Over the last couple of years, the commercial property sector has got very
excited about the proposed introduction of Real Estate Investment Trusts
(REITs). It has now been announced that REITs will be introduced in March,
but the proposals are not as radical as many had expected. The problem is
that the property industry really wants a tax-exempt structure, whereas the
government wants to make sure it does not lose any revenue.
Whilst the all-important conversion charge figure (ie how much it will cost to move new properties into REITs) has not yet been fixed, some key requirements
have been made clear. In particular, REITs will have to be listed companies, with
at least 75% of income derived from property rental (and 75% of assets utilised
in property rental). They will not be taxed on the income and gains from property
rental, but 95% of income must be distributed each year. No single investor may
control 10% or more of the shares or voting rights, and there will be a very high
interest cover ratio of 2.5:1 to limit gearing. REITs will have to hold at least three
rental properties (although each lettable unit will count as a single property, so
one REIT could own one large multi-let building).
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January 2006 |
