Review your content’s performance and reach.
Become your target audience’s go-to resource for today’s hottest topics.
Understand your clients’ strategies and the most pressing issues they are facing.
Keep a step ahead of your key competitors and benchmark against them.
add to folder:
Questions? Please contact [email protected] 
All questions
Overview of the market
The main highlights of the Belgian capital market for the period from 2019 to 2021 are as follows:
The Belgian capital market is dominated by (local and foreign) institutional investors, being REITs or private equity real estate (PERE) funds. They are also the most involved in large-ticket transactions when it comes to offices. One specific asset class deserves to be mentioned: logistics. For a long time, Belgian REITs took the lion’s share on this market, but 2021 saw a trend emerging of the teaming up of local developers and PERE funds to guarantee first deal certainty on their pipelines and their continued involvement in their relationship with their customers; and to grant second access to a pipeline for pre-agreed terms outside an auction process.
Recent market activity
2020 notably saw the IPO of Inclusio. At the end of 2020, the real estate portfolio, made up of 58 buildings (703 housing units, three social infrastructure buildings, 13 commercial units and two office buildings) and spread over 69,287 metres squared, amounted, in terms of market value, to €129.2 million. Inclusio is the first Belgian REIT specialised in social housing.
In 2021, the Belgian REIT Leasinvest merged with developer Extensa to become a mixed real estate investor and developer, acting under the new name Nextensa. The merger consisted in the contribution of Extensa’s shares to Leasinvest’s capital in exchange for new issued shares, followed by the admission to trading of these new issued shares. The total value of the investment portfolio is approximately €1.4 billion, distributed among Luxembourg (45 per cent), Belgium (42 per cent) and Austria (13 per cent). The total value of the development portfolio is approximately €0.3 billion. This merger was not a public-to-private transaction since Nextensa remains stock-listed, but it abandoned its REIT status in Belgium.
On 25 February 2022, the Belgian REIT Befimmo announced a voluntary public tender offer on all its shares by a subsidiary of PERE fund Brookfield at a price of €47.50 per share, which represents a premium of 51.8 per cent over the closing share price. Subject to review of the final offer, the board of Befimmo has expressed its support for the transaction, and the two largest shareholders have each entered into a soft irrevocable undertaking to tender their shares. The transaction obtained clearance from the Belgian merger control authority on 6 May 2022.
In terms of transactions executed by Belgian REITs, the trend towards a further specialisation per asset class and internationalisation remains. The largest transactions of 2021 to be reported are:
In terms of international presence, the most active Belgian REIT is Aedifica, with investments in Finland, Sweden, Germany and the Netherlands and, in recent years, expansion through new acquisitions in Ireland, Spain and the United Kingdom. This internationalisation is a trend we have noticed with regard to all major Belgian REITs.
Belgium is not a country of establishment of PERE funds. However, it is nevertheless an attractive investment country for foreign institutional investors.
The most significant transactions reported in recent past years are summarised below. We have chosen to mention the transactions executed by South Korean investors in this section considering their structure on closing: these transactions were completed and funded by securities firms that, post-completion, place securities on the market, either with (Korean) individuals or (Korean) institutional investors.
2020 saw the largest single asset transaction ever on the market, with the purchase of Finance Tower by Meritz Securities (South Korea) for a reported investment value of €1.2 billion. The Finance Tower is let to the state. The seller was the Dutch developer Breevast. In addition to the investment volume, this transaction was also remarkable as it was structured as (multiple) asset deals, with the unwinding of a leasing structure.
The largest transaction of 2021 was the acquisition of the office building Astro Tower by Union Investment (Germany), signalling their return as a purchaser on the Belgian market. The Astor Tower is one of the tallest office towers in Brussels. Like many large-scale transactions, the acquisition was structured as a share deal.
