundation for REIT Education and Research

Much can still be done to the new draft before it takes effect on January 1st, 2018. It is a good thing that the range of types of real estate that a REIT may cover has been extended to include apartments and other income-generating properties. We would like to add land to that list. Land often generates income from leasing or renting, either independently (such as land leased to petrol stations, retail stores or restaurants) or as an intrinsic part of bigger projects (e.g. car parks) such as retail parks, office complexes and warehousing parks. The range of entities eligible as REITs should be extended to include non-public closed-end investment funds [FIZANs], whose certificates may be eligible to be traded on the Warsaw Stock Exchange and that meet the REIT criteria – or at least that a legal mechanism is created for the easy conversion of existing REIT-like funds into companies eligible for such status. The second draft of the act employs a tax solution that is uncommon in the world but also very interesting: taxation at a preferential rate of 8.5 pct on income earned by REITs from the leasing of properties, paid as a dividend and combined with the exemption of dividend income earned by REIT investors from capital gains tax. In our opinion, this approach would make REIT shares even more attractive for individual investors. The main drawback of the second draft REIT act is the use of accounting profit as the basis for calculating the 90 pct dividend payout ratio. The requirement of holding share capital at least equal to PLN 50 mln is not very good either. We propose replacing the share capital criterion with capitalisation or equity. In practice, real estate companies structure their capital in various ways, and the share capital often only makes up around a dozen percent of its equity. The draft entails than no less than 70 pct of the carrying value of a REIT’s assets should comprise real estate and the shares of subsidiaries. It should clearly stipulate that the 70 pct is real estate generating income from rent rather than any real estate. In some extreme cases, 100 pct could be real estate in projects under development that have yet to generate any income. Development, extension and reconstruction projects should be counted as well in order to ensure that REITs are competitive, but they should be fitted into the remaining 30 pct limit. We also propose a reduction in the required 95 pct stake held by REITs in subsidiaries and to impose instead the requirement to hold control or joint control (according to the IFRS definition). This would allow REITs to set up joint ventures with other business partners and to use the benefits inherent in such structures. I also believe that REITs’ subsidiaries should have much more flexibility when it comes to liquidity management and the distribution of income to the holding in any form whatsoever. The requirement to distribute 90 pct of the profits as a dividend, combined with the limitations imposed by the Commercial Companies Code on the possibilities and procedures of dividend payment, will actually hinder and delay the proper payment of dividends by REITs. If a subsidiary earns a profit in year one, this can be paid out after the approval of the financial statements as profit distribution in year two – but only then does it become part of the REIT’s income, as it can then be disclosed by the REIT in its financial statements for year two and so it is not paid out to the REIT’s shareholders until year three.

Mirosław Bednarek

CEO, Matexi Polska

This new form of indirect investment of capital in the real estate market will attract a certain group of investors. However, I think that they will mostly be people who are already active on the capital market, investing in various funds and derivatives. I think that buyers who invest in real estate directly, through the purchase of apartments, will appreciate this investment – mostly because they actually own the property. In my experience, individuals who invest in apartments have other long-term plans for their properties than just making money from renting them out, such as providing security for themselves in their old age or handing over the apartments to their children or grandchildren. It is also worth remembering that share units in investment funds, including those that invest capital in commercial real estate, have generated losses on numerous occasions in the past and they do not provide such a strong sense of security when building up your own fixed assets. To sum up, I believe that REITs are an interesting alternative; however, mostly for the clients looking for new possibilities on the capital market or possibly the buyers of apartments who calculate the value of investments exclusively on the basis of the returns from rent, without any other goals. The emergence of REITs is a natural consequence of the development of the Polish investment market. I don’t think that their development is a threat for the apartment rental market.

Michał Sapota

CEO, Murapol

We are pleased that the legislature has identified the need to launch REITs on the Polish capital market and has also included apartments. On the one hand, this tool will offer an attractive investment for those interested in investing their savings. On the other, it will be a driver of increased developers’ sales, because the introduction of the option to invest in residential real estate through REITs will boost demand for residential units. REITs could bring large institutions, such as banks, investment funds or insurers, to the market as well as smaller investors who will have an additional option to diversify their investment and expand their portfolios with properties that generate a stable, long-term income. I can also see the potential for a new group of investors to emerge with funds that are dormant and have little or no experience in investing. It is also an interesting option for those who can see the investment attractiveness of residential properties and who can now invest directly in them, taking on all the burdens of managing leased properties. REITs will provide them with the opportunity to invest in apartments in a significantly easier and more secure way. Considering all the above factors, I am convinced that investors will quickly become aware of the advantages of investing capital in REITs and that institutions will have substantial funds for apartment purchases. Their demand for apartments will then drive the productivity of developers. On this assumption it should be expected that the current sales figures of development companies will continue to improve. It is worth pointing out that growth in the development sector will generate further growth in all the other industries that work with it, including the construction and construction-related segments, interior design, household appliances, and so on. To sum up, including the option of investing in apartments in the REIT bill will have a positive effect on many sectors of the Polish economy, while increasing employment and remuneration, which is why I am confident that the legislation will be of crucial significance to the entire economy in the long run.

Paweł Toński

board member, Polish Chamber of Commercial Real Estate [Polska Izba Nieruchomości Komercyjnych, PINK]; partner, Crido Taxand

In 2016, the government undertook the task of drawing up the regulations for REITs – or investment funds for commercial real estate. The first draft of the legislation, published last autumn, was a complete failure – if were to compare it to another idea the government seems intrigued by, it would resemble an electric car fuelled by diesel that operates only in reverse and only on Polish roads. The new draft contains many good ideas: (1) a reasonable tax rate – we should appreciate the huge efforts made by the Ministry of Finance to replace the 19 pct rate with a 8.5 pct rate, that is, the 19 pct tax on the “income distribution” and not the amount of profit, which would result in the REIT tax constituting a higher burden than the one currently imposed on ordinary real estate companies; (2) relatively clear tax rules, including a business-friendly exemption for all investors – meaning just one tax level; (3) the Commercial Companies Code limitations that take the mandatory distribution into account ; and (4) its concise provisions and reasonable prerequisites (apart from the distribution). As the distribution requirements are inconsistent with the realities of the sector, this remains a huge problem. The draft disregards the fundamental differences between taxable profit and accounting profit, distribution capacity and ready cash, while at the same time using these concepts to create the key operating conditions for REIT. As a result, it may tax and force the distribution of paper profits while preventing REITs from repaying loans or enhancing their real estate. The draft is also focused on Poland – addressed virtually only to those companies operating in Poland and on the Polish stock exchange, which is a deliberate, although controversial, decision on the part of the government. There are also a few doubtful scenarios (e.g. the definition of real estate, some portions of the tax regulations) that are easy to correct, due to the simplified approach employed in fast-tracking the legislation. In conclusion, the “REIT car” looks quite interesting, but it is not operational at the moment. Fortunately, the “designer”, i.e. the Ministry of Finance, seems aware of its shortcomings and has promised to correct them.