A new amendment of legislation aims to increase the number of regulated real estate investment companies

4 July 2017

Regulated real estate investment companies - the Hungarian form of Real Estate Investment Trusts - are public limited companies investing in and managing real estate (“RIC”). Act CII of 2011 on Regulated Real Estate Investment Companies (“Act”) allowed the creation of such companies, and favourable tax rules apply to their operation. Still, RICs have not become popular due to the strict and ambiguous applicable legal provisions.

In order to support the establishment of RICs, the Hungarian Parliament clarified and eased the regulation as of June 20, 2017. The main elements of the amendment are summarized below.

Originally, RICs were permitted to issue only ordinary shares. After the amendment, RICs may also issue employee shares, but still may not issue preference shares (which would provide preferred rights related to dividends, voting rights etc.).

Certain portion of the shares (free float) of RICs has to be admitted to regulated markets (usually to stock exchange), but there is a limit on how much admitted shares may be possessed by one shareholder (free float limit). The calculation of the 5% free float limit has been amended, so that its calculation shall be based on the total amount of the company’s registered capital instead of only on the nominal value of the shares of the free float tranche.

If all the issued ordinary shares of a RIC are admitted to a regulated market, this calculation shall be made only on the day of the company’s registration as a real estate investment company. Therefore in such case the shareholders are allowed to acquire shares over the free float limit after the registration and to practice their shareholders’ rights after those shares without restrictions. If not all the ordinary shares are admitted to a regulated market, a shareholder who breaches the free float limit, is obliged to sell his shares beyond the limit and he shall not exercise the shareholder’s rights arising from these shares.

As a general rule, RICs shall pay at least 90% of their profit as dividend to their shareholders. When calculating profit, the amount of the transition margin related to changing to annual accounts in accordance with IFRS standards, which is accounted for as retained profit, shall not be taken into account. The above rule shall only be applicable to profit earned after the company became registered as a real estate investment company; therefore the profit earned before the registration or after the company terminated its registration shall be appropriated according to general rules, based on the company’s decision.

Under the Act liquid monetary assets shall mean bank deposits, government securities issued by any member state of the EEA or the OECD, debt securities issued by an international financial institution, as well as securities listed on recognized capital markets in the amount as indicated in the balance sheet of the company’s annual report. The amendment clarified that only those assets qualify as liquid monetary assets which the company is free to dispose of (e.g. collateral security shall not be deemed as such).

The Act regulates that senior executives of RICs must have a university degree, at least three years of management experience in fields prescribed by the Act and shall have no criminal record. As a result of the amendment, the university degree can be obtained in any field and not just in the fields of finance, economics or law.

It is clear from the aforementioned changes that the Hungarian Parliament would like to support the establishment of real estate investment companies. The amendment clarified provisions important to potential investors (e.g on dividends and shares) and also abolished unnecessary restrictions (e.g on the requirements for executives). We will have to watch the effect of these new rules in order to establish whether they reached their desired aims, and to decide whether any further amendment is required to make real estate investment companies attractive to market participants.

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