Real Estate Investment Trusts (REITs) will be introduced as from January
2007. The idea is that they will be property investment vehicles, which allow
tax-efficient investment in professionally managed real estate portfolios.
Overall, the broad aim is to create a vehicle whereby investors can invest
indirectly in real estate but be treated from a tax perspective as if they
owned the property directly (ie the vehicle is designed to be tax transparent).
Needless to say, there are numerous complex provisions that apply, and the drafts of those provisions have recently been published. In practice, the
REITs regime is most likely to appeal to:
1 Existing property investment groups that might want to convert to REIT
status in order to take advantage of a possible increase in liquidity, and
also the beneficial impact on the discount to net asset value in which
their shares are trading.
2 New funds investing in UK property which target individual investors who
can hold shares in a REIT within an ISA, and pay no CGT on income
derived from the right.
3 Property-rich businesses (eg retailers and banks) wanting to raise money
through a sale and leaseback. However, it is not yet clear that a sale and
leaseback would be a cost-effective way of raising money, given that at
current interest rates it should be possible to borrow at an interest rate
below current rental yields.
Obviously, REITs are primarily designed for serious investment funds.
However, it should not be forgotten that they can also be relevant to much
smaller property companies and they should therefore not be seen solely as
the preserve of mega-funds. Having said that, they are unlikely to be suitable
for many family companies (given there are restrictions on closed
companies, and also on any shareholder having more than 10%), but there
may well be existing, smaller, investment operations that could benefit from
conversion to a REIT. Source: Herbert Smith.
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July 2006 |
