Spanish REITs aid real estate recovery
Just eight years after their introduction, REITS have become key players in Spain’s buoyant commercial real estate market. The number of listed REITs, which are locally known as SOCIMIs, is growing fast and they have led the recovery in Spanish property.
The number of SOCIMIs listed on the Alternative Stock Exchange Market has risen from three in 2014 to 23 in August 2016, and five more are listed on the Ordinary Stock Exchange Market. Global real estate firm CBRE reports that Merlin Properties, Hispania, Axiare and Lar España have been among the most active.
In 2016, Spain’s economy continued to grow at one of the highest rates in the Eurozone and it was a busy year in the real estate market. According to CBRE, the growth rate was 2.7%-2.8% and property investment activity was around €8.5-9.5bn1.
While 2016’s market share data has yet to be reported, in 2015 SOCIMIs and investment funds accounted for 78% of transactions in a robust office market. After several years of weak office take-up, 2015 recorded the highest figure since 2007. Promising economic and employment growth forecasts suggest that 2017 will see active demand and rents will continue to recover, although political uncertainty may affect some smaller players.
SOCIMIs introduced in 2009
The Spanish REIT was introduced in October 2009 under the name of Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario (SOCIMI). Its legal regime was set out in the Law 11/2009 of 26 October, as amended by Law 16/2012 of 27 December, which was designed to make SOCIMIs more attractive.
SOCIMIs are public limited companies (sociedad anónima) established to hold either: (i) leased urban assets or (ii) a stake in the share capital of other SOCIMI or foreign entities of analogous or similar activity (the vehicles known as REITs).
Since the amendment made in 2012 SOCIMI are subject to zero taxation under corporate income tax, thus putting them on equal footing with the existing regimes for REITs abroad.
Zero rate for corporate income tax
Importantly, SOCIMIs are subject to corporate income tax at a zero per cent rate, provided their income and gains are distributed as dividends either: (i) to shareholders owning less than 5% of the share capital or (ii) to shareholders owning at least 5% of the share capital, provided that they are taxed at a minimum 10% tax rate on such dividends.
This tax regime makes SOCIMIs very attractive for all kinds of investor, whether resident or non-resident in Spain. It places them on equal footing with other well-designed REITs in Western countries.
Consequently, investors not resident in Spain (for example, funds investing in shopping centres, hotel buildings or any other property to be leased), and especially residents of the European Union, can maximize the tax efficiency of their investments in Spanish real estate. They don’t pay corporate income tax on leases, and don’t pay withholding taxes under the parent-subsidiary directive. Essentially, they receive return on their investment without tax leakage.
Despite the instability in Spanish politics, the country’s improving economy is driving growing national and international demand for real estate. The SOCIMI appears to be one of the best instruments to satisfy such appetite and improve investment returns.
1 www.cbre.es/es_en/research/outlook 2016/2016real_estate_market_outlook_eng.pdf
8th March 2017