In a bid to revive Spain’s lagging real estate market and to also protect property investors’, the Spanish government has recently drafted a new law that permits property developers convert to regulated Real Estate Investment Trust companies (REITs).

The REITs company establishments are supposed to help revive Spain’s real estate industry governed by strong rules to keep control.

REITs companies own and operate real estate properties with the first one being established back in 1960 in the US. Since then the concept of these companies has caught on in countries such as Australia and the UK.

The good thing about REITs companies is that they have to distribute the bulk of their income via dividends to their investors. This will give them favorable tax breaks at the company level. Dividends are publicly listed to keep everything above board.

Under the new proposed rules, REITs companies will be tax exempt under the Spanish Corporate Income Tax law. But to achieve this they will have to pay out a minimum of 90% of their rental proceeds and the capital gains on asset sales of investors. REITs must also have a working capital of €15m (£12m, $19m).

All listed companies will need to comply with the disclosure and transparency requirements imposed by the securities regulator Comision Nacional del Mercado de Valores (CNMV). They might also be allowed to trade on the Spanish stock exchange.

One potential issue with this new law is the fact that many developers have financial problems and can barely hold themselves over water these days. It takes a strong developer to have the cash flow to setup a REITs company in today’s market.

Since the real estate market has dropped off more than 40 percent in the last year, many developers are stuck with newly built properties, unable to sell.

In the end, time will tell whether the new proposition will work in the long term or not. The idea is certainly there and seems valid enough to help rectify the mess that is Spain’s real estate market right now.

Further reading:

• Spain’s brave move to revive property [FT]
• Investors should look to Reits in market turmoil [FT Advisor]

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