VZCZCXRO0547
PP RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHRL #2344/01 2271016
ZNR UUUUU ZZH
P 151016Z AUG 06
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 4697
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 BERLIN 002344 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD, TREASURY FOR BRIAN COX 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV GM
SUBJECT: INDUSTRY IMPLICATIONS OF THE REITS DEBATE IN 
GERMANY 
 
REF: 05 BERLIN 2269 
 
¶1.  SUMMARY: Germany's Finance Ministry is nearing the 
completion of a draft law to legalize Real Estate Investment 
Trusts (REITs).  The decision to legalize REITs, however, 
must first receive the approval of Chancellor Angela Merkel's 
"Coalition" Cabinet, which is deeply divided on the issue. 
While the Christian Democrats are in favor of REITs, some 
members of the Social Democrats have been actively publishing 
position papers and opinion articles in which they label 
REITs as "locusts" and dangerous for the German housing 
market.  Industry experts believe that the legalization of 
REITs could reinvigorate Germany's currently sluggish, 
although potentially lucrative, real estate market (Germany's 
real estate market is valued at an estimated USD 9.5 
trillion).  The finance and investment industry is especially 
paying attention to the REITs debate, as experts believe its 
outcome could be an important indicator of how other 
finance-related legislation evolves.  END SUMMARY. 
 
REITS: TWO YEARS IN THE MAKING 
------------------------------ 
 
¶2.  A REIT is a property investment fund that allows real 
estate holdings to be packaged as publicly traded companies 
that pay dividends from rent proceeds and property sales. 
The increased liquidity and transparency of being listed on a 
stock exchange is expected to attract a new class of 
investors, as well as more properties to the market.  German 
proponents look to the success of the REITs model created by 
the United States in the 1960s and the experiences of several 
European countries that, according to a European Public Real 
Estate Association (EPRA) study, have REITs of their own 
(France, Italy, Spain, Belgium, the Netherlands, and, 
effective 1 January 2007, the UK).  Finance Ministry 
officials claim that, if REITs are legalized in Germany, the 
market would be the largest in Europe; one estimate puts the 
potential market value of REITs in Germany at up to USD 290 
billion.  The Finance Ministry, which first organized a 
committee to discuss REITs in 2004, had hoped to introduce 
REITs into the market by 1 January 2006.  Several firms, such 
as UBS, Morgan Stanley and Fortress, have already been 
preparing to offer German REITs in the expectation of its 
legalization, calling REITs "the hottest issue of 2006." 
 
¶3.  Political opposition to the introduction of REITs stems 
from a fear that foreign investors will descend on Germany 
like "locusts" and "prey" on the German real estate market in 
search of profits -- to the detriment of local residents and 
the federal government.  (Note: The term "locusts" in 
reference to foreign investment companies was originally 
coined during the 2005 election cycle, when Social Democratic 
Party's former Chairman Franz Muentefering called foreign 
private equity firms in Germany "locusts".  The word has 
since been used not only to criticize the legislation 
introducing REITs but also to call for greater regulation of 
the hedge fund industry (reftel).  End Note.)  Under pressure 
from the new Left Party, members of the Social Democratic 
Party have taken the lead on criticizing the plans for 
legalizing REITs, raising the concern that REITs will 
increase the cost of rents to unaffordable levels and force 
middle-class residents to seek cheaper housing elsewhere. 
Even Chancellor Merkel has weighed in on the REITs debate, 
noting that the "social consequences" of REITs must be taken 
into consideration.  Additionally, critics of REITs point to 
the potential losses the government will assume as a result 
of lost taxation revenue.  With the on-going struggle to 
close financial holes in the budget, this argument has 
resonance in certain government circles.  Through REITs, 
investment firms can avoid high corporate taxation rates by 
distributing all REITs profits to investors, who are then 
individually taxed at a lower rate.  Critics have also 
pointed to the potential loss of government revenue as yet 
another example of how foreign investment firms are taking 
advantage of the German system. 
 
¶4.  Tensions within the "Grand Coalition" over the 
legalization of REITs escalated just before the beginning of 
its summer recess in June.  After discussion in a Coalition 
working-group on the REITs issue, the group Chairman, 
Christian Democrat Leo Dautzenberg, announced that 
disagreements over the legalization of REITs had been 
resolved and that the Finance Ministry would begin drafting 
the REITs law.  His statement provoked an angry response from 
SPD leaders that the group had not agreed on moving forward 
and claimed that critical obstacles to the legalization of 
REITs remained.  Social Democrats went so far as to call 
 
BERLIN 00002344  002 OF 002 
 
 
Dautzenberg's announcement a "betrayal of trust" within the 
Grand Coalition. 
 
REITs IN GERMANY: ILLUSORY OR SOON TO BE REAL? 
--------------------------------------------- - 
 
¶5.  Embassy contacts at the Finance Ministry are hopeful of a 
successful legalization of REITs in Germany, although they 
acknowledge the political outcome is too uncertain to 
predict.  If all goes according to the Finance Ministry's 
plan, the Coalition Cabinet will decide on the REITs draft 
law 20 September 2006, the Parliament will begin discussing 
it 19 October 2006, the Parliament's finance committee will 
give its opinion on the law 29 November 2006, and the 
Bundesrat will pass it 15 December 2006 so that the new 
legislation can come into effect in the first part of 2007. 
Coalition leaders and REITs advocacy groups, however, are 
doubtful that REITs will be legalized before the end of the 
year.  Christian Democrats are supportive of the REITs 
legislation and note that their legalization is now dependent 
on whether Social Democrats decide to support REITs.  Despite 
the Finance Ministry's concrete plans, Social Democrats in 
the Bundestag claim the REITs issue is currently at a "very 
vague state," making its future political direction difficult 
to assess. 
 
¶6.  Further complicating prospects for the legislation is the 
recent negative press given to high-profile American private 
equity firms investing in Germany's real estate market.  In 
late July, German newspapers and magazines reported that a 
Texas-based private equity firm has been buying up mortgage 
debt in Dresden and hiking the interest rates to the point 
where families could no longer afford their monthly mortgage 
payments.  Other critical news stories have emerged to 
tarnish the real estate investment industry.  Finance 
Ministry State Secretary Thomas Mirow also noted at a German 
conference recently that REITs would inevitably suffer from 
an image problem in Germany because of the general public's 
deeply-rooted, cultural distrust of the finance and 
investment industry. 
 
¶7.  Industry experts are especially anxious about the outcome 
of the REITs debate in Parliament as the REITs draft bill is 
the first opportunity for the industry to determine the 
political parties' true positions on legislation for 
promoting Germany's financial industry.  Industry experts 
hope that the introduction of REITs will be the first of 
several finance industry-friendly laws passed under 
Chancellor Merkel's watch.  As early as this fall, the 
Finance Ministry plans to propose to Parliament a wholesale 
revision of the current investment laws in Germany, including 
current hedge fund regulation laws, with an eye toward 
reducing the regulatory burden on investment firms and 
fostering Germany's finance industry (reftel). 
KOENIG