11 / 2006
When, in 2003, France allowed REITs (Société d’investissements immobiliers cotée - SIIC) this probably was the final shoot to start the REITs-race in Europe. The listed real estate market in France has increased by 50 percent since the introduction of REITs and further REIT growth is expected. 20 listed companies controlled €26 bn in 2006.
Regulations on French REITs are very liberal. There are no limits on stakes for shareholders. Consequently, the SIIC are attractive for foreign investors which want to save taxes, even if the real estates are outside France.
The most important REITs-sector in France had been offices in Paris. But competition is high and yields have declined. Thus, investors are looking for other choices.
In France most parts of Social Housing sector (HLM) at the moment still are protected against direct privatisations. For that reason REITs in France concentrate on commercial property and the private housing sector. However, the commercialisation and fundisation of the private sector already leads to increased pressure on the social sector.
The permission of REITs in 2003 heated up the already hot real estate speculation in the private sector and promoted the assumption of portions by international groups of capitals. Clearest example: In 2003 GECINA, one of the largest publicly traded real estate companies, was registered as REIT (SIIC). Gecina is the largest SIIC, the portfolio in 2004 was almost $12 billion, 60 percent commercial properties and 40 percent residential properties. (1) In 2005 the Spanish company METROVACESA took over 68.5 percent of the shares. Thus, the largest European real estate dealer developed.
Even Société Foncière Lyonnaise (SFL) is primarily owned by a Spanish company, Inmobiliaria Colonial, which acquired 95.1 percent of SFL to access the French market in 2004, but reduced the stake later.
A main consequence in France is the intensification of condo conversions (vente à la découpe) : A real estate company buys total buildings originally owned by private or public institutions, and „cuts it into pieces“; that means that it sells individual dwellings. In Paris a main target for this method are old houses along the boulevards, mostly rented by the middle and upper middle class. The affected flats are large and can be divided into smaller ones. The rent increases within a renting contract are legally limited, while the market rents and property prizes explode. Thus the return from the paid rents are much less than the returns from condo-sales. In France an eviction notice of the tenant is possible due to block transformations (at least 10 dwellings). Thus the affected tenants have only one choice: buy or move. Even if the tenant has a purchase option, the selling price orients at the market. These prices are unaffordable for many old tenants, even if they have a secure and good income. Thus, even upper middle class tenants move away, partially into poorer populated areas in the XI, XII, XVIII, XIX Arrondissement (for example in Barbès in the north), where they buy more affordable free-hold flats. As a consequence, the housing offer for the poorer households in these areas gets seriously reduced.
In 2003 and 2004 15% of all registered housing sales in Paris were condo-conversion sales. The total number of the conversion sales is estimated on 30.000. In this sector REITs are playing an important role. In 2004 GECINA sold 379 dwellings and 3,230 square meter office surface for 106.5 million Euro. Already between 1999 and 2004 GECINA and SIMCO, another huge company, sold more than 15,000 dwellings. In 2003 Gecina sold 3,200 dwellings to US-fund Westbrook for 1,2 bilion €.
Westbrook is very active in condo conversion. This particular deal lead to strong reactions by the affected tenants, who founded a couple of tenants associations at the level of the affected buildings and associated these groups to a city wide alliance.
The first association of this kind was created in July 2003: association des locataires du square du Roule et de la rue du faubourg St Honoré. In 6 years these tenants had four different landlords. The buildings were built 1880 and since then always were rented. The tenant associations represents the tenants towards the owners, demands complete information and informs the tenants about their rights. The movement is unusual, because higher income people are concerned. The vice-president of the association is the well-known actress Jeanne Moreau. The members can get free legal consultation of the C.N.L (Confédération National du Logement), one the recognized tenants organizations in France.
There are even reports on alliances between middle class tenants and excluded, which are supported by the organization D.A.L. (Droit outer Logement): With the help of the tenants two migrant families occupied empty flats in the building. Not only economical papers, even fashion journals like “Elle” reported in detail.
