While it's been nearly fifty years since the Treaty of Rome established the European Community, the rejection of the EU constitution by French and Dutch voters earlier this year and the acrimony that followed served as a reminder that Europe is still anything but united. And pan-European real estate investors are more likely than most to feel the effects of crossing a national boundary: Europe isn't one market, but a mosaic of different tax and planning regimes.
“There is no Europe when it comes to taxes or banking rights,” says Van Stults, a US national and managing director of Orion Capital Managers in London and Paris. “You have to deal with it on a country by country basis.”
To do so, some firms utilize a network of contacts on the ground in each country who speak the language, understand local customs and laws, and have access to the off market deals that provide the juiciest returns. Of equal importance is ensuring that you're well briefed about local regulatory and tax issues.
“It's important to get advice so you don't underestimate the differences in things like compliance issues,” explains Stults. “But when investing across jurisdictions your biggest exposure is tax risk: you need significant legal and accounting advice to ensure you don't incur costs that you didn't anticipate.”
The UK is, on the face of it, one of the more straightforward markets for international real estate investors. One example of the relative openness of the British property markets: a fair portion of prime London real estate is under foreign ownership. “Candidly, there aren't many obstacles,” says Charles Martin, a corporate partner with law firm Macfarlanes in London. “Ownership is tax transparent, and interest costs are generally tax deductible.”
What's more, the landlord-tenant laws tend to favor the landlord: while standard leases in Continental markets often release tenants after as little as three years, many UK lease agreements last for ten years or longer.
Inevitably, though, there are still pitfalls. While transaction costs are relatively low in the UK (see table), a nasty shock can come in the form of stamp duty land tax, which is generally charged at 4 percent of the value of the property. Another problem of which international investors may be unaware is the requirement of receiving authorization from the Financial Services Authority, the government regulatory body, to set up as an asset manager. Furthermore, the lack of any notary system to register the legal owners of real estate means that buyers require the services of a lawyer to confirm that the vendor holds the title to sell a building.
Some commentators also suggest that the UK is a better market for investors than for developers. John Bowman, a London-based partner with Freshfields Buckhaus Deringer, notes, “The general view of developers of major projects is that the planning system is too slow and cumbersome and is discouraging as much investment as might otherwise be interested in UK developments.” He identifies the difficulty of getting permission for land usage change or new developments in residential areas, and “not in my back yard” objections from locals, as particularly contentious areas. The upside of this for investors is that the buyers of a shopping center, for example, can be reasonably confident that a rival mall will not appear nearby without warning. Developments in existing urban areas that do not change land use are more likely to receive permission.
Like the UK, France is an open market that allows non-residents to freely invest in the country; the sole requirement is that the Bank of France receives notification.
However, in some ways it is a more difficult market to operate in than the UK. Tenants are generally entitled to terminate their occupancy at the end of every three-year period, for example, provided they give a minimum of six months' notice. In practice, however, a tenant will often waive this right for the first threeyear period, giving landlords at least six months of security.
The French tax regime can also pose problems for foreign real estate investors. Income deriving from French property is taxable in France, regardless of whether the investors are French or foreign residents. Investors will generally therefore find themselves liable for some combination of corporation tax, personal income tax and withholding tax, depending on their investment structure.
On top of that, buyers need to be aware of what Peter Cluff of Europa Capital describes as “the dreaded 3 percent tax”: a compliance tax intended to ensure that the owners of French property do not evade their other tax obligations. An exemption from the tax can only be obtained by disclosing certain information to the authorities each year. Says Cluff: “It's very onerous as it's an annual tax payable on the market value of the assets in France rather than simply on the equity invested. There is joint liability on all entities in a chain of ownership and therefore you need to be careful when drafting documents to include a clause whereby all your investors agree to divulge, if required, their ultimate owners, which could be an issue for secretive family offices or fund of fund investors.”
France also has a rigorous planning regime. Each municipality sets out its own Plan Local d'Urbanisme (PLU), laying down the restrictions on land use and defining the natural and agricultural zones that need to be protected. This plan not only makes it all but impossible to get land re-zoned, but also gives each municipality a pre-emptive right to buy buildings in certain areas. As a result, before selling a property, the owner must check the authorities have waived any right they had to buy it. This system has proved a boon for tourism, by preserving the beauty of ancient cities like Paris, but it can be a headache for the real estate industry.
The price of doing businessTransaction costs purchasers of real estate can expect to incur in selected European markets.
|Country||Transfer Tax||VAT||Agents fees||Legal fees||VAT on transaction fees|
|(as a % of purchase price)|
|France (1)||4.8% – 6%||19.6%||1% – 5%||1% – 4%||19.6%|
|Germany (2)||3.5%||None||1% – 6%||1% – 1.5%||16%|
|Italy (3)||10%||0% – 20%||1% – 5%||Approx 0.5%||20%|
|Spain (4)||6% – 7%||16%||1.5% – 3%||0.5%-1.5%||16%|
|UK (5)||4%||17.5%||0.5% – 1.25%||0.25%||17.5%|
No entryWhile most European markets have now completely opened their property markets to foreign buyers, some still have some regulations in place.
|COUNTRY||RESTRICTIONS ON OWNERSHIP|
|Austria||Foreign citizens and companies must have|
|their right to buy property approved|
|by the government|
|Czech Republic||Non-EU citizens must form a company|
|Denmark||Ownership restricted if the new buyer does|
|not intend to occupy the building|
|Poland||Buyers must obtain a permit from|
|the Ministry of the Interior|
|Portuga||Foreigners must form a local company|
|Romania||Foreign buyers must form|
|a company to purchase land|
|Russia||Foreign buyers unable to own land|
|Turkey||Restrictions on buying land in rural and|
|Ukraine||Foreigners restricted from owning|
To the East
Private equity real estate investors are hoping that the relatively new markets in Central and Eastern Europe will provide strong opportunities over the next few years: witness the steady flow of fund launches in the region announced over the preceding months. Ten years ago these markets would have posed a challenge to western real estate investors. Today, things do seem to be changing.
“The difficulty has now reduced to the point where it's almost as easy here as in the West,” says Peter Murphy, a research director with DTZ in Budapest. “You used to come across so many legal and ownership issues that you needed to look at deeds extremely carefully. While you still do, the chances of a nasty surprise are now much less.”
As in Western Europe, the challenges faced by investors are likely to vary between countries: in Poland, Hungary and the Czech Republic, the markets tend to be much more transparent and the buildings of better quality than those further south or east. But one thing many of these markets have in common is a certain love of bureaucracy left over from the Soviet era. Murphy cites the example of Budapest, where each of the city's 23 planning districts has its own level of transparency and efficiency. “There are twenty three little kings each running his own kingdom,” he says. “The result is that certain districts are being developed faster than others.”
Tax regimes can also vary in attractiveness quite significantly. Some countries, such as Slovakia and Romania, have recently introduced a flat tax, potentially making them very attractive to Western investors. Hungary, in contrast, has so many different levels of tax that it can be quite difficult to work out how much you can expect to pay.