As previously mentioned, 2022 should see the return of South Korean investors on the purchaser side, and started with the acquisition by KB Securities of the North Galaxy, an office building located in Brussels and currently let to the Belgian Ministry of Finance. The sellers were AXA Belgium and ATP, a Danish pension fund. With a reported investment value of over €600 million, this transaction was the second-largest single asset transaction in Belgian market history and was most probably the largest transaction of 2022. The transaction was structured as a share deal, with a ‘double FIIS structure’, being the incorporation of a Belgian specialised real estate investment fund (FIIS) by the purchaser (BidCo), followed by the purchase of the shares in the target company, the conversion of the target into a FIIS and the merger of the target into the BidCo. This type of acquisition structure allows for an optional financing structure and cash repatriation to the ultimate investor.
Real estate companies and firms
Belgium counts 17 REITs (société immobilière réglementée (SIR)). The top-five REITs, in terms of fair value of the portfolio, are:
As an alternative to maintaining the attractiveness and competitiveness of Belgium, the possibility to take the form of a SIR commonly named BE-REIT has been introduced to allow undertakings investing in real estate that wish to opt for a regulated status (and thus benefit from a preferential tax regime) to avoid the burden of compliance with the Belgian Act on Alternative Investment Fund Managers (AIFM Law).
The activities of a BE-REIT may only consist of:
The BE-REIT must thus mainly engage in an operational activity with a long-term strategy instead of an investment activity. The BE-REIT does not, therefore, follow a defined investment policy but has a business strategy based on creating long-term value (instead of engaging in buying to sell within the framework of a defined investment policy). To that extent, the BE-REIT Law requires the BE-REIT to exercise its activities itself, maintain direct relationships with its clients and suppliers and have, for the purpose of exercising its activities as described above, operational teams at its disposal that make up an important part of its workforce.
In terms of capital and listing requirements, the BE-REIT must have a minimum share capital of €1.2 million and all shares must be listed on a stock exchange, with a minimum 30 per cent free float. Listing can only occur after registration on the BE-REIT list and after the publication of a prospectus.
BE-REITs are under the supervision of the Financial Services and Markets Authority (FSMA).
BE-REITs are formally subject to income tax, but their investment proceeds (including capital gains) are not included in their taxable base. Taxation of the investment occurs at two different moments:
It is important to note that the basis on which the dividend withholding tax applies is different depending on the investors and the underlying investments.
Distributions made to Belgian residents are subject to the withholding tax for the entire amount of the dividend distributed.
Distributions made to foreign residents are subject to withholding tax only for the part of the dividend stemming from Belgian-source profits; foreign-source profits are exempt from Belgian withholding tax.
The principal activity must be the active management of real estate assets, subject, however, to diversification requirements and leverage restrictions:
Developments are allowed but cannot be sold before, during or within five years of completion (no promotion). The BE-REIT is also allowed to hold shares in subsidiaries investing in real estate, including institutional BE-REITs, but specific requirements, including minimum participation thresholds, apply in the case of public–private partnerships or joint ventures.
In terms of returns to investors, the BE-REIT is obliged to distribute annually 80 per cent of its net profits (as determined by royal decree) less the net decrease of its indebtedness. Capital gains realised are not included in this distribution obligation provided that they are reinvested within a four-year period.
The trend within Belgian REITs is specialisation in terms of the asset class and internationalisation, which bring their own challenges.
Specialisation in terms of asset classes is challenging when considering the risk diversification requirement. The FSMA has indeed confirmed that this risk diversification requirement is not only assessed considering the value of a property but also the exposure to the tenant. Tenants of the same group are considered as one single tenant for the purposes of this assessment. Under certain conditions, a derogation is still possible, but it then means that the leverage limit of the REIT cannot exceed 33 per cent of its consolidated asset value.
The absence of a harmonised REIT regime in Europe, certainly combined with the fact that Belgian REITs are operating companies, brings its own regulatory and tax challenges. A notable example is whether Belgian REITs can opt for the FBI regime for their Dutch subsidiaries, which, based on the shareholders’ test, requires the Belgian REIT to be similar to an FBI while the activities allowed are not exactly the same. The same is true in terms of taxation and profit repatriation: it is not always possible for a Belgian REIT to apply for a similar regime in the country of investment and, in such a case, the Belgian REIT faces investments in foreign countries subject to local income taxation and to withholding tax when profits are repatriated.
