Merlin and Colonial led the losses on the Ibex yesterday, losing €590 million in the stock market, due to the Executive’s plans to eliminate the tax exemption for REITs. The PSOE proposal would involve raising the Corporate Tax from 1% to 25%. According to analysts at Jefferies:
| PSOE and Sumar have reached an agreement to reduce or remove tax benefits for REITs. If approved, this proposal could reduce FFOs for companies exposed to Spain. The market seems to be overestimating the potential negative impacts, particularly on Colonial while the impact on Merlin still need to be assessed. Although the review of the bill in Parliament is uncertain, it also raises concerns for REIT regimes sustainability across Europe. |
| Spain’s PSOE and Sumar parties have agreed to remove the favorable tax regime for SOCIMIs (Spanish REIT regime) or at least part of the tax benefits. If the proposal were to be approved by the Parliament, the impact on REITs’ dividend payment capacity could be material, depending on their exposure to Spain, as they will become subject to the general Spanish corporate tax rate of 25% (as opposed to 0% currently). Within our coverage universe, nine companies out of 30 are exposed to Spain (see table below), though only three have meaningful exposure (Merlin Properties 88% of its GAV, Colonial 30% and Carmila 23%). At first glance, we estimate that such proposal could reduce EPRA EPS by c.-7/-9% for Merlin Properties, by -1/-5% for Colonial and Carmila, and by less than -3% for Xior, Klépierre and Sagax. As for URW, Covivio and Cofinimmo, the potential negative impact would not be material on the 2023 EPRA EPS. Note that the potential negative impact on EPRA EPS will also vary according to the financial leverage and cost structure of each Spanish subsidiary and available tax deficit credit (e.g. Colonial). Following the announcement, the share price of Merlin Properties and Colonial fell by -7.3% and -5%, respectively. There are still a lot of moving parts and the tax optimization could also lower the potential final impact. In our view, the market could overreact, especially for Colonial as the profit before tax that would be taxable would be closer to €20m on 2023 figures according to our calculation. Our main concern remains on Merlin Properties, however we expect the company to disclose a more precise calculation on the potential cash impact at its Q3-24 release on Thursday 14th of November. So far, we understand that the chances of this bill passing in Parliament are uncertain. There is no majority support, and PSOE and Sumar parties would need backing from all other coalition partners (ERC, Junts, PNV, Bildu and Grupo Mixto) to move forward. In our view, this proposal sends a negative signal for the rest of European REIT regimes. For the record, in 2023, the Dutch government enacted a bill to amend the FBI regime (Dutch REIT regime). However, we remain uncertain about the constitutionality of an arbitrary and sudden removal of REIT status across Europe, especially considering that many REITs had to pay significant exit taxes to obtain the REIT status. |
Table 1 – Theoretical impact on recurring results by company
