UK REITS on course for 2006

The proposed shake-up of property investment law in the UK, which is expected to spark a rapid expansion of the listed real estate sector, is on course for introduction in mid-2006, the industry's lobby said.

Analysts had feared the introduction of tax-efficient real estate investment trusts (REITs) could be derailed by Treasury concerns over loss of tax revenue, which could lead to the creation of a structure that was unacceptable to investors.

The industry's technical committee responsible for consulting with the government on the introduction of UK REITs published its response on Monday to a Treasury discussion paper on the matter.

"I think there's every chance of running to the timetable we envisage with REITs being in the Finance Bill in 2006," Liz Peace, chief executive of the British Property Federation (BPF) told reporters at a briefing on the response paper.

U.S.-style REITs generally carry out their investment activities tax-free provided they pay out a high proportion of their earnings in taxable dividends, usually making them high-yield stocks.

These characteristics, and a booming underlying global property investment market, have made REITs one of the fastest expanding areas of stock markets since the dot.com crash of 2000, particularly in the United States, but also in Japan and France where they were launched in 2001 and 2003 respectively.

The technical committee confirmed a report on the contents of a draft of the response, distributed prematurely last week, that the main concern of the government is losing tax revenue from REITs, particularly to overseas investors.

The industry is pushing hard for the UK to adopt the U.S. international standard for REITs where no tax is levied at the corporate or vehicle level, but only on the dividend income distributed according to the tax status of the investor.

The Treasury has proposed that REITs be subject to a 22 percent tax, with tax credits offered to investors, but the committee said this would effectively kill the model as an attractive investment for foreign capital flows.

A third compromise solution could be an internal trust model, which bears some similarity to the Australian Listed Property Trust example of separate fund management and operational components of the company stapled together.

That would satisfy the government's tax concerns, but is unlikely to be as attractive to investors.

A REIT through and through

"A REIT has got to smell like a REIT and taste like a REIT. Why go through a more difficult way and not the easiest and most transparent route?" Rosalind Rowe, director for tax services at PriceWaterhouseCoopers told the briefing.

"There is a warning in Malaysia which took a REIT structure that worked for the government, but hadn't been market tested and so in the end didn't work," Rowe added.

John Gellatly, head of indirect property investment and strategy at Merrill Lynch Investment Managers, warned that if the government did not get the tax model right then the flow of domestic UK property investment offshore would also accelerate.

"The last eight property IPOs (initial public offerings) have all been offshore. There's now 3 billion pounds in listed property trusts in Guernsey, which are REITs in all but name."

The BPF's Peace said Britain could not afford to wait on the introduction of REITs. Since France adopted the U.S. model, it has seen the market capitalization of its 10 established quoted property companies double within 18 months.

"If we don't set up REITs...we'll miss a huge opportunity for the UK to become an international REIT centre," she said.

Peace said she expected indications from the Treasury in late summer on the proposed structure of the new property investment vehicles prior to Chancellor (Finance Minister) Gordon Brown pre-budget statement towards the end of the year.

"REITs do have a lot of support in the middle levels of the Treasury where the work is done," she added.

"We feel the government has moved fantastically on this...They've shown themselves willing to listen and they shouldn't get hung up on the question of the tax take. It's a chance worth taking and the tax position can't be worse than what you have already."

Source: Reuters
Date: 23.05.05

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