SOCIMIs — listed real estate investment companies — have emerged as a real estate investment vehicle. These listed companies are responsible for acquiring and managing real estate assets: their income essentially comes from renting them out. Inspired by US REITs — real estate investment trusts — SOCIMIs are already very popular in Spain. In fact, Spain is the second country in the world with the highest number of entities of this type.
One of the reasons is their appeal to both large fortunes and individual investors. Their objective is to boost the rental market, an area with significant room for growth in Spain, where the figures are lower than on the continent. In addition, like any other type of investment, they seek to offer stable returns and establish themselves as an alternative for those who — increasingly — are turning their attention to real estate.
Their legal framework is Law 11/2009, which provides, among other things, for their special tax regime, that of their shareholders and their reporting obligations. However, due to the rigidity of the requirements in its regulation, Law 16/2012 introduced amendments to encourage more companies to adopt this special regime.
Tax advantages and requirements
The clearest advantage is precisely their taxation. The law establishes a special tax regime for companies that opt to apply it, under which they will be taxed at a 0% rate for corporate income tax, which generally has a standard rate of 25%. Their tax advantages go further, as they receive a 95% rebate on transfer tax and stamp duty — ITP and AJD in Spain. In any case, to access this privileged tax regime, SOCIMIs must meet a series of requirements.
The first of these has to do with a holding-period requirement. Thus, the law requires that the real estate assets included in the company’s assets be kept leased for at least three years. If, rather than being acquired, they have been developed by the SOCIMI, the period increases to seven years. Another of the most important requirements also aligns with the objective of SOCIMIs to promote the rental market: at least 80% of their investments must be allocated to real estate assets intended for rental. This does not necessarily have to be residential rental, as it also includes the office, retail and logistics sectors.
SOCIMIs offer a very strong advantage in terms of liquidity compared with other alternatives, since divestment is very fast. The distribution of profits is also important. At least 90% of rental income, 50% of the profits obtained from the transfer of real estate assets and 100% of those arising from dividends from eligible shareholdings must be distributed among investors. Likewise, the share capital of the SOCIMI must be at least five million euros, and its legal reserves must not exceed 20% of this amount.
Disadvantages of investing in SOCIMIs
Like any investment vehicle, SOCIMIs also involve certain risks and disadvantages. Beyond the fact that the value of real estate assets may fluctuate with the property market, SOCIMIs, as listed companies, are exposed to variations in securities prices. In addition, as they have real estate assets backing their debt capacity, they are also exposed to pressure on interest rates.
SOCIMIs also have a limited free float — in Spain, it must be at least 25% of share capital — which means that the percentage of shares that can be traded on the stock market is also small. Finally, the management of SOCIMIs, in contrast with other types of investment funds or indirect investments, is usually expensive. Added to all this are the rigidity issues of their legal structure, which had already appeared in the first years after their regulation.
All of this means that they are not always the best option, especially for small savers who need flexible and agile formulas. Instead, investor models such as real estate crowdfunding are emerging as an alternative for real estate investment from small amounts, free from the rigidity of SOCIMIs and where investors themselves decide which assets they want to participate in.