Although a legal and tax regime is available, Belgium is not a country of establishment of PERE funds. Most of the parties active in the Belgian market are foreign investors, mainly from France, Germany and Luxembourg (with SICAV-SIFs and RAIFs most of the time serving as fund platforms for foreign institutional investors).
Belgium counts 231 PERE funds or FIIS, a dedicated fund structure available for institutional investors. The funds already formed to date can, however, be described as ‘captive funds’, holding local real estate investments of local players (e.g., banks or insurance companies) or of foreign institutional investors.
The FIIS aims at providing asset managers and institutional investors with a flexible and efficient fund vehicle for their real estate investments, in Belgium and abroad. It is a closed-end real estate fund whose main characteristics are:
The FIIS tax regime and the BE-REIT tax regime are the same.
The FIIS can only invest in real estate, defined as follows:
With respect to shares in a Belgian real estate company, the FIIS can acquire those shares but is obliged either to merge this company, or to convert this company into a FIIS within 24 months.
The FIIS is subject to a minimum investment volume of at least €10 million at the end of the second financial year following its inscription on the FIIS list. This is a one-off assessment based on the acquisition value or the appraised value used to compute the exit tax.
Promotion, understood as a main or ancillary activity implying a forward sale or a sale within five years after construction, is strictly prohibited.
No compulsory diversification requirement or leverage limits apply to the SREIF.
The FIIS is also subject to the same annual distribution obligation as the BE-REIT.
On the regulatory side, it should be determined in which category the FIIS shall fall:
Transactions
In deals involving Belgian PERE funds (FIIS), the regulations are extremely limited and are meant to protect the institutional character of the FIIS:
In public M&A, two typical deal structures can be envisaged: a share purchase and a merger. Relevant regulations and constraints are described below.
A potential buyer can purchase shares of Belgian REITs either on the market or through private sales. Two compulsory requirements will then apply:
A mandatory public takeover requires a prospectus approved by the FSMA.
A public takeover is subject to the observance of a strict (disclosure) procedure and requires the involvement of the FSMA and of the target.
The bidder must file its announcement and a draft prospectus with the FSMA, which shall announce the bid and notify the target one business day after receipt. This is merely an announcement, and is not yet an approval of the prospectus.
The period of review of the prospectus by the parties starts with the comments of the board of the target filed with the FSMA and the FSMA approving the prospectus. After formal approval of the prospectus, the board of the target must file a draft response memorandum, also to be approved by the FSMA.
As from this last approval, the acceptance period starts, during which the board of the target shall also inform the works council. The acceptance period often lasts for two to 10 weeks.
Parties wishing to launch a counter bid have until two calendar days before the end of the acceptance period to announce their intent. It must, however, be noted that a counter bid shall only be accepted provided that the price per share offered is 5 per cent higher than the price of the initial offer.
The results of the offer are published five business days after the closure of the acceptance period, with the price being paid 10 business days after this publication, followed by a five to 10 business day period for the potential reopening of the takeover bid.
In practice, shareholders owning an important participation often enter into (soft) undertakings to tender their shares to the offer.
There are two important aspects to note within this process:
Belgian mandatory takeover legislation provides for certain exemptions, of which the following are the most relevant. No mandatory bid will have to be launched in cases where the 30 per cent threshold is exceeded:
Both transactions are subject to mandatory rules provided in Belgian corporate law, including quorum and majority requirements:
In terms of pricing and the exchange ratio, the Belgian REIT legislation also contains strict requirements in the context of a merger:
Except in cases where the subsisting entity intends to go public or one of the restricted exemptions applies, a prospectus approved by the FSMA is required to issue or list the new shares, or both.
As from the crossing of a 5 per cent threshold, on a stand-alone, group or consortium basis, the shareholder is obliged to disclose its participation to the REIT, with such disclosure being published. The threshold is often lowered to 3 per cent in the articles of association of most REITs.
