On 5 December 2016, the Mercado Alternativo Bursátil (the MAB) made publicly available a new regulation (Circular 20/2016) which significantly changes the Spanish Real Estate Investment Trusts' trading legal regime (REITs, or SOCIMIs as they are commonly referred to in the Spanish market). Circular 20/2016 amends Circular 14/2016 by:
- creating a new sub-segment within the already existing SOCIMI segment; and
- amending the requirements and procedures applicable to the listing on the MAB of shares issued by SOCIMIs.
The Spanish real estate sector is constantly evolving, and in the past four years many SOCIMIs have opted to trade their shares on the MAB segment for SOCIMIs. To this day, there are 29 SOCIMIs listed in the MAB. As Circular 20/2016 states that in the Spanish real estate sector there are many companies, including already incorporated SOCIMIs, with a significant asset value not yet invested (whether directly or indirectly) in urban assets to be leased. Circular 20/2016 aims to create a flexible regime by giving these companies an opportunity to trade their shares on the MAB, and an increased transparency of the information provided for investors intending to invest in these SOCIMIs.
Circular 20/2016 was published on 5 December 2016, and entered into force on 31 December 2016.
A new sub-segment
Automatic integration
The main change to the Spanish SOCIMI market industry is the creation of a new sub-segment named SOCIMIs in Development (SOCIMI en Desarrollo).
Companies that are traded on the MAB, or are applying for listing, will be assigned to this new sub-segment if they are:
- SOCIMIs; or
- foreign companies with a corporate purpose and investment strategy that is comparable to that of a SOCIMI,
with less than 70 per cent of their assets' market value are invested (whether directly or indirectly) in urban immovable assets to be leased.
With regard to the listing applicants, MAB will assess the market value of the assets invested with the aid of a valuation report, which must be prepared by an independent expert, and submitted to the MAB as part of the Information Document (Documento Informativo de Incorporación).
Obligation to notify
SOCIMIs, or foreign companies with a comparable corporate purpose and investment strategy, which in any moment have or deem to have a market asset value of less than 70 per cent invested in urban assets to be leased, must communicate such situation to the MAB in order to be included in the sub-segment SOCIMIs in Development. The obligation to communicate only triggers if the 70 per cent threshold is met during four consecutive months.
Communication to the market
Companies that are automatically assigned to the SOCIMIs in Development sub-segment and companies that are under an obligation to notify the market as explained above, must release a communication to the market. This communication must include a detailed report on the composition, nature, condition and forecasted value of the assets not linked to leasing activities, as well as the future economic prospects of those assets within the company.
Requirements for inclusion in the MAB
Circular 20/2016 also amends the requirements governed by Circular 14/2016 on applying for admission to trading on the MAB, the main change being as to the contents of the Information Document that all SOCIMIs must submit at the time of presenting an application. Circular 20/2016 requires that, in the context of the general description of the business, SOCIMIs must disclose in relation to consolidated urban land:
- detailed information on the collection of building permissions; and
- detailed information with regard to the status of the land, including (if any) agreements with the construction company, status of the works, conclusion forecast, etc.
Points to consider
Investors should be aware that many of the companies that will become part of the SOCIMIs in Development sub-segment may not generate income, because their final product (a leasable urban asset) may not be finalised by the time of their investment. On the other hand, incorporation onto the new sub-segment does bring the opportunity to participate in the entire real estate investment cycle: land purchase, planning, and construction and lease of the assets.
Circular 20/2016 will also enable investors to participate in the potential profits that real estate developers generate when developing the assets, given that the generated capital gains will benefit from the SOCIMIs' tax regime.
Furthermore, by introducing changes to the Information Document, Circular 20/2016 increases transparency with the aim of making investments in SOCIMIs in Development more attractive and transparent.
We expect that these new developments will encourage many Spanish real estate developers to incorporate SOCIMIs in Development.
