The "Regulated Real Estate Company"

Analyse The Belgian REIT Sector (Real Estate Investment Trust) takes on status of "Regulated Real Estate Company"

The Regulated Real Estate Companies  (“RRECs") Act of 12 May 2014 aims at offering the status of "regulated real estate company” to real estate companies that wish to operate as an REIT (Real Estate Investment Trust) and meet the legal characteristics of an RREC" (hereafter  the "RRECs Act").

The status of Regulated Real Estate Companies was introduced  for the Belgian REIT sector on 16 July 2014 by the Royal Decree of 13 July 2014 regarding regulated real estate companies.

This new RREC regulation offers an alternative for the traditional closed-end real estate investment company to a lot of real estate investors.

An alternative for the traditional closed-end real estate investment company to a lot of real estate investors

The new regulation came about because an amended legislation was imperative after recent EU legislation (more in particular the AIFMD) started considering traditional closed-end real estate investment companies as "alternative investment institutions", as a result of which a lot of additional obligations arise, without there being  a clear economic added value in return.

The tax concessions an RREC can benefit from will from now on be equal to those of a closed-end real estate investment company, and, provided that they meet certain conditions, allow companies to pay no corporate tax on income and capital gains they earn from real estate  they develop and manage. As a result, Belgium now also appears to have its own real estate investment vehicle without the more complex rules applying to investment funds being applicable.

Such a more flexible legislation is clearly inspired by the French "Société Immobilière réglementée" or by the "REIT" or "Real Estate Investment Trust" known in Germany and in the United Kingdom.

1. Characteristics of an RREC – Specific Legal Framework

A regulated real estate company is a company formed for an indefinite period of time, licensed and supervised by the Financial Services and Markets Authority (hereafter FSMA) and defined in the RRECs Act on the basis of its activity.

This activity consists in making real estate available to users, directly or through a company in which it holds a participation, and possibly within the limits set for this purpose, owning other types of "real estate" (shares in public closed-end real estate investment companies, rights of participation in certain foreign collective investment institutions, shares issued by other REITs and real estate certificates). 

Within that framework an RREC can perform all activities in connection with the construction, refurbishment, renovation, development (for its own portfolio), acquisition, disposal, management and exploitation of real estate.

Just as with close-end real estate investments companies, there are two types of RRECs: "public RRECs", whose shares are tradable on a regulated market and which attract the necessary financial resources through a public offer of shares, and "institutional RRECs" which are under the control of a public RREC and which attract  the necessary financial resources only from certain eligible investors acting on their own account.

The RREC needs to develop a strategy for the purpose of keeping its real estate in its possession for a long time, focusing on active management, which implies that the RREC itself is responsible for the development and the day-to-day management of its real estate.

Its activity will therefore be wider than the mere acquisition of real estate with the purpose of collecting rents and/or disposing of such real estate once more.

The RRECs Act specifically obliges the RREC to perform its activities itself,  maintain direct relationships with suppliers and clients, have operational teams that  in addition  should  be "a significant part of its staff". In other words, unlike as far as traditional investment funds are concerned  the management cannot be performed by a third party.

The essential difference from close-end real estate investment companies is that RRECs are required to develop and follow a business strategy, according to a general commercial purpose, namely making real estate available to various users. The essential task of a close-end real estate investment company, however, consists in investing funds collected from several investors according to a specific investment policy, in the interest of investors (in other words, the properties that are characteristic of an "alternative investment institution").  This means specifically that an RREC can develop a strategy that spans  the entire value-chain of the real estate sector, while as far as the AIFM status is concerned, only investments in real estate are possible.

Given their importance for the real economy and public savings, the RRECs will fall under the supervision of the FSMA. Just as is currently the case for a close-end real estate investment company, specific rules will be imposed in terms of maximum leverage ratio (still a maximum of 65%), risk diversification and the pay-out ratio, as such rules also exist for the REITs in the neighbouring Member States.

2. Approval Procedure – Transitional Regime – Right of Exit

Any company that wants to obtain the RREC status should file a licence application with the FSMA, according to certain conditions and the procedure included in the Royal Decree of 16 July 2014.

From the entry into force of the RRECs Act (i.c. 16 July 2014), the existing  close-end real estate investment companies had a single four-month period (i.e. until 16 November) to apply for an RREC licence to the FSMA. Within the three months following the FSMA decision to grant the licence, a special general meeting of the close-end real estate investment company must be convened to give its views on the alteration of its Articles of Association.  At least 50% of the shareholders must be represented and 80% should approve the new status. If no 50% quorum is achieved, a second extraordinary general meeting will be held. Regardless of the number of shareholders represented, the rule here as well is that 80% of those present must vote in favour.

For existing shareholders, an exit mechanism has been provided for. Thanks to that mechanism shareholders voting against the alteration of the Articles of Association at the special general meeting can, subject to compliance with certain strict conditions (inter alia: minimum period of ownership, up to EUR 100,000.00 per shareholder, etc.), ask to repurchase their shares at a price equal to the highest of the following two elements: either the price prior to the publication of the invitation to attend the special general meeting, or the average closing price for thirty days prior to the special general meeting. The company may impose a condition precedent stipulating that such exit may be asked only by a small percentage of shareholders.

Although this stage may result in certain practical problems and difficulties (voting against an alteration of the Articles of Association, liquidity problems, etc.), in principle there should be no problems, because it is in the interest of the closed-end real estate investment companies, and therefore of the shareholders, to opt for the RREC status.

3. Conclusion

Up to now and broadly speaking the transformation process of the public closed-end real estate investment companies turns out to be a success.

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Alain De Jonge

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Leo Peeters

Leo Peeters