The law implementing the Shareholders’ Rights Directive II allows listed Belgian companies to request certain information from intermediaries to identify their shareholders.
Assuming that there is no hostile bid, the board shall most probably collaborate on a regular due diligence exercise over the REIT. The board decides which information will be disclosed taking into account various factors such as the corporate interest of the target, confidentiality duties, equal treatment of shareholders, as well as EU Market Abuse Regulation (MAR) and competition aspects. The Belgian takeover legislation requires that the same information is provided to any competing bidder. Confidentiality agreements with the target or reference shareholders, or both, are common practice to ensure confidentiality of negotiations and information obtained within the context of the due diligence.
Since the REIT is listed on a regulated market, the information about a potential transaction and its financing may be inside information for the purposes of the MAR. The parties involved will usually acknowledge being familiar with the statutory prohibitions and restrictions for holders of inside information established under the MAR, and the supplemental rules enacted thereunder, as well as with the legal and regulatory consequences relating to the misuse or improper circulation of inside information, including sanctions and penalties associated with serious or very serious offences under the MAR, and with criminal offences regarding insider trading on the securities markets, and undertake to comply with said prohibitions and restrictions.
The parties involved will also have the obligation to maintain ‘insider lists’ The FSMA can request the communication of such list.
The FSMA may require the parties to a potential bid to make a public announcement, for example, if there are rumours in the market (the put up or shut up rule).
If the bidder receives inside information on the target, it must disclose such information in the prospectus, and it cannot acquire or sell target securities until this information is no longer sensitive.
In public M&A, with a REIT as a target, the consideration depends on the type of deal structure: in a share purchase and (mandatory) public takeover, the consideration will consist in cash, while the consideration in a merger will consist in shares.
In the case of a voluntary public takeover, the bidder can subject its bid to conditions, most of the time referring to the level of participation he or she wants to acquire. Mandatory public takeovers cannot be conditional.
Because of the high level of transparency that is imposed on REITs, the practice shows that representations and warranties, indemnification and covenants are not usual, and any risk is usually factored into the offered price.
The situation is quite different when the REIT acts as seller or purchaser. In such a case, the deal terms are quite similar to any other real estate transactions, with usual conditions precedent, representations and warranties, indemnification clauses and covenants. One specific deal structure to mention when a REIT acts as purchaser: in practice we often see that such deal is structured as a contribution in kind in the capital of the REIT and remunerated in shares (subject to the 30 per cent threshold not being exceeded). The ‘seller’ then places the REIT’s shares on the market shortly after the acquisition, subject to a lock-up period applicable to 5 to 10 per cent of those new issued shares. This type of deal guarantees an acquisition without cash contribution for the REIT concerned.
If the public M&A takes the form of a voluntary public takeover, the bid must relate to all securities issued by the target. The bid may be conditional on the approval of competition authorities, or any other regulatory approvals, and is often subject to conditions, such as an acceptance threshold, or the non-occurrence of a material adverse event beyond the bidder’s control. In practice the FSMA refuses to approve any condition that is likely to limit the success of the bid.
PERE transactions are similar to other real estate transactions, with usual conditions precedent, representations and warranties, indemnification clauses and covenants. When being a target or a party to a transaction, PERE funds are used to take out insurance to limit, or even reduce to zero, their own exposure.
The most widely used insurance, imported from the UK market, is warranty & indemnity (W&I) insurance, which covers undisclosed risks for the period prior to closing. Parties usually negotiate their terms of acquisition and then provide the purchase agreement to an insurance broker. The insurance company usually reviews the agreed representations and warranties to, as the case may be, exclude some from the insurance coverage. Usual exclusions concern the condition of properties, certain environmental matters and transfer pricing.
On a few occasions, we have seen purchasers also buying title insurance to guarantee title to the underlying real estate asset. Indeed, Belgian mortgage registers have a ‘negative’ value: they will only mention disputes over the ownership when such litigation has started. The absence of such mention therefore does not mean that the ownership is not disputable.
