EUR 200.00 For Business Accounts Only

REIT SECTOR: CHANGES IN REIT TAXATION? (ANÁLISIS BANCO SABADELL)

On the occasion of the presentation of Spain’s 2021 draft budget, according to the press, “the Govt. will levy a tax of 15% on REITs” (El Confidencial). No details have been given on the measures that the Govt. appears to have taken (and are still pending approval), but we believe that this would be the already-known 15% tax on retained earnings, a measure that would not have a significant impact on cashflow or the valuations of the companies within our coverage universe, as they pay out a dividend higher than the tax base.
If it were a new tax on net profit (regardless of whether it has been retained or not), the impact is difficult to assess, but it would be very negative due to (i) its effect on cashflow, (ii) the rise in the risk premium associated with investing in real estate assets in Spain. As for its hypothetical impact on cashflow, it would not be evident, as companies might deduct their amortisation expense (the General Accounting Plan –or PGC in Spanish- is used as a reference for taxation) and other deductible expenditures. It should be noted that the effective rate paid by the large companies listed on the IBEX is significantly lower than the general 25% rate. For example, based on a simple calculation and assuming amortisation levels equivalent to 2% of investment in real estate assets (a tax refund is granted for amortisations) we see that every 1pp in the tax rate would deduct around -0.6pp in EPS vs. the current situation. Thus, a general 15% rate might have an impact of -9% on EPS (and a similar impact on valuation). Other deductible expenditures, such as negative tax bases (relevant in the case of COL and MRL), should also be taken into account.
In our coverage universe, Colonial shows the lowest risk in this regard (it is shedding -3%) thanks to its exposure to France (accounting for more than 50% of the GAV attributable to the parent company), and to the fact that it could activate again, as we have outlined, tax shields on negative taxable base from the time the crisis. MRL (down -1%) also has tax shields on negative taxable base after the acquisition of Metrovacesa’s commercial property arm. Lar España is falling -1%.