Italy is considering steps to make real estate investment trusts more profitable as it seeks to attract 1 billion euros ($1.3 billion) a year to a market that has failed to gain popularity since its 2006 creation.
The Economic Development Ministry proposed cutting the size of dividends REITs must distribute and easing rules for stock market listings, according to a draft bill. The ministry aims to increase the number of REITs to seven from two and raise their combined assets to 11.1 billion euros from 6.1 billion euros. The proposal hasn’t been scheduled for discussion in Prime Minister Enrico Letta’s cabinet.
The proposed changes are part of a wider package of measures designed to improve productivity and increase foreign investment in Italy. A bigger REIT market may boost Letta’s plan to sell 1.5 billion euros of state real estate assets over three years.
“REITs are seen as an indispensable vehicle for the state privatizations coming up,” said Francesco Galietti, founder of research company Policy Sonar in Rome. The creation of new REITs may help the government get better prices when it sells its buildings, he said.
REITs, which trade on stock exchanges, provide tax breaks for their owners in return for guarantees that a set amount of their profit is distributed to shareholders. The specifics vary from country to country and the Italian ministry seeks align its rules more closely with France, which has 37 REITs with a combined market value of $68 billion, according to a study by the European Public Real Estate Association. The U.K. has 23 REITs with a total market value of $49 billion.
“Professional investors must be assured profitability and a rulebook” that’s in line with European peers, the ministry said in the draft. “The property market’s efficiency, and especially in the non-residential segment, depends in large part on the presence of institutional investors.”
The proposal includes cutting the minimum company stake that must be publicly traded to 25 percent from 35 percent and raising the maximum holding by a single investor to 60 percent from 51 percent. The changes would make Italy’s rules similar to those in France and Germany, the ministry said. The plan would also lower the dividend requirement to 70 percent of earnings from 85 percent, allowing REITs to reinvest more of their profit.
Regulatory changes alone may not be enough to invigorate an industry that has struggled compared with other European countries. Beni Stabili SpA (BNS), the bigger of the two Italian REITs, had a market value of 970 million euros at the end of June, about 43 percent of its net asset value of 2.28 billion euros. Unibail-Rodamco SE (UL), France’s largest REIT, traded at about 125 percent of its NAV on June 30, while French No. 2 Klepierre SA (LI) was at about 107 percent.
Italian REITs have borrowed too much and failed to attract significant investment from Italian insurers and pension funds, said John Lutzius, managing director with Green Street Advisors in London.
“A significant portion of the failure of Italian REITs to grow is due to self-inflicted wounds,” Lutzius said in an interview. “For the right management team and the right incentives, it’s a very strong platform and an interesting way to play the Italian market.”
The Italian property market has contracted since the financial crisis as two recessions curbed investment and bank lending. Non-residential transactions in 2012 were 49 percent lower than the peak in 2006 and inflation-adjusted prices fell 8.9 percent in that period, Bloomberg Newscalculated based on data from national statistics institute Istat, the Economy Ministry and the Bank of Italy. Transactions are expected to slide 6.8 percent in 2013 and prices are forecast to slip 5.6 percent, Nomisma Institute said in a September report.
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