REITs first appeared in the US in the 1960s, and the American REIT market has enjoyed considerable growth over the last quarter of a century. From there, REITs have spread to most developed economies, including many EU member states, and can presently be found in approximately 40 countries. In the US, the total return on investment in REITs making up the FTSE Nareit All Equity REITs Index reached 1,225% over the last 25 years, which translates into an average annual return of 10.9%. This, coupled with the good performance of REITs in other countries, contributes to an increased interest in this type of legal structure in jurisdictions where such solutions have yet to be introduced.
What Can REITs Offer?
Depending on the jurisdiction, REITs can benefit from tax exemptions or preferential tax treatment, which puts entities investing in such vehicles in a similar position as direct real estate investors. In addition to preferential tax treatment, other advantages of REITs include: (i) enabling a broad range of entities to invest in real estate; (ii) increasing local capital involvement; (iii) encouraging investment in select, professionally-managed pieces of real estate, which promises greater ROI; (iv) enabling investment in various real estate projects and different types of real estate, which creates a diverse and resilient portfolio; (v) facilitating exit, as the instruments issued by REITs (on the stock exchange) are characterized by greater liquidity compared to the real estate itself.
Poland to Follow?
Several countries in CEE have already implemented the necessary legislation with Greece first introducing REITs in 1999, Bulgaria in 2003, Hungary in 2011, and the Czech Republic and Turkey in 2013. Recent years have seen a few attempts at introducing REITs into the Polish legal system. In October 2016, the Ministry of Finance produced a REIT bill, subsequently modified in 2017. The two bills differed significantly, demonstrating a lack of clear and comprehensive vision.
Ultimately, the second bill was abandoned, only for the Ministry to surprise investors with a brand new one in 2018. In the third iteration of the bill, only residential real estate was to be eligible as a REIT investment and receive preferential tax treatment, with commercial real estate being left out altogether. The bill faced a barrage of criticism and was eventually discarded.
In 2021, the Ministry of Economic Development, Labour, and Technology took the initiative, announcing that a new bill would be produced by the end of the year. Considering the fact that the bill has recently made its way back to the Ministry of Finance, further delays can be expected. Based on available information, REITs were initially to be allowed to invest in residential and commercial real estate alike, which is now being reconsidered in favor of either restricting or excluding residential real estate investments. On the bright side, governmental representatives indicated that both investors and REITs can expect preferential tax treatment.
Although at this time there is no bill to speak of, one cannot help but wonder whether the end of 2021 is a realistic deadline for the presentation of a draft bill as indicated by governmental representatives – the prevalent belief on the market is that it is only a matter of time before REITs take root in Poland.
What Happens Next?
There is simply nothing to wait for when it comes to REITs. Almost all investments in commercial real estate in Poland are made by institutional investors from abroad (in 2021 domestic capital was responsible for only 4% of this type of investment). Favorable REIT regulations in neighboring countries (Czech Republic, Germany) push this ratio above 20% and 50%, respectively. The example of the Czech Republic is particularly useful in this case, where the level of domestic investment in commercial real estate before the introduction of REITs to the legal system in 2013 was similar to that in Poland. It proves that appropriate REIT regulation facilitates safe and long-term investment.
One can only hope that, in this case, it’s fourth time lucky. This is important as the newly introduced amendments to tax regulations (taking effect in 2022) are about to increase burdens on natural persons engaged in the real estate rental business, which could lead to a portion of Polish capital being withdrawn from direct real estate investment in favor of investment in foreign real estate. Given a proper legal framework, REITs can balance the scales and provide a powerful incentive for the development of the Polish real estate market.
By Katarzyna Sawa-Rybaczek, Partner, and Lukasz Czerepak, Associate, Penteris
This Article was originally published in Issue 8.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
