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The UK Real Estate Investment Trust ("REIT") regime
launched on 1 January 2007, and immediately saw a number of the
UK's largest listed property companies convert to REITs. The
following five years have seen further REIT conversions as well as
the launch of a number of start-up REITs. As at 1 April 2012 there
were 24 UK REITs.
Significant changes to the REIT regime were announced in the
2011 Budget and draft legislation containing the detailed
provisions was published on 29 March 2012.
The proposed changes to the REIT regime are farreaching and will
significantly increase the attractiveness of the regime to a wider
pool of property investors and providers of capital. The changes
are aimed at reducing barriers to both entry and investment in
REITs.
Although the new rules will not take effect until the Finance
Bill becomes law (expected July 2012), those considering REIT
conversion in light of the proposed changes will now be able to
plan ahead with greater certainty.
The proposed changes to the REIT regime will benefit many
Those expected to benefit most significantly from the proposed
changes include:
All existing and future REITs
The abolition of the 2% entry charge for companies entering the
regime will significantly reduce the cost of entering the REIT
regime, and may also result in more properties being acquired and
sold within corporate
Allowing cash to be a 'good' asset for the purposes of
the balance of business assets test will make it easier for
start-up REITs to raise funds to be spent over time. It will also
make it easier for existing REITs to raise additional capital from
shareholders.
Institutional investors
The new diverse ownership rule for institutional investors will
enable small 'clubs' of diversely-owned institutions to
form REITs, where this previously may not have been possible
(although the REIT's shares will still need to be either
'listed' or 'traded' on a recognised stock
exchange).
Start-up and closely held/family owned property
The proposed three year grace period for new REITs to meet the
non-close company requirement will enable property companies to
build sufficient reputation to attract new shareholders without
prejudicing their ability to enter the REIT regime at the beginning
of the three year period.
AIM and PLUS market (and overseas equivalent) traded
companies
Relaxation of the requirement for a REIT to be listed on a
'recognised stock exchange' will enable AIM and PLUS market
(and overseas equivalent) traded companies to obtain REIT status
without requiring e.g. a full London listing.
Offshore property companies
The abolition of the 2% entry charge for companies entering the
regime may make the 'on-shoring' of UK properties that are
currently held offshore (and already outside the scope of Capital
Gains Tax) much more attractive.
Key benefits of REIT status
REIT status affords a number of commercial and tax benefits,
including:
Access to the global REIT "brand"
REITs are recognised globally as tax efficient structures for
investment in real estate. As at September 2011, there were 35
countries worldwide that have REIT or 'REIT-like' regimes
in place. They are known and understood by both investors and
analysts worldwide.
Attractors of international capital
REITs have a proven track record of attracting international
capital. There are significant investment pools and fund
allocations specifically designated for investment in REITs, and
conversion to REIT status can often unlock new sources of
funding.
A liquid and publicly available source of property
Depending on what exchange a REIT is listed on, the REIT regime
provides a method by which investors can tap into a liquid and
publicly available source of property investment.
REITs may be attractive to investors for the following
reasons:
Easier access to property investment compared to purchasing a
property directly.
Indirect investment into property through a readily tradable
investment asset, as compared to direct investment into property,
which is generally illiquid.
Diversity of investments across a range of property
assets.
Access to parts of the property sector that private investors
cannot usually access e.g. shopping centres or industrial
property.
Regular income returns.
Lower transaction costs, i.e. 0.5% stamp duty on shares
compared to 4% SDLT on property.
Key benefits of REIT status
Access to the global REIT "brand".
Attractors of international capital.
A liquid and publicly available source of property
investment.
Improved after-tax returns for shareholders.
" Effective elimination of latent capital gains.
Comparison of after tax returns in investing in a UK taxable
company and a UK REIT
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