After lengthy negotiations amongst the various actors of the real estate and financial sectors, a new Royal Decree of 7 December 2010 on Real Estate Investment Trusts (“sicafi” / “vastgoed-bevaks”) was published on 28 December 2010 (the Royal Decree). The Royal Decree considera-bly modifies the regulatory regime applicable to Belgian REIT by repealing and replacing both the Royal Decree of 10 April 1995 and the Royal Decree of 21 June 2006 which contained respectively the regulatory and accounting regimes formerly applicable to Belgian REIT. Both regimes are now encompassed in this new single piece of regulation which implements the Law of 20 July 2004 on collective investment undertakings. This DechertOnPoint briefly examines the main changes contained in this new regulation.
The Royal Decree aims at (i) encompassing various recent changes in the legislation regard-ing collective investment undertakings, public offerings, obligations of issuers on regulated markets and the EU rules on the application of international accounting standards as well as (ii) improving and thoroughly modernizing the legal regime applicable to Belgian REIT by bringing in certain important changes that are summarized below.1
New Form of REIT: The Institutional REIT
The Royal Decree creates a distinction between the public REIT (“sicafi publique” / “openbare vastgoedbevak”), i.e. the “classic” listed collective investment undertaking, and the new institutional REIT (“sicafi institutionnelle” / “institutionele vastgoedbevak”) which can now be created and used by a public REIT as a special vehicle for the realization of specific projects with institutional investors (such as public entities, credit or financial institutions, investment firms, collective investment undertakings, insurance companies, etc) and which should facilitate the participation of REIT to public-private partnerships.
A public REIT can only hold, either directly or indirectly, shares in an institutional REIT (or in a real estate company), if it has the exclusive or joint control over the acquired entity. Further-more, a public REIT is not allowed to jointly control an institutional REIT (or a real estate company) together with another public REIT unless both are under the control of the same public REIT.2
These requirements, which aim at ensuring that the public REIT is always collectively managed in the exclusive interest of its shareholders, are a prerequisite in order for the shares (in an institutional REIT or real estate company) to be considered as a “real estate asset” (“bien immobilier” / “vastgoed”) within the meaning of the Royal Decree.
New Rules on Capital Increase
Under the former Royal Decree, a REIT was prohib-ited from cancelling or limiting the preferential subscription right of the existing shareholders when increasing its share capital and was therefore compelled to comply with the mandatory minimum subscription period of 15 days when wishing to access the capital markets (Article 593 of the Companies Code).
One of the most important changes introduced by the Royal Decree is the possibility for a public REIT to increase its share capital against a contribution in cash with cancellation or limitation of the preferen-tial subscription rights provided that a priority allocation right (“droit d’allocation irréductible” / “onherleidbaar toewijzingsrecht”) is granted to the existing shareholders.3 Such priority allocation right (which aims at replicating the economical effect of a statutory preferential subscription right) is subject to certain requirements:4
- it must concern all newly issued securities (it is therefore not possible to divide the offering into free and reserved tranches);
- it is granted to the shareholders in proportion to their shareholding;
- a maximum price per share must be an-nounced at the latest the day before the open-ing of the subscription period;
- a minimum subscription period of three listing days is required.5
The shortening of the subscription period (three days versus 15 days previously) should facilitate the access of public REIT to the capital markets to finance their investment needs. It should indeed allow public REIT to be less exposed to the volatility of the market and banks (lead managers) should therefore be less inclined to recommend important discounts which are detrimental to the REIT’s image and to the shareholder who has not exercised his/her preferential right (dilution).
Additional requirements are also introduced in the event of a capital increase against a contribution in kind.6
Finally, where an institutional REIT controlled by a public REIT decides to increase its share capital in cash at a discount of more than 10%, certain information requirements apply towards the shareholders of the public REIT (such as the drafting of a special report by the management body of the public REIT).
The public REIT is still subject to the following limits:7
- the debt ratio of the public REIT may not exceed 65 % of its total assets;
- the annual financial charges relating to the consolidated debt of the public REIT may not exceed 80% of the amount of its revenues and charges increased with the amount of its fi-nancial products.
The Royal Decree now provides that the 65% threshold must be complied with at two different levels, i.e. at statutory level (at the level of the relevant public REIT) and at consolidated level (at the level of the group).8 This double threshold must be appreciated at the time of the subscription of a new debt and shall therefore not apply where the threshold is exceeded due to a variation of the fair value of the public REIT’s assets.
The Royal Decree also provides for the following important new rules:
- if and where the debt percentage exceeds 50% of the consolidated assets, the REIT is now compelled to draft a financial plan to-gether with a time schedule describing the measures that the REIT proposes to take in order to avoid exceeding the general threshold of 65% in the future. A special report must also be drawn up by the statutory auditor con-firming the consistency of such plan with the accounting record of the public REIT; 9
- if the consolidated debt ratio or statutory debt ratio remains in excess of the 65% threshold for more than two years from the date the REIT has become aware of such breach, the general meeting of shareholders must be con-vened within three months in order to decide on the possible dissolution of the REIT or on other measures to remedy such breach.
