Summary and implications

With the news that M&G and Blackstone are intending to launch a new REIT from the ownership of Centre Parcs, the possibility of creating a tax advantaged REIT PropCo and a non REIT OpCo has reared its head again. Businesses are actively looking at new twists on OpCo-PropCo arrangements and exploring ways to bring such arrangements within the REIT regime.

  • OpCo-PropCo structures have been looked at by those in a number of sectors since the introduction of the REIT regime in January 2007.
  • REIT anti-avoidance rules were introduced in 2009 to prevent OpCo-PropCo connected structures, originally in the pub sector.
  • The REIT regime remains attractive for those PropCos that can comply with the regime’s conditions.
  • The anti-avoidance rules appear to have been navigated, but with a greatly reduced level of connection between OpCo and PropCo.

The problems with OpCo-PropCo

The current REIT regime contains a number of restrictions, including:

a) Intra-group owner occupation is the wrong kind of occupation

REITs must carry on a ‘property rental business’. Where there is intra-group owner occupation, the properties involved are precluded from being a part of the REIT’s ‘property rental business’.

b) REITs cannot use artificial structures to circumvent the REIT legislation

An organisation cannot enter into ‘prescribed arrangements’ (with anyone) which, broadly, allow that organisation to meet the conditions of the REIT regime. This anti-avoidance measure was introduced in 2009 to prevent the use of ‘artificial structures to circumvent the REIT legislation’. The measure is very wide and HM Revenue & Customs approach to the measure’s purpose and application remains unclear.

OpCo-PropCo moves with the times

As a result of the restrictions described above, OpCo-PropCo structures have had to evolve. In 2007 and 2008, some groups explored the possibility of splitting a single ‘economic’ group into two tax groups; one that qualified as a group REIT (containing PropCo) and one that remained outside the REIT regime (containing OpCo). The intention was for the rental income to be tax exempt in PropCo, but tax deductible in OpCo. With the restrictions described above, this would not work today.

However, as the M&G and Blackstone REIT demonstrates, there remain opportunities. If OpCo takes only a minority interest in the PropCo REIT, then the intra-group owner-occupation restriction does not apply because the property occupation is in a separate group to the property ownership.

 Navigating the ‘prescribed arrangements’ measure may prove trickier. However, there is an exclusion for genuine commercial transactions, and therefore scope for the creation of new structures that are driven by genuine commercial objectives. Splitting property expertise and funding from the different risks and rewards associated with an operating company is likely to satisfy this objective.

There have also been developments in the area of tied premises. In 2009 HM Revenue & Customs removed an obstacle in the legislation that stopped potential REITs with tied premises from entering the REIT regime. As a result, tenanted pub companies in receipt of rental income are not automatically excluded from the REIT regime. Such companies will have to comply with all the other requirements of the regime, including the two restrictions above.


There have been few new REITs since the rush of conversions in early 2007. Splitting large, successful operating groups with a heavy property requirement (supermarkets are the obvious example) may allow the creation of more. The M&G and Blackstone split may well start a trend.

The M&G and Blackstone REIT is likely to list on the Channel Islands stock exchange

It is a requirement of the UK REIT regime that the principal company of a group REIT has a listing on a recognised stock exchange. Most UK REITs meet this requirement by listing on the main market of the London stock exchange. Few have decided to list outside the UK, so the M&G and Blackstone REIT would be in a minority. There are relatively low costs involved with listing on the Channel Islands stock exchange, compared to a full UK listing.

Tied Premises

Tied Premises exist where Organisation A supplies to Organisation B a property interest as well as goods for onward sale. For instance, a pub company might lease a property to a tenant and supply that tenant with a number of its products for onward sale.