Few participants in the real estate industry will have heard much to get excited about in the Chancellor’s 2011 Budget on 23 March. Aside from the relaxations to planning rules and the introduction of new enterprise zones, which are covered elsewhere in this Real World, perhaps the most high profile announcement involved the closure of certain SDLT planning schemes, including those taking advantage of the Islamic finance relief. However, the detail behind the Budget also included some significant proposals directed at enhancing the accessibility of REITs.
Launched in 2007, the UK’s REIT regime was intended to introduce a tax efficient vehicle to encourage retail investment in real estate. Broadly, a REIT (a Real Estate Investment Trust) is exempt from tax on profits derived from its property business and investors in the REIT receive distributions (subject to withholding tax for some investors) which are taxed as property income. In effect, the REIT is transparent for tax purposes and it was hoped that this feature would encourage the establishment of closed ended real estate collective investment vehicles in the UK and bring such vehicles currently based in the Channel Islands and elsewhere, onshore.
Although the UK’s major property companies have converted into REITs, the uptake from smaller companies and start-ups has been less than enthusiastic. Some of the reasons behind this are the many requirements of entry into the regime and, in particular, the “conversion charge” of 2 per cent of asset value which is payable where an existing company becomes a REIT.
The Budget included potentially ground-breaking proposals to reduce the barriers to entry to the REIT regime and to reduce the regulatory burden for existing and future REITS. Perhaps most significantly, the Government plans to remove the 2 per cent conversion charge.
An informal consultation with the real estate industry will commence by which the Government will seek views on a large number of proposals. These include a proposal to introduce a diverse ownership rule to allow institutional investors to set up REITs and a proposal to relax the requirement for a REIT to be listed on a recognised stock exchange.
The proposed amendments will be included in the 2012 Finance Bill. If the consultation is successful and the measures are implemented as proposed, the changes should be a considerable boost for the UK property fund market. If the establishment and ongoing administration of REITs can be simplified, there is a real possibility of the UK becoming a competitive jurisdiction for property funds.