Major overhaul of REITS in the UK gives boost to property investment sector

Proposals announced today (Wednesday March 23) by Chancellor George Osborne to simplify the UK’s Real Estate Investment Trust regime go beyond what experts had expected.

Not only will there be simplification to the ownership requirements and listing regime but a whole raft of measures, which will make REITs easier to operate and to understand, according to Rosalind Rowe, PwC real estate partner.

‘The Chancellor’s announcement about potential changes to the REIT regime will give a much needed fillip to the property market. Those changes, coupled with abolishing the entry charge and allowing cash to be a good asset, are clearly focused on encouraging new entrants into the regime,’ she explained.

‘Instead of bearing substantial listing costs and needing to assemble a large portfolio, REITs can be formed initially to invest in a smaller portfolio of buildings held, occupied and managed by local communities. Over time, such incubator REITs could grow into a large REIT and ultimately list, which will also help the REIT market to grow,’ she added.

Osborne said that informal consultation on the proposals will start immediately with legislation promised in 2012. Subject to the responses the Government will make changes both to reduce the barriers to entry and investment and to reduce the regulatory burden for existing and future REITs.

The consultation will seek views on the introduction of a diverse ownership rule for institutional investors which will enable them to meet the non-close company rule. This will enable institutional investors to set up UK REITs. And on allowing cash to be a ‘good’ asset for the purpose of the REIT balance of business asset test. This will allow UK REITs to make investment decisions on a commercial basis.

It will also look at extending the time limit for complying with the distribution requirement in particular circumstances involving stock dividends to reduce the administrative burden on those REITs that pay out dividends on a six monthly basis.

And also up for consideration is abolishing the conversion charge for companies joining the REIT regime, introducing a fixed grace period for new REITs to meet the non close company requirement so that start up UK REITs can build sufficient reputation to attract shareholders.

There will also be an examination of relaxing the requirement for a UK REIT to be listed on a recognised stock exchange to encourage entry into the REITs regime, particularly for start-up property investment companies.

'Freed from the strictures of listing and administration costs, landlords will be able to focus on profitable buildings in limited locations, increasing returns and making a residential REIT more likely to provide acceptable investment returns. These benefits would be available to commercial property investors, as well as private residential sector landlords,’ explained Rowe.

‘Finally there is good news for existing REITs, with alterations to the definition of finance costs and extending the time for REITs to meet the distribution comments,’ she added.

The British Property Federation welcomed the proposed changes to the UK REIT regime and pointed out that it could attract significant investment in property in the UK.

‘We are delighted that the government has grasped this opportunity both to make the UK REIT regime more attractive for new entrants and to make it work better for the UK’s REITs,’ said Peter Cosmetatos, director of Finance at the British Property Federation.

‘The forthcoming informal consultation covers many of the issues we have lobbied government on in recent years and in some respects goes even further, with the mooted abolition of the 2% conversion charge which is such a barrier for offshore funds tempted to come back to the UK,’ he explained.

'We are optimistic that, taken together, these proposals could have a real impact on boosting investment in UK property and in the scale and health of the UK’s REIT sector, and look forward to participating in the consultation,’ he added.