Investment

What is a REIT?

A REIT (pronounced like ‘Reet ‘ in Jackie Wilson ‘s song ‘Reet Petite ‘) stands for real estate investment trust and is the generic term for a property-owning vehicle that pays no tax. There are REITs in many countries around the world, but not in the UK – yet.

America, where REITs began in 1960, and Australia, where they are called listed property trusts, have the most mature REIT markets. Many Asian countries, though not China, now have REITs and several European countries, including France, Belgium and Holland, do. REITs are structured differently in each country. America has one of the most liberal regimes, while in the Netherlands and Belgium REITs are very restricted.

What is so good about REITs?

Tax is the bane of the property investor. Corporation Tax and Capital Gains Tax bills are high in asset companies, so property investors spend a great deal of time trying to work out how to avoid paying these two taxes. REITs pay no tax, which is why the UK property industry is so keen to see them introduced by the Treasury.

The quid pro quo of paying no tax is that REITs, which are mainly listed on a stock exchange, have to distribute most of their income – 80-90% – to shareholders, usually by way of dividends. This means that in order to expand, REITs have to issue shares to raise new equity; they cannot rely on boosting their coffers by retaining profits, as publicly listed property companies in the UK do.

Will REITs ever come to the UK?

Yes, almost certainly. The 2004 Budget saw the publication of a consultation paper on a UK REIT. Discussions between the Treasury and the UK property industry, which is being represented by a joint working party from the British Property Federation, the Investment Property Forum and the Royal Institution of Chartered Surveyors, have been going on for at least a year in a bid to agree the fine details on the structure of the UK REIT. The Treasury is aiming to introduce a REIT in the 2006 Finance Bill, although some commentators believe the timetable will slip and 2007 is a more likely target.

Why does the Treasury want to introduce REITs?

Peer pressure is one of the major reasons: the UK is one of the few economic powers not to have REITs and they have been a storming success in America, where they grew in size by 918% between 1992 and 2003.

By introducing REITs, the Treasury says it has four aims: to improve the efficiency and liquidity of property investment; to improve transparency and scrutiny; to provide access to property for long-term savers; and to expand the residential private rented sector.

In America Reits grew in size by 918% between 1992 and 2003

Are there any potential pitfalls?

Yes. Chancellor Gordon Brown could step in at the last minute and put the kibosh on REITs. The Treasury might also introduce too rigid a structure – particularly in relation to the amount of development and the amount of borrowing permitted. And the cost of converting into a REIT may be prohibitive. Every company that wants to convert is likely to have to pay either a percentage of its future Capital Gains Tax bill or a percentage of the value of its assets.

How will a REIT work in practice?

Most publicly listed property companies, such as Land Securities, British Land and Liberty International, and many privately owned ones, are expected to convert into publicly listed REITs. Given the option of being a company that pays tax and one that doesn’t, there are few that would opt for the former.

REITs usually focus on one sector, so, while property company Brixton, say, focuses entirely on industrial property and could convert in its entirety, Land Securities, British Land and Hammerson might set up two REITs because their portfolios are split between shopping centres and central London office buildings.

Once converted into REITs, property companies should see their share prices soar from the price they are trading at today as tax-paying companies. Because the companies will have to pay out a high dividend, investors – not just the big financial institutions but also the man on the street – will be rushing to snap up shares. The dotcom collapse in 2001 put many investors off the stock market, but property companies with very stable income should encourage them back.

With a lot more money in their coffers, property companies will look increasingly beyond the three established sectors of retail, offices and industrial to spend their money. Pubs, hotels, primary healthcare properties, such as doctors’ surgeries, nursing homes and even schools should benefit from the influx of money. The housing market should also benefit. A proper private rented sector, run by professional landlords rather than buy-to-let investors, should be established.

How will it directly benefit regeneration?

More money should be channelled into regeneration and development, although not from a REIT, which will almost certainly be restricted in the amount of development it can do. But Land Securities, British Land and their like could well split their activities between investment and development, putting the investment property into REITs and keeping the development work in a standard company.