The Elephant in the room – the case for REITs in the Polish legal system

REITs around the world

The US, UK Germany, Japan and China — the world’s top economies – all have legal systems that include specific regulations and guidelines concerning real estate investment trusts. Although they differ in specific jurisdictions, both in terms of their success and specific operating rules, REITs offer investors a unique opportunity to invest in the asset class often available only to the wealthiest, i.e., real estate. The introduction of REITs also leads to the increase in the real estate market potential.

But what REITs really are and why they are in fact vital for a healthy real estate market? For once, they permit for a greater liquidity of real estate markets by allowing investors to buy and sell shares in real estate portfolios easily, unlike in the case of direct property investments. Because of REITs, the individual investors gain exposure to real estate markets without having to directly buy, manage, or finance real estate. Moreover, REITs often enjoy special tax treatments, which can result in better returns for investors compared to the direct ownership of real estate. They are also beneficial from the perspective of transparency, as usually the publicly traded REITs have to comply with certain specific disclosure rules.

REITs in Poland

General overview and legislative proposals

REITs in Poland are the metaphorical elephant in the room. Real-estate practitioners as well as lawmakers have discussed this issue for a long time, but to no avail. It appears as if all interested parties are aware of this obvious legislative gap, but no real solution has ever emerged. However, this may soon change as the Ministry of Development and Technology has commenced work on the preparation of a draft bill on REITs.

The draft bill has not been made public yet, but the Ministry of Development and Technology has presented the key points of the proposed law.

First of all, Polish REITs would be established as publicly-traded joint-stock companies with the share capital of at least 100 million złotys. As a result, the introduction of REITs in Poland should have a positive impact on the Warsaw Stock Exchange, due to the emergence of additional investment options as well as the influx of new investors interested in the real estate market. This would enhance the liquidity of the real estate investment sector in Poland, where currently foreign investors predominantly own the commercial assets and domestic funds have smaller presence. It should be noted that this approach is in line with the existing European REIT models which generally operate as publicly-owned investment vehicles.

And REITs would have to be managed only by an ‘experienced asset manager’. Although it’s too early to tell what will be the specific requirements that the managers will have to fulfil, this solution should be assessed positively. REITs often encourage participation of individual (and possibly inexperienced) investors, and therefore, additional security layers ensuring stability and proper management should be carefully considered.

Laws on REITs in different jurisdictions often introduce certain limitations as to real estate asset classes that can be the subject of investments. Based on the proposals of the Ministry of Development and Technology, Polish REITs would have the possibility to invest in the following classes of real estate assets:

• Offices
• Shopping centres
• Residential buildings
• Nursing homes
• Student housing

The ministry’s proposals do not indicate other typical classes of assets that are usually the subject of REITs’ investments, such as data centres, warehouses or hotels; however, given the stage of the legislative process, it may be hopefully be treated only as an accidental omission.

The proposal also provides for preferential tax treatment such as the application of a 10% CIT rate on REITs’ rental income (instead of the regular 19%) and the deferral of taxation until the dividend payment. Dividends paid by REITs would be subject to 0% income tax at the level of investors. REITs would also be obliged to pay dividends of at least 90% of the rental income reduced by certain costs and taxes.

Impact of REITs on Poland’s real-estate market

The impact of REITs should be assessed from the perspective of individual investors. Individual investors in Poland are currently being effectively deprived of the opportunity to accumulate wealth by investing in Poland-based real estate portfolios. Ignoring this purely materialistic aspect, this also has a direct impact on the situation of the Polish housing market. In practice, for an average individual investor, investing in real estate means purchasing an apartment and generating rental income. This in turn leads (as one of a few factors) to the steep increase in prices of apartments in Poland. The introduction of REITs would create a possibility of investing in diversified real estate portfolios with a lower entry point. Moreover, dividend-based system on which REITs are based, ensures a steady income flow, very similar to the one generated from the lease rent. Some REITs around the world even offer a monthly dividend (one of the best-known REITs even used it as its advertising slogan), thereby further blurring the line between investing in REITs and obtaining rental income generated by an individually owned apartment.

In addition, Polish REITs are also likely to attract new institutional investors, enhancing the flow of investment into the market (including, potentially foreign capital). The introduction of a familiar structure (similar to the ones existing in other EU economies) can instil confidence among investors that might feel more comfortable investing in real estate through a regulated vehicle with which they have experience in different jurisdictions. The general stability for which the REIT structure is known can offer a certain level of security and predictability which is crucial when entering a new market.

Considering more intangible factors it should also be noted that the introduction of REIT legislation can be seen as a positive economic indicator, meaning that a country is open to foreign investments and has a growing real estate sector. As the Polish Ministry of Development and Technology stated, Polish REITs will create “new perspectives for the real-estate market, investors, and the Polish economy”.

Taking all of the above into account, the introduction of REITs into the Polish legal system should be strongly advocated for. It will be beneficial both for individual investors and the real estate market as a whole. It will clearly attract new investments in the real estate sector and lead to further development of the real estate market. Let’s just hope that this time the act on REITs will not get stuck in the legislative process, and after years of struggle, proper legislation will finally be passed.