With draft legislation on Real Estate Investment Trusts (REITs) due to be finalized by the UK Parliament next week, a major property investor has called for more changes to widen their appeal.
After years of lobbying by the property and financial services industries, REITs legislation will be debated in a Parliamentary committee next week, before being presented to the whole House of Commons in July, as part of the 2006 Finance Bill.
Fund manager F&C argues that now is the time to incorporate further changes to widen the potential appeal of UK REITs. “We welcome REITs as a long awaited development in the UK investment arena. It will confirm property’s position as the main alternative asset class to equities and bonds,” says Paul Herrington, Head of UK Property Investment at F&C. “However, there are a few areas which merit further deliberation. In its current form, the REIT structure will appeal mainly to a few major existing quoted property companies – those large businesses with many shareholders, who tend to have an investment rather than development bias. Such companies ‘only’ need to pay a 2% conversion charge to become a REIT.”
F&C believes that the future appeal of REITs will be shaped by the proposed restrictions. These include the need to be listed on certain recognized stock exchanges – with AIM a notable exclusion, a proposed 10% cap on shareholders, restrictions on the level of gearing as well as rules governing income distribution and asset mix.
“The sheer costs will pose a challenge to potential new entrants,” says Herrington. “For example, new entrants to the REIT market must float themselves first, announce their intention to convert to a REIT and only then acquire the properties. Existing property unit trusts and Limited Partnerships will not be able to convert to a REIT structure under current proposals. There are other types of property investment vehicle which are currently outside the REIT regime, including offshore investment trusts, limited partnerships and some very successful companies listed on AIM which are likely to stay outside of it under currently proposed rules. If UK legislators do not widen REITs investment criteria then investors will have to consider other property investment options, particularly if they want to track the direct property market as closely as possible. REITs may therefore appeal to some investors but not necessarily to all. The Government has demonstrated its willingness to listen to representations to deliver a more flexible and marketable product than initially sanctioned. We hope that this positive attitude will continue and that the REIT structure will in due course be modified to incorporate other types of property investment structures in order to provide a full range of tax efficient property products to all members of the investment community, from the institutions to the smaller retail investor.”