In June 2004 forty associations of affected Westbrook-tenants from Paris and the Paris periphery united to a Collectif (alliance). It is called “Découpés” (“the cutted”). Later that alliance even covered associations of tenants in other condo-conversion-buildings. With actions and press releases the organization raises awareness on the problem of privatisation in France and on the consequences for the social mixture in the city centres.
The association organized demonstrations together with tenants organisations and even built links with a movement in Marseille, which as well is confronted with the problem of condo-conversion. The a group called “Centre ville pour tous” fights against privatisation and the resulting displacement of people with lower income from the city centre. The group fights for the social mixture in the centre and against social segregation.
Another serious consequence of the REITs introduction in France was tax loss. Tax loss in 2004 was estimated at about €3 bn. This message lead to a serious crisis in the process of allowing REITs in the UK and Germany. But on the other hand the French state earned money from taxation of real estate transfers.
Meanwhile French REITs are even used to control German housing stocks. In October 2006 a Private Investment Fond plans to sell 40.000 housing units to the French based “Foncière Développement Logements”. The housing stock is the larger part of the former ThyssenKrupp real estate company, which controlled 48.000 housing units in German Ruhr District. In 2004 this company was sold to a consortium of US-American large investor Morgan Stanley Real Estate Fund and the Corpus Group, a construction of some German savings banks. No securities for tenants and employed had been agreed upon within this sale. Also allocation rights of the industries did not become secured.
One year after the buying up the new owner (new name: Immeo) started the sale of numerous old worker’s houses in Essen and Mülheim to tenants and other interested persons. The tenants protested with meetings and demonstrations. But such action does not impress speculative investors.
Because the sales of the small worker’s houses are partially not connected with a conversion into condominiums, the affected tenants do not enjoy specific legal regulations on security of tenure. If the new owner needs the house for his/her own, he/she immediately can call for an eviction. Several eviction notices are reported from the neighbourhood “Heimaterde” (“Homeland Earth”) in Mülheim and another old Krupp-neighbourhood in Essen. These neighbourhoods partly build an important segment of the local urban heritage, but this status does not help the tenants. More and more tenants, who had lived in the settlements for decades, flee the privatisation process. The whole social composition rapidly changes.
“In the old times of Krupp lifelong residence-rights had been usual, but today neither Immeo nor ThyssenKrupp want to know anything about it”, Immeo-tenant Hans Schmitt complains. “45 years I have bent my back for Krupp. I just was a little wheel for the profit making of these capitalists. The renovation of our flats was done with public subsidies. We have paid our houses many times.”
However, neither heavily negotiated rent increases nor the sales probably play the main role for Immeo’s high net yield in the last two years. Particularly due to the favorable financing of the buying up the yield on equity was approx. 15%, according to press.
Apart from the single privatisations Immeo even realized block sales to other investors. The largest block - approximately 5500 dwellings in Duesseldorf - was sold to the French investor “Foncière des Régions” in 2005. This is a principal shareholder of the Foncière Développement Logements (FDL), residing in Metz, which now took over the 5500 dwellings of “Foncière des Régions” and - for 2,1 billion Euro – even the remaining 40,000 dwellings of Immeo.
In order to lift the large assumption, Morgan Stanley plans to engage as large investor with FDL. For the American major bank this business thus only seems to work as a lucrative regrouping. FDL is a French REIT (SIIC), which developed from a private Social Landlord (HLM) which was based in the Loraine steel industries. Fonciere Des Regions even before this deal belonged to the top five of France-REIT (2,5 bn $ market capitalisation).
The business press used this event as an argument for the fast permission of German REITs, which would allow to keep the business at the German stock exchanges. In opposite, Ruhr Tenants Forum argues that the case demonstrates how keen international investors are on having REITs as a fast exit for private equity. The permission of German REITs would accelerate the process of privatisation and globalisation and it would endanger numerous publicly owned housing companies controlling 3 million housing units.
Meanwhile the French state plans to review the liberal regulations on French REITs and to establish some limitations for large shareholders in order to achieve more income on taxes.