The European Capital Markets Union (CMU) has been a priority for the European Commission (EC) since 2015, aiming to achieve better integration and cross-border investment opportunities, while reducing inequality and increasing prosperity. Yet, there are vital elements of the CMU which require development in order to achieve its objectives. Among the most important is a mutual recognition of investment regulation in European listed real estate (LRE), or more specifically real estate investment trusts (REITs) regimes.
There are 14 REIT regimes in Europe, which provide a legal and tax framework for LRE investments in member states. However, these regimes are siloed from one another, often meaning that French or German REITs may not benefit from Belgian REIT regime the way Belgian companies can. Coupled with an ineffective withholding tax procedures, a German or Belgian investor would not receive the same tax treatment of investments in Spanish REITs, presenting a true/real barrier to investment. A successful and integrated market would mean that investors across all REIT jurisdictions would be permitted common freedoms and benefits.
In principle, this is sound. But in order to understand practically how the same treatment of European REITs would help achieve the objectives of the CMU, it is important to understand the underlying issues that the CMU sets out to address.
Underlying objectives of the CMU
The recent report by the High-Level Forum (HLF) on the CMU, published in February 2020, provides a useful outline of the underlying objectives of the Capital Markets Union (CMU), some, not all, of which are set out below:
- Increasing resilience of the EU economy
- Providing for an adequate retirement
- Improving access to investment products for long-term needs
- Leading globally on sustainability
It is to these four principles that a set of actions to stimulate the growth of LRE in Europe (or EPRA recommendations on REITs’ growth) can provide the greatest positive impact.
Increasing resilience of the EU economy
One of the key principles of the CMU is to make the EU economy stronger. The idea is to ensure that there is full access to a broader set of economies, a deeper pool of capital and wider range of assets and asset classes, to ensure that good investment opportunities can be taken advantage of, benefitting investors, economies and communities alike, while avoiding shocks.
Currently, the REIT regimes are siloed. This means that the benefits of each regime are rarely available outside of its own jurisdiction. It is great that the REIT regime exists, but it is not helping achieve the CMUs goal of resilience, because at the moment a German property business is unable to access the benefits of Belgian REIT regime, making investment less attractive and acting as a lag on the flow of capital and diversification between these markets.
The solution to this is to simplify tax frameworks as they currently exist. As it stands, tax frameworks developed by member state REIT regimes provide favourable conditions to keep investment capital and benefits within that member state. By reworking these rules and encouraging greater cross-border investment in LRE there can be enormous benefits to overall resilience in Europe.
Adequate retirement and investments for long-term needs
One of the goals of the CMU is to make available appropriate assets and asset classes to all types of investor to ensure that retirement provision is adequate for Europe’s ageing population. In order to do this, ready access to investments which are appropriate for the longer-term (e.g. risk adjusted return assets) is important.
As it stands, Europe’s pension provision is reliant on savings accounts, yet interest rates have been at or near all time lows for more than a decade, heavily affecting savers’ ability to grow capital to provide for their retirement income. New avenues of long-term capital growth are needed, and it is only fair that retail investors are given as much choice as possible.
At present, it is acknowledged that property investments are a vital portion of a long-term investment or retirement portfolio, and a lot of insurance companies and pension funds are invested in LRE Yet, much of Europe’s property can only be accessed by institutional investors, private property companies, etc. If the CMU is trying to provide wider access to assets appropriate for long-term and retirement investors, then it must make property investments more easily available to all investors. REITs are the only way to democratise property investment and make them available to all types of investors. A mutual recognition of REITs in Europe would further increase this access and help the CMU to achieve its goal.
Leading globally on sustainability
The CMU sets out to lead globally on sustainability, and with the climate emergency now firmly at the top of the political agenda, the EC should look to integrate all forms of business and investment that actively promotes and rewards sustainable practices.
REITs, by their nature, are businesses in perpetuity and as a result face enormous shareholder scrutiny over sustainable business practice and reduction in energy and carbon use. By encouraging mutual recognition of REITs and with it the growth of the REIT market, the EC can build an environment in which property companies play a major role in improving sustainability.
At present, the EU is currently not on track to deliver its €11.2 trillion required to meet its 2030 energy policy targets. But the biggest gap within this target relates to investment in energy efficient buildings. LRE provides a significant contribution to financing energy efficiency while providing more sustainable choices for investors. A simplified and fully integrated CMU framework which recognises and facilitates greater cross-border investment in LRE could encourage more investment in energy efficient buildings and drive a renewed focus towards the sustainable finance agenda.
REITs for a better European future
Given the current global environment, long-term nature of investment in the property sector and its importance to the European economy it is our view, that there is both a need and the scope for facilitating a simplified legislative framework on withholding tax in the CMU. Together with a clear recommendation for the mutual recognition of European REITs, the European energy policy targets could also be achieved.