By Michele Lerner

As REITs thrive around the globe, governments in countries without this type of approach to real estate investment are considering the potential benefits of REITs on their economies.

In Finland, a pending proposal would establish a REIT regime in 2009. Legislation passed by the Finnish Parliament applies only to residential property; however, a number of groups continue to lobby to have other property types included.

"On Jan. 31, 2007, the Finnish Parliament's Commerce Committee stated that the government must take action to develop legislation that will solve real estate companies' taxation problems in order to make Finland more competitive," says Jaakko Leinonen, chief advisor, real estate investment and finance, at RAKLI, the Finnish association of building owners and construction clients. "The government's housing policy was published in the end of 2007, and it was accepted by the Finnish government on Feb. 14, 2008," he continues.

Pending Politics

The main reason for introducing REITs in Finland is that the government wants to direct more private capital into housing projects, specifically to some developments on the outskirts of Helsinki, says Allan Saunderson, managing editor of Property Finance Europe.

"However, Finland's situation is a mirror image of the political resistance across the Nordic nations to REITs, due to the corporate tax-free status of REIT vehicles," he says. "They view it as unfairly favoring real estate over the manufacturing industry. That is why, for example, Sweden is looking long and hard at the introduction of REITs, but has made little progress on legislation."

Additionally, Leinonen says that political influences have predisposed the REIT legislation to focus on residential property, because many legislators believe that REITs would help the housing market. "RAKLI has been lobbying together with Tela, the Finnish Pension Alliance, the Federation of Finnish Financial Services (FK), The Finnish Association of Mutual Funds and The Finnish Association of Real Estate Brokers to include additional types of property in REITs," he says.

Missing Opportunity

Even though the European Public Real Estate Association (EPRA) is encouraged by the discussion currently taking place in Finland, the organization would still like to see more progress. "Various political issues seem to hamper an ideal Finnish REIT structure, with the government focusing its efforts on the residential sector only," says Fraser Hughes, research director for EPRA. "At this time, commercial real estate is left out in the cold, and we believe this is not optimal for the Finnish market, or the broader property investment market."

Additionally, Hughes says that REIT structures around the world allow a broad range of commercial and residential activities, and it would be a missed opportunity for the Finnish market to introduce such a narrowly focused Finnish REIT. "In fact, the flexibility of other REIT structures around the world offers opportunities to take over Finnish property vehicles; potentially taking management and ownership away from the local market," he says. "By not introducing a competitive and comparable REIT structure, the Finnish government runs the risk of losing its influence over the property market in future years."

Making History

Saunderson sees Finland's REIT introduction as a small event by itself, with only four or five REIT companies forming. "Finland's REIT legislation will attract only limited international interest, but it is a larger event to the extent that it is the first legislation of its kind in the Nordic region," he says.

Leinonen says that it is hard to determine at this early stage which real estate companies may opt to transfer their assets into a REIT structure. "Currently, Sponda, Citycon and Technopolis are the three largest listed real estate companies, but the drafted legislation will unlikely affect them," Leinonen says. "The three largest residential real estate companies are SATO, VVO and Avara. Whether they decide to become REITs depends on which type of residential properties might be included in the residential REIT legislation, but it is too early to say."

Once the tax and property issues are resolved in Finland, Leinonen anticipates both domestic and foreign investors will be eager to invest in Finnish REITs.