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Reits rules should be reformed to support recovery, BPF tells chancellor

Rules governing UK real estate investment trusts (Reits) should be liberalised to encourage new entrants to the market and help the commercial property sector recover, according to the British Property Federation (BPF).

Reits are property investment companies with a special tax status that eliminates corporation tax levies in return for 90% of the rental income on the properties being distributed back to investors where it is then taxed.

The introduction of the regime in January 2007 saw a rush of early conversions by large FTSE-listed companies such as Land Securities, British Land and Segro. In its Budget submission this week, the BPF will tell Alistair Darling, the British chancellor, that the financial crisis and the structure of the Reit regime itself is hindering growth and making development very difficult.

The BPF has been engaged in talks with officials in recent months over two issues:

• encouraging the growth of the Reits sector so that (once economic conditions permit) it can continue to attract new entrants and capital from a wide range of sources, and
• helping residential REITs- the greatest missed opportunity – emerge to help the wider housing sector. The value of UK residential property is estimated to be £3.5 trillion of which 30% is rented, 13% privately. It is a vast pool of potential investment for residential Reits which could transform the British housing market through a rented sector backed by institutional investors and professional property managers akin to the commercial sector.

Peter Cosmetatos, BPF director for finance, said: “Evidence from the USA and Australia show that Reits can play an important role for facilitating the recapitalisation of the property sector after a crash, and at the same time cleansing the balance sheets of banks whose exposure to real estate is felt to be too great. We intend to carry out further work in this area more broadly within the property industry and in collaboration with colleagues in the banking sector and capital markets with a view to putting specific proposals to Government in due course.”

John Richards, chief executive of Hammerson, said: “There is a wealth of international experience that shows how Reit sectors grow in response to increased flexibility. France’s thoughtful adjustments to the SIIC* (French Reits) regime is a good example. Failure to act in the UK will be a missed opportunity, not least because, with some appropriate liberalisation, Reits have the capacity to be a large part of the solution to some of the banking sector’s over-exposure to real estate. This was well demonstrated in the USA and elsewhere.”

*SIIC is effectively a French Reit, It stands for sociétés d'investissements immobiliers cotées and refers to French listed real estate investment companies):

Jonathan Thompson, international head of real estate at KPMG and chair of the BPF’s finance committee, said: “The entry charge is a now serious barrier to any new players seeking publicly listed equity. New Reits are unlikely to have any latent gains and so paying a conversion charge at 2 per cent of a firm’s property value – out of cash – is a major disincentive. The ability to defer the entry charge until property is sold is a must.

“The other important measures that we recommend in this area are removing the listing requirement and allowing those selling property to a Reit, in return for shares in it, to defer the obligation to pay tax on any gain until they dispose of the shares. Failure to act could also make the recovery more difficult.”

Rupert Dickinson, chief executive of Grainger, the UK’s largest residential landlord, said: “With the right legal framework, it should be possible to overcome doubts about the yield from residential property. The enormous appetite of the public for exposure to residential property through direct investment is one reason while the secure, reliable and inflation-proof income that residential rents can offer to insurance and pension funds is particular long-term benefit we should look to promote.”

Francis Salway, chief executive of Land Securities and BPF president, said: “Now is a great opportunity to finesse the Reit regime and maximise the prospects of attracting new equity capital into the sector at a time when we can expect banks to be reducing their exposure to commercial property.”

Ian Coull, chief executive of Segro, said, “If we look at how to get property off the balance sheets of banks and into Reits, in which they could hold shares, market clearing prices would begin to become established again. This would help to drive forward a recovery, mirroring what happened in the USA during the late ‘80s. The ongoing increase in yields offers a unique opportunity for the government to plan legislation for the recovery, enabling investors to take advantage of cyclically low prices.”

Liz Peace, BPF chief executive, said: “The severity of the downturn has prompted companies to change their financial strategies to ensure the ongoing resilience of their business for shareholders. It is important than Reit regulations do not prevent the companies from managing their resources in the most appropriate way at this time.

“The key areas we have identified as problematic are: the inflexibility of the 90% distribution requirement; the operation of the profit-financing cost ratio in an environment where volatile fair value fluctuations in the pricing of financing costs can have a dangerously distortive effect; and the way cash raised other than from property disposals is treated for the purposes of the balance of business test.”

For more information and all PR and media queries, please contact Andrew Teacher, Head of Media, on 020 7802 0113/ 07968 124545/ ateacher@bpf.org.uk