What are REITs?
Real Estate Investment Trusts ("REITs") are listed companies that invest in physical property, typically commercial real estate. Their main advantage is their tax efficiency: in return for paying out 90 per cent of their cash flow, or rental yields, as dividends, they do not pay corporation tax or capital gains tax. REITs are popular with investors as they provide an opportunity to invest in a diverse range of otherwise unaffordable real estate. Further, as shares in REITs are easily traded they allow investors to avoid the liquidity issues traditionally associated with investing in property.
What has changed?
Under the previous REITs regime, only certain defined institutional investors were able to invest in REITs without violating rules against close companies. As the definition of institutional investors did not cover REITs themselves, REITs could not invest in one another or form joint ventures.
To remedy this, George Osborne announced in his December 2013 Autumn Statement that the definition of "institutional investor" should be widened to encompass REITs. The Treasury indicated its hopes that this would attract further institutional capital into the UK real estate sector and give UK REITs access to more financing opportunities. Regulations to implement this change came into force on 1 April 2014.
The changes provide three main benefits to the REIT sector. Firstly, joint venture REITs are now possible. This is a promising option in the current climate where debt finance is no longer as freely available as it once was. Peter Cosmetatos, director of finance at the British Property Federation notes that “Investor appetite for such joint ventures is holding up, as the number of investors able to enter into sizeable transactions on their own is reducing.” Secondly, it is possible for a REIT to have separate spin-off subsidiary REITs for particular assets, rather than one very general wide portfolio. This facilitates specialism by REIT investors. Thirdly, and importantly, the Regulations include overseas equivalents of a UK REIT in the definition of "institutional investor". This means that overseas REITs are able to invest in UK REITs. As well as promoting the transfer of international expertise, according to Liz Peace, chief executive of the British Property Federation, investments by overseas REITs will "ultimately increase the availability of capital to the UK market".
Is the money flooding in?
Not yet. Perhaps it's a bit too optimistic to have expected a huge influx in just the first weeks after the rule change. If, however, potential investors are hesitant, because they think this change has come too late with the best gains (in the current property cycle) having already been made, then surely they are mistaken. It could well be the case that the best gains have now been made in prime London offices but there is still plenty of capacity in retail and industrial and particularly in the regions. It is to be hoped that investors embrace the rule change, recognise the capacity that remains for returns on investment and provide the capital that is needed to propel the next phase of the UK property and, wider economy, recovery.