Spain is a well-established overseas destination to invest in property and a prime favourite with investors from the UK – the Foreign and Commonwealth Office estimates that around 1 million Britons own a property in Spain. However, after a decade (1996 to 2006) of spectacular price rises when property values increased by a huge 190%, the Spanish property market is currently suffering from a downturn.
In an attempt to kickstart the property market and maintain investors’ interest in the country, the Spanish government has drafted new legislation for the creation of real estate investment trusts
(REITs). Known as Sociedades Cotizadas de Inversión en el Mercado Inmobiliario in Spanish, the REIT legislation is expected to become law during the first half of 2009.
As a company, a REIT owns and operates real estate properties, and must regularly distribute a large percentage of its income as dividends to investors. In return, REITs enjoy substantial tax breaks. REITs were created in the US in 1960 as a vehicle to allow large-scale investment in property and currently represent an important segment of the US economy. US REITs have experienced a rise in their equity market capitalisation of over 30% in the last 10 years. REITs are also popular in the UK and Australia.
The proposed Spanish REITs will be exempt from Spanish corporate income tax (currently 30% and one of the highest in the EU), provided they invest 75% of their assets in lease-related residential properties. REITs must have a minimum of €15 million (₤12 million) of working capital and pay out at least 90% of rental proceeds and capital gains on sales of assets to investors.
Collective investment schemes already exist in Spain, but the introduction of REITs is expected to open up the Spanish property market, particularly the rental market, to large-scale investment. “The proposed REITs offer a potentially more dynamic vehicle for investing in Spanish property,” comments James González, Market Analyst at Obelisk Investment Property, “and may well kickstart Spain’s rental market.”
James points out that the long-term rental market in Spain is currently very small compared to other EU countries where around 30% of homes are rented. “With just 8% of properties available for rental, Spain has huge rental potential,” he says, “and the introduction of REITs as well as the recent government tax incentives should give Spain’s rental market a huge boost.”
According Barcelona-based property consultants, Aguirre Newman, Spain’s rental market is due to grow by 15% during 2008 with future high increases expected for 2009 and beyond. The new REITs may well push these expectations even higher.
News submitted by Alison Kane, Obelisk International