The regulations on the establishment and operation of a REIT continue to set strict requirements for the actors of the real estate market, but the restrictions adapted to the Hungarian conditions eased the former capital and payment requirements. Consequently, a number of real estate companies have announced their intention to be transformed into a REIT form in the future. NAV has already registered Graphisoft Park (announcement) as a REIT, and earlier it also registered Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt (BIF) as a regulated real estate investment proforma company.
As a result of the legislative changes introduced in 2017, not only companies incorporated in Hungary but also REITs having their registered offices in the territory of the states that are signatories to the Agreement establishing the European Economic Area can benefit from the options provided in the Hungarian legal regulations.
What does the favourable taxation environment mean for a REIT?
Not only a REIT and a proforma REIT but also project companies owned by them in 100% are exempt from the payment of corporate tax and local business tax (with certain exceptions, such as e.g., the transfer pricing rules also apply to them).
In addition, a preferential, 2 percent recourse asset transfer duty is applicable to a REIT and REIT proforma company on the acquisition of the ownership right and rights and titles of real properties acquired by them and to the acquisition of any capital share in a business association that owns properties in the domestic territory. Whenever a legal transaction is executed between associated parties, the transaction is exempt from duty.
Under what terms and conditions can a company become a REIT?
Without providing a complex description of the detailed rules, here is a brief summary of the most important features of a regulated real estate investment company. A public limited company intending to operate in the form a REIT must satisfy numerous requirements.
1. REIT initial capital and activity limits
While according to the former regulations the capital requirement was HUF 10 billion, any company intending to operate as a REIT currently must have at least five billion forints initial capital. In the case of companies obliged to prepare consolidated annual reports the initial capital reported in the consolidated balance sheet must be taken into account. Concerning the scope of activity, the company may only be engaged in the sale and purchase of owned real estate, the lease and operation of owned real estate, real estate management and asset management and, from 2017, also in the operation of buildings and structures.
2. Ownership and owner limits and personal requirements pertaining to a REIT
A REIT may not have any equity participation in any business association other than project companies, other regulated real estate investment companies and business associations whose core activity is the organisation of construction projects.
As a result of the modifications made in 2017 a REIT can also issue employee shares, the requirement for the minimum face value no longer prevails and the limit applicable to insurance companies and credit institutions applies only to direct participation (they may exercise no more than 10 percent of all voting rights).
The provisions related to the free float participation limit have also been modified. A REIT must have at least 25 percent share series compared to the total face value of the total registered capital, the holders of which may not own (directly or indirectly) more than 5 percent of the total face value of the total registered capital each. At least one part of the shares of the company (equivalent to 25 percent free float) must be introduced to the stock exchange. However, in a REIT, which floats all its shares on the regulated market the 5 percent limit cannot be applied. In the case of such companies, the free float requirement must be checked only at the time of registration.
The former regulations set a requirement for financial economic or legal qualifications for the executive officers of a REIT. Having reviewed the market specificities, the legislator also eased those requirements and at the moment the only requirement for the executive officers is higher qualifications.
3. REIT dividend payment rule
A REIT must pay out a dividend, equivalent at least to the expected dividend within 15 trading days following the approval of the financial statements. If the disposable funds are lower than the expected dividend amount, then at least 90 percent of the disposable funds must be paid out to the investors. It was also clarified that the cash and cash equivalents over which the right of disposal of the REIT, the proforma company or the project company is limited, are not included in the disposable funds.
4.Other requirements
Within the framework of the amendment of the legal regulations last year, it was also clarified that in the case of a REIT obliged to prepare consolidated annual reports. the requirement for the ratio of debt and the value of real properties must be checked on the basis of the consolidated data.
In addition, during the assessment of the real estate assets, the real assets of all companies involved in the consolidation must be taken into account: the value of no real estate or participation in another REIT cannot exceed thirty percent of the balance sheet total of REIT (that limit was twenty percent earlier).
If a REIT prepares its annual report according to IFRS, the value of the real estates must be established in line with the principles of IFRS revaluation model or the fair value model.
What is the process becoming a REIT?
The real estate company must apply to NAV for registration as a regulated real estate investment proforma company. From the date of registration, the favourable tax rules pertaining to a REIT already apply to the proforma company on condition that by 31 December of the year following the business year of registration the company must satisfy all statutory requirements of a REIT.
The tax benefits associated with REIT status made this instrument popular in the international market both in the real estate sector and among investors. The appearance of REITs in Hungary is also favourable for the investors because in the current investment environment the shares generating a high dividend income to the shareholders with the growing real estate market represent a real alternative for the market actors.
