By Peter Dougherty
ARE you tempted to buy a home before Spain’s rising property prices make them too expensive to afford?
In the game of Monopoly, we buy property so we can charge rent instead of paying it to other players.
In Spain, we buy property for similar reasons. What isn’t well known is that an alternative way to participate in the real estate sector has existed in Spain since 2012. One that doesn’t require committing much of our life savings.
It’s called a SOCIMI (Sociedad Anonima Cotizada de Inversión en Mercado Inmobiliario).
Unlike the board game, we can’t buy SOCIMIs using Monopoly money.
Nonetheless, they enable us to take part in the local real estate market without cashing in the bulk of our hard-earned savings just to get started.
The game of Monopoly originated in the US in 1935, the UK version of the game began in 1936, and Spain’s variation of Monopoly dates back to 1961.
Coincidentally, 1961 is the same year that ordinary investors in the US were introduced to a new way to invest in real estate: the Real Estate Investment Trust (REIT).
Prior to the creation of REITs, real estate investment was typically only available to those who could afford to buy and manage properties directly. REITs changed that.
A REIT owns, operates, or manages income-producing real estate and allows people to invest in that real estate by buying shares – just like buying stock in any other company.
They were established to make real estate more accessible, diversified and liquid and they enjoy special tax benefits if certain requirements are met.
Since they were first introduced in the United States, REITs have been established in a great many other countries including Australia, Japan, Hong Kong, South Korea, the United Kingdom, Belgium, France, and Germany.
The popularity of REITs is directly related to the numerous advantages they offer investors:
- Professional management
- Hedged against inflation
- Transparency: publicly traded REITs reuse regular reports
- Investors gain access to highly diversified real estate portfolios
- Ease of valuation: like any other stock, REITs listed on an exchange are valued at market price
- Small minimum investment requirement
- Specific knowledge isn’t needed to invest in REITs vs. buying real estate directly
SOCIMIs are the Spanish equivalent of REITs. Since their creation in 2012, SOCIMIs give ordinary investors in Spain access to free real estate market in a diversified manner with a low minimum initial investment, through a liquid product with favourable tax treatment.
They provide investors with greater opportunities to access real estate assets, currently, more than 100 SOCIMIs are publicly listed in Spain.
Several conditions must be met to qualify as a SOCIMI:
- At least 80% of its assets must be invested in land, urban real estate for leasing, or shares of other real estate companies
- Its properties must be held for at least 3 years
- At least 80% of its income must come from rental income or dividends from other real estate companies
- It must distribute most of its profits as dividends each year
If all legal requirements are met, in most cases SOCIMIs pay 0% corporate income tax.
Thus, unlike a typical company that pays corporate taxes and then passes after-tax dividends on to its investors who, in turn, pay individual taxes on the dividends they receive, SOCIMI income is only taxed once as a rule.
In the end, SOCIMIs may not come with Monopoly’s tiny green houses, but they’re redefining how the real estate board in Spain can be played.
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