The market is currently experiencing the development of tax insurance to guarantee identified risks – most of the time at the exclusion of transfer pricing. In such process, (at least) the purchaser must provide the insurance with a robust defence memorandum stating the arguments in favour of the taxpayer and the likelihood of success in a case of litigation.
No hostile transaction is to be reported on the public M&A side. The current public bid of Brookfield on Befimmo has been supported by the management. This is partly due to the fact that most Belgian public companies are owned by a controlling shareholder or group of shareholders. In addition, Belgian law allows the target’s board of directors to implement measures to safeguard the corporate interest and frustrate a hostile bid.
There are two layers of financing: acquisition financing, typically to acquire the shares of the target (whether the latter is listed or not); and real estate financing or refinancing with the target as borrower.
Acquisition financing is characterised by the legal prohibition of financial assistance, meaning that the target cannot grant security interests over its assets in order to guarantee or facilitate the acquisition of its own shares. Acquisition finance is therefore most of the time an unsecured financing with the following notable exceptions:
Real estate financing will first depend on the leverage capacity of the target company; for both corporate law and tax law reasons, it is indeed not possibly to over-leverage a company, or to grant security interests (in a portfolio refinancing scenario) in excess of the company’s own benefits of the transaction unless appropriate justification exists considering the company’s own corporate interest. Up to this leverage capacity, the company acts as borrower and grants a market standard collateral package that includes a mortgage, pledge of receivables (e.g., rent receivables, insurance receivables) and pledge of bank accounts. The shareholder usually pledges the shares of the target company and subordinates any intragroup loans. A few points must be kept in mind:
The typical deal structure described above does not, as such, have adverse tax consequences for the REIT or the FIIS concerned:
The situation is, however, quite different for the investor that will acquire shares in the REIT or the FIIS. Dividends distributed are indeed subject to 30 per cent withholding tax subject to an exemption or reduction based on an applicable tax treaty. The withholding tax exemption as provided for by the EU Parent-Subsidiary Directive is indeed not available. Important to note is the dividend withholding tax exemption provided by domestic law when the foreign investor is a pension fund. To benefit from this exemption, the pension fund must:
The pension fund must deliver a certificate to the Belgian payor confirming the fulfilment of the above conditions to benefit from the Belgian withholding tax exemption.
In deal structures where the REIT or the FIIS acts as purchaser, a specific tax regime should be mentioned. In the case of a merger in a REIT or a FIIS, or in the case of a contribution of a real estate asset to the REIT or the FIIS, the latent gain is not subject to the ordinary corporate income tax at 25 per cent, but to the exit tax at 15 per cent.
Besides the EU AML requirements and EU sanctions, Belgium does not have entry barriers for foreign investors in real estate, except because of the implementation of Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investment in the European Union in the case of operations in a highly sensitive sector or in a sector likely to affect security or public order, like critical infrastructure.
Investors should pay specific attention to EU and local merger control regulations, as practice shows that the group and market definitions can be quite broad (certainly for PERE funds where the asset manager has the control and is part of a large international group), and the Belgian thresholds are quite low.
Corporate real estate
The trend in the Belgian market is based on asset classes, and not on the type of investor. For hotel, leisure and (care) housing, the trend is to separate opcos and propcos, the investor keeping the propco and the opco being carved out, most of the time via a regular sale of the business. A standard (long-term) lease agreement is then concluded between the opco and the propco. Specific to the hotel sector, it is nevertheless frequent to see one single structure, with the operation being taken care of via a hotel management agreement.
Outlook
The current market challenges for both public and institutional actors are the increase in the interest rate, the increase in construction costs and the increase of the indexation. It remains to be seen to what extent these will influence market activity, but the current feverishness in the market suggests that a slowdown in activity will occur after the summer.
The public takeover of Befimmo should, if completed, be the major highlight in the sector and, in terms of trends, it remains to be seen how Belgian REITs will further internationalise, as the case may be, via public M&A transactions such as cross-border mergers.
Outlook and conclusions
add to folder:
If you would like to learn how Lexology can drive your content marketing strategy forward, please email [email protected].
© Copyright 2006 – 2022 Law Business Research
About Author
