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REITs

Real estate investment trusts (REITs) are companies (or groups of companies) that provide a tax efficient, liquid and well-regulated way for investors to invest in commercial property. However, the UK REIT regime was designed to attract the existing UK listed property companies, rather than new entrants. It was very successful in that objective, but the time is right to explore how the sector can be helped to grow.

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What's the issue

After successfully introducing REITs in the UK (and cashing in some £1.2 billion of entry charge paid at the top of the market by property groups converting to REIT status), the government has not really looked at how it can build on its creation by helping the sector grow. That is in stark contrast to France; and the 50 year history of REITs in the United States also shows how well-designed liberalising interventions in the regime can stimulate its development.

We are pleased with the dialogue we and the UK's REITs have with government - particularly at the technical and operational levels - but we want to see a more flexible regime that can draw in more companies, and more capital.

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Why is it important

REITs are a growing global brand, and despite their short existence, the UK's REITs have already demonstrated both their ability to raise equity (including in particular from overseas), and their ability to access the debt markets

The UK REIT regime in particular has relatively high barriers to entry, including an entry charge set at 2% of gross assets and the requirement for listing on a recognised stock exchange (a concept that excludes AIM). As a result, many new funds are formed offshore - and once they are offshore, they are not likely to come back to the UK. We believe that the UK would benefit from a more flexible, competitve REIT regime.

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What we're doing about it

From the beginning, we have engaged with HM Treasury and HMRC officials to address niggling problems in the REIT legislation, and we regularly bring industry groups together with HMRC officials to discuss administrative and operational issues. Our efforts in these areas have contributed to a healthy relationship between the UK's REITs (and the advisers who serve them) and officials.

What has been more difficult is getting government to focus on the strategic possibilities for growing the UK's REITs sector. After years of talking about residential REITs, private REITs, mortgage REITs and so on, we finally won a commitment from the Treasury to look at whether barriers to entry could be lowered in a meaningful way without loss to the Exchequer.

In the spring of 2011 the government conducted an informal consultation covering many of the issues on which we have lobbied in recent years, such as a relaxation of the listing requirement and a simplification of the diverse ownership tests that REITs must satisfy. In some respects the consultation went even further, with the mooted abolition of the 2% conversion charge that is such a barrier for offshore funds tempted to come back to the UK.

The government has confirmed that those measures will indeed be implemented in Finance Bill 2012, so we look forward to seeing the draft legislation towards the end of 2011.

When combined with the changes to the SDLT rules surrounding the bulk purchase of residential property, conditions are finally looking more conducive to the emergence of residential REITs. We are optimistic that, taken together, the proposals outlined in the 2011 Budget could have a real impact on boosting investment in UK property, and in the scale and health of the UK’s REIT sector.

REITs contact

Peter Cosmetatos

Director of Policy

(Finance and Investment)

pcosmetatos@bpf.org.uk

REITs contact

Ion Fletcher

Senior Finance Officer

ionfletcher@bpf.org.uk

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FT Adviser - The Reit stuff

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Costar - Debt buying REITs ‘could ease bank deleveraging congestion'

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Estates Gazette - Battle looms over EU 'tax on REITS'

BPF in the news - 16/11/2011
The Wall Street Journal - Changes Pave Way For U.K.'s First Residential REIT