INVESTMENT
basic rate, those who pay the higher rate, and even greater for pension funds. Again quoting Deloittes among other investment advisers:
After tax After tax Advantage from co. from reIt
Basic rate
tax payer Higher rate
tax payer Pension
Fund
• • •
• •
• 72 54 72
Other AdvAntAges Investment in a REIT is:
Liquid and tradable Easily accessible
Diverse, over many property assets A provider of regular income
Inexpensive, stamp duty is only 0.5 on shares compared to SDL7 at four per cent on property
A means of investing in a wider range of property such as business parks, shopping centres and industrial property.
The property industry welcomed George
Osborne’s budget, which went further than even the most optimistic within the industry could have predicted. Notable successes included the disaggregation of stamp duty on bulk house purchasing, potential changes to the UK REIT regime, a simplification of the planning system and allowing businesses to lead neighbourhood planning in predominantly business neighbourhoods - all of which the BPF had been encouraging the government to deliver. Whilst changes to the
planning system had been widely expected, changes to the way stamp duty is calculated and a potential lowering of the REIT barriers were two pleasant surprises.
80 60 100 11.1% 11.1% 38.9%
the Budget PrOPOsAls If all of the proposals are put into effect, the new REIT regime will be more flexible, less costly and attract new sources of rented property. The two per cent conversion charge will
be dropped so that existing owners of rented property can convert to REIT status without a front end charge. The new investment universe could well appeal to pension and investment funds, pub groups, storage companies, owners of hotels, restaurant and entertainment chains where ownership of property and operational management are two widely different skills. This more flexible environment will
enable small pension funds to join hands and even those who compete at an operational level such as entertainment groups to offload properties to a single REIT. REITs specialising in residential property
will enable developers to build residential estates and blocks of flats while housing associations and local authorities may see conversion as a means of refinancing portfolios while retaining management or
BPF comment on ReIts aFteR the aPRIl 2011 Budget Stamp duty has long
been an obstacle standing between large institutional investors, such as pension funds and investment in residential property. If institutions could be
attracted in greater number into the residential sector, a significant increase in new homes would result. For example, a fund of £1bn could see as many as 5,000 new homes built, based on average house prices. The removal of some of
the barriers to entry to the REIT regime should also provide a timely boost to investment in UK property and the REIT sector. Liz Peace, chief executive
of the BPF (pictured left), said, “This is a budget that the property industry will want to get behind. It has a general thread that is supportive of enterprise and a number of issues on which our industry can genuinely feel it is being supported. “We are particularly
pleased that the government has been willing to engage on issues such as planning reform, REITS and the stamp duty bulk purchase rules. The government has listened to ours’ and others’ representations and you cannot ask for much more than that. “Some aspects remain
work in progress, such as the use class issue and REIT reform, but I am sure the industry will continue to provide its considered expertise in support of the government’s objectives.”
contracting property management out to specialist providers. There are still many questions to be answered. Some quite technical questions need
early decisions such as a ruling on the deduction for Capital Allowances for plant and machinery which save tax for taxpaying companies. Since REITs pay no tax these allowances are of no value and are known as ‘shadow’ Capital Allowances, so a means must be found to deal with this anomaly. A proposal included in the June 2010
budget under the last labour government would have allowed the payment of stock dividends as PIDs so that REITs could conserve cash to develop the business. The British Property Federation, BPF, has energised its legendary lobby power to persuade the Chancellor to pass the necessary measure which will cost the Treasury nothing since investors would pay tax on these distributions. The House of Lords Select Committee
on Economic Affairs supports such a move while describing the current legal set up as “Unduly Cautious” until all of the proposals are put in place. Once the requirement for REITs to be
listed on the official list (the Stock Exchange) has been removed they could be listed on AIM or even unlisted to allow new ventures to be set up. The requirement that they should be diversely owned could also be relaxed if even a small number of shareholders, eg pension funds, are themselves widely owned or have a wide range of beneficiaries. Will a flow of new REITs be delayed until
there is stability in both commercial and residential property markets, even if there is no sign of price increases? It took a bust and a subsequent substantial improvement before the American REIT market took hold. Since existing UK versions are London and south east centred, they are stable with useful increases in asset values and rents in 2011, but although the structures and mechanisms are in place it may well be 2015 before they are used and tested by new REITs. If the Chancellor follows through on his
proposals and accepts the property industry suggestion, perhaps he will look again and allow private pension funds to invest in the PRS. Now that would increase the number of
homes to let.
Add your own comments online at:
www.propertydrum.com/articles/REITs
PROPERTYdrum AUGUST 2011 67
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