In Germany and the United Kingdom, more than €1 trillion of commercial property is owned by companies with primary businesses unrelated to real estate.1 Most of these properties are illiquid assets—occupied by their corporate owners—and therefore often receive scant management attention. This dynamic could change given newly proposed legislation to introduce real estate investment trusts in these countries in 2007.2 By selling property to REITs, companies can unlock value from real estate and use the proceeds to reinvest in core business operations—actions often viewed favorably by shareholders and rating agencies. However, we find that the proposed laws include restrictions and disincentives that, unless rectified, will discourage corporate participation and leave the promise of REITs unfulfilled.
The potential is significant. REITs are companies that own income-producing properties, such as office buildings, shopping centers, or hotels. They enjoy tax benefits because they pass on a high percentage of their rental income to shareholders. Shares in public REITs are traded like any other stock. REITs are transparent, liquid, and closed end—an efficient structure that, for many investors, trumps both direct ownership in property and other indirect property-investment vehicles.3
Through REITs, retail and institutional investors gain access to an alternative asset...