The Finnish government has disappointed pension funds. This time it is over its plans to introduce real estate investment trusts (REITs). The pension fund community wants the new REITs structure to cover more than just residential property – the government disagrees.

“We are happy that the ministry of finance has proposed a model for how to deal with the issue of double taxation for property investments. But we’re very disappointed that the reform is limited to only residential property, which will be too narrow to make any significant difference,” says Matti Leppälä, director at Tela, the Finnish Pension Alliance, which has been lobbying for the introduction of REITs for a number of years.

Tela, which was asked by the government to give its opinion on the matter, wants the ministry of finance to reconsider and include all other types of property, including offices, shopping centres as well as infrastructure.

The problem is pension and insurance funds want to add property and infrastructure assets to their portfolios, particularly domestic assets. Valtion Eläkerahasto, the e12bn Finnish state pension fund, and Varma, the e29bn Finnish pension insurance firm, are both looking to increase their investments in infrastructure.

Varma’s chief investment officer, Risto Murto, says they would prefer to invest locally, which he thinks is the most natural market to make a long-term infrastructure commitment.

The Federation of Finnish Financial Services (FKL) also believes the government should include other types of property investments. Satu Huber, the association’s managing director, says they are happy things are moving forward, but are disappointed that proposals so far have been limited.

But the government remains resolute for now. It is more interested in pursuing its political program of encouraging more house building.

“Renewing the legislation is an important part of the government’s housing policy to specifically strengthen and encourage the market for new property in Finland. That’s why the government, at least as a first step, wants REITs for new housing projects,” Ilkka Harju, legislative counsellor at the ministry of finance, explains.

Current domestic property fund regulations have been in place for 10 years, but have been unpopular due to double taxation. Although large investors have opportunities to take on direct property investments, smaller investors have more difficulties, since indirect investment opportunities are limited. Finnish pension and insurance funds have traditionally had most of their property assets invested directly in the Finnish market.

“But at the moment, it’s difficult to invest anywhere else than in the capital and other larger cities. The REITs model would allow for indirect investments elsewhere in Finland and would help to develop and diversify the domestic property market,” says Mr Leppälä. He also believes it would open up the market to more foreign investment.

Investors had an average of 9.1 per cent allocated to property at the end of 2007, which has slowly decreased over the last five years. Property makes up more than a quarter of all domestic investments (26.3 per cent).

“The REITs model has been very beneficial in other countries,” says Mr Leppälä. He thinks that there should be the same opportunities to develop the Finnish market as there are in other European states. Ms Huber at FKL agrees, but is also concerned about proposals requiring REITs to be listed.

“We don’t think REITs should automatically have to be listed, since that hasn’t always been the case elsewhere,” she says.

Mr Harju at the ministry of finance expects the legislation to be in place by the beginning of next year. The consultation continues.

OUR VIEW

Once again, politics seems to have won over economics. The Finnish government’s proposals of limiting REITs to only include residential property are clearly based more on political needs than the interests of investors. While it is understandable that the government wants to use REITs as a means to encourage more available housing and thereby fulfil its election promises, it is not necessarily good for investors.

It is not certain that residential property is the most interesting investment from an investor’s point of view, compared to offices and infrastructure, for example.

For the industry, which has lobbied for the introduction of REITs for over 10 years, it must be a great disappointment to end up with such a limited model. And since Finnish funds tend to have a large property allocation to the domestic market, the matter certainly is important.

More general REITs would also allow for indirect investments outside of major cities and help diversify the property market.

But, for investors looking to take advantage of a more diversified property market, it must be regarded as a significant first step. And the government has also not excluded including other types of property for REITs – although that is likely to happen at a later stage.

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