Distribution of Profits
As was already the case under the former Royal Decree, a public REIT must distribute 80% of its net profits to its shareholders.10 The Royal Decree now provides that no distribution is permitted if the statutory or consolidated debt ratio of the public REIT already exceeds 65% or if such distribution has the effect of increasing the global debt ratio of the REIT above the 65% threshold.11 Undistributed profits (that should have been distributed pursuant to the 80% rule but were not distributed because of the 65% threshold) shall be allocated to the reserve and be used only in view of decreasing the consoli-dated or statutory debt ratio (as the case may be) below the 65% threshold.
A public REIT is still prohibited from investing more than 20% of its assets (on a consolidated basis) in “one single real estate entity” (“un seul ensemble immobilier” / “een enkel vastgoedgeheel”) i.e., one or several real estate which are to be considered as one single investment risk for the public REIT, such limit being appreciated at the time of the real estate acquisition by the REIT.12
Specific derogations to this rule may be granted by the CBFA13 which can now appoint one or several experts (to be remunerated by the REIT) to assess whether the relevant real estate forms one single real estate entity within the meaning of the Royal Decree and/or to assist the CBFA for the purpose of granting the derogation.
Where the REIT does not comply with the invest-ment diversification requirements (set out in the Royal Decree or in its articles of association) or is in breach of the conditions imposed in the derogation granted by the CBFA, the general meeting of shareholders must be convened within three months of becoming aware of such breach in order to decide on the possible dissolution of the REIT or on other measures to remedy such breach.
Shareholdings in Other Companies
The Royal Decree contains further limitations regarding the acquisition by a public REIT of participation in other companies. As already mentioned, a public REIT can only hold, either directly or indirectly, shares in an institutional REIT or in a real estate company, if it has the exclusive or joint control over the acquired entity. Furthermore, when a public REIT exclusively controls other companies without holding, either directly or indirectly, the entirety of their share capital, certain strict requirements must be complied with.14
In addition to these requirements, when a public REIT jointly controls another company together with a third party, the articles of association of such company (or any other relevant document) must provide—in order to address a possible conflict between shareholders which affects the manage-ment of the controlled company— the right for the public REIT to either acquire from (call option) or sell its stake to (put option) the other shareholder(s) with whom a conflict exists (purchase price to be determined by independent experts).
Real Estate Experts
Independence criteria of real estate experts (respon-sible for the valuation of the real estate portfolio of the public REIT and its subsidiaries)15 have been reinforced in order to prevent potential conflicts of interest:16
- the expert shall not be linked to or have a participation in the promoter, nor can the ex-pert perform any management duties and/or have any other link or relationship with the promoter that can impede his independence;
- he/it should have the necessary reputation and appropriate experience to perform real estate valuation and his organization must comply with the activity of expert;
- his/its remuneration cannot be, either directly or indirectly, linked to the value of real estate assets being appraised;17
The expert is appointed for a term of three years renewable and can only be in charge of the valuation of a specific real estate asset during a period of maximum three years. After such term, a three-year cooling off period must be complied with before the same expert can appraise the same real estate asset again.18
A series of other new rules have been introduced by the Royal Decree.
Possibility to Issue Securities Other than Shares
The Royal Decree now expressly provides the possibility for a public REIT to issue securities other than shares (such as bonds) although securities which do not represent the share capital, such as profit-sharing certificates (“parts beneficiaires” / “winstbewijzen”) or similar securities are expressly excluded.
Role and Obligations of the Promoter of the Public REIT
The Royal Decree modifies the definition and notion of “promoter” (“promoteur” / “promotor”) of a public REIT.19 Are considered promoters, the persons controlling exclusively or jointly the public REIT or the persons controlling the manager (legal person) of the public REIT that has adopted the form of a partnership limited by shares (“SCA” / “Comm. VA”).20
The promoter’s best efforts obligation to have at least 30% of the share capital of the public REIT held by the public has now become a continuous and permanent obligation. The promoter must at any time take all reasonable measures in order to reach such threshold.
Granting of Credit, Security and Guarantee
The granting of credit, security (mortgage, etc.) or guarantee by a public REIT or by its subsidiaries is now only permitted (i) within the group (hence no credit or security can be granted to or on behalf of a third party) and (ii) within the framework of the financing of the real estate activities of the public REIT or of its group.
The granting of security and guarantee (within the above limits) can now represent up to 50% of the global fair value of the portfolio of the public REIT on a consolidated basis (instead of 40% under the former Royal Decree).21
Governance and Organization
The Royal Decree provides for the following new rules:
- The board of directors of the public REIT must now be composed of at least three independent directors (within the meaning of article 526ter of the Belgian Companies Code);22
- In order to avoid that organizational rules be without effect where the REIT has adopted the form of a SCA / Comm. VA, certain rules have been made applicable to the statutory man-ager (“commandité” / “beherende vennoot”) of the public REIT and to the management body of such manager;23
- The possibility has been introduced for a public REIT to delegate the management of its (consolidated) real estate portfolio to a com-pany controlled by the public REIT which spe-cializes in real estate management;
- It is no longer mandatory for a public REIT to appoint a custodian (“dépositaire” / “be-waarder”);24
- It is no longer required to obtain the prior approval of the CBFA regarding the amount of fees, commissions and costs that will be in-curred by the public REIT;25
- The scope of the conflict of interest rules has been broadened and adapted to take into ac-count the creation of the new institutional REIT.