Liz Peace became CEO of the British Property Federation in 2002, with a remit to raise the profile of the commercial property industry. She is a passionate and vocal standard bearer; the most recent of a long line of successes was the leadership of a pan-industry alliance which persuaded the UK government to introduce REITs. She talks to Martin Hurst
What is your view of the EU's role in the European property industry?
It is changing. Three years ago, the European Commission had very little knowledge of property investment vehicles. The European Property Federation (EPF), the lobbying body to the industry, of which we are one of the founder members, decided that it was time to attempt to raise the profile of property investment at the Commission and encourage officials and politicians to consider where the EU could help in terms of encouraging cross-border activity as part of its mission to create a single market. Now the level of understanding is better but still needs improvement.
The EPF then came to the conclusion that there would be value in exploring the idea of a pan-European REIT. I think that those whose governments had already seen the light were less enthusiastic. I'll be quite blunt - I didn't really see the point because we already had one in the UK. But other members of the EPF - Sweden, Finland and Portugal for example - said that their campaigns with their respective governments were not progressing and quite reasonably that an EU push would be valuable.
In the UK, meanwhile, we were concerned initially that if the EU were to start to take an interest in REITs it might deflect the Treasury from the work it was doing on the UK REIT.
Nonetheless, now that we have our own REIT, I don't think we can deny that the future of property is international rather than national and we should indeed have some sort of EU-REIT structure. But there are two differing views as to how this might be best achieved. One body of opinion, represented by EPRA, believes that it is much better to work for REITs from the bottom up in each individual country and that when sufficient individual REITs are in place sooner or later there will be a degree of pan-European harmonisation. The EPF view is that we would be waiting a lifetime for that and actually it makes a lot of sense to get the EU to start to look from the top downwards at how it might provide a framework for an EU-REIT. I think the answer is that there is room for both approaches and that they will meet in the middle eventually.
In the meantime, any suggestion that the EU is ignoring REITs would be naïve. It has clearly started to look at REITs in terms of what they mean for the operation of the single market and I think this represents both a danger and an opportunity. It is not unknown for the Commission to implement measures that have adverse, and often unintended, consequences for particular interests and it may seek to do things or impose on the member states that which is not helpful to a REIT.
So I think we need to engage with the EU and show it how REITs can be beneficial to their broader objectives of pan European market harmonisation and encourage cross-border flows of investment and cross-border transactions in property.
Is the EU at a stage in its development of knowledge where its intervention would be helpful? Or is it the other way around?
That's the difficult question. I am not convinced one way or the other. I would suspect that it is at a fairly early stage in its thinking about all this and that is quite a dangerous time as it may see things that it thinks are potentially harmful in the way different jurisdictions are handling different things and try to intervene as a result.
The issue is what can usefully be done from a European perspective. The EPF has already published a short paper outlining its case and looking at the benefits that would be conferred on national jurisdictions if we could have a standardised EU-REIT framework. It is also about to publish a much larger piece of work carried out for it by Maastricht University expanding on the case for an EU REIT.
The hope is that this will lead the Commission to set up an expert group of some sort to examine the issues. Of course, what isn't going to happen at any time soon is any harmonisation of tax treatment of property across the EU, simply because, with the exception of VAT, taxation is not a Treaty issue and is therefore a matter for individual member countries to decide. And I would very much doubt if any of them would be prepared to contemplate giving up that position.
You could argue that unless you can harmonise taxation there is little point in harmonising the REIT structure. But I think we have got to start somewhere and if we could just get agreement to some common principles with regard to REIT structures, then in due course - and this isn't going to happen quickly - we might start to see some movement on a common approach to taxation.
You have to look at it from three perspectives:that of the investor who wants to be able to invest anywhere without incurring an additional or excessive tax bill; the government, which wants its share of the tax normally attaching to property transactions and investment; and the property company, which wants to be able to trade in property cross-border and treat investors in a way that encourages investment. So it is quite a complicated matrix and I don't think anyone has cracked it in a way that makes everyone happy.
Do we need to educate national governments in the way that EPRA has done?
EPRA has an important role to play in promoting the concept of REITs across Europe and helping individual governments to progress their own individual REIT regimes. How much of the latter is necessary depends on the national capabilities. From the UK perspective, EPRA provided initial briefing and arranged for the UK government to look at the Dutch REIT and the French SIIC. But as soon as it got down to a serious detailed campaign they left it to a national alliance of bodies that understood the UK government and UK tax law in order to be able to assuage the treasury's concerns on this.
How is the UK REIT likely to develop?
We must continue to press for the necessary changes to the REIT regime to ensure that it is as flexible as possible. There is scope for improvement but it won't come quickly. Nevertheless we will continue to campaign for legislative change and also to raise the level of awareness of the benefits of investing in REITs and quoted property through the medium of our REITA organisation.
As for residential REITs - the only way I can see this happening is at the top end of the market. If our government wants affordable housing, then some sort of subsidy is likely to be needed. I know this goes against free market principles but it is something which has been borne out by the US experience where REITs alone have not been able to provide social or affordable housing. But even with the housing market, there need to be some changes to the REIT legislation.
For example, it would make a big difference if companies were allowed to churn the assets in order to be able to realise some of the capital gain on their portfolio. This is a particular difficulty highlighted by a company called Grainger plc whose approach is very much modelled on this concept. Furthermore, if you could move your buy-to-let property into a REIT in exchange for shares in the REIT without crystallising the capital gain, would that be a way of building up the stock that a Resi-REIT needs. But even if we could make these changes, the current state of the rental market suggests that making a residential REIT stack up would still be challenging.
What have you been doing to facilitate international tax harmonisation?
It has been an aim to get the OECD model treaty to recognise REITs and how to deal with them from a tax perspective. The project is in the draft protocol stage and if accepted it will in due course be rolled out across the OECD countries. This doesn't mean that countries will have to renegotiate their bilateral tax treaties immediately, but as and when one is renegotiated it will have to take account of the model tax treaty. So we have made a huge advance there, even though this is just one small element of the cross-border tax issue. We have not looked at REITs investing in REITs - this will be an issue for the OECD in the future. Working with the OECD is essential if we are to address tax issues globally.
How effectively are the various industry associations working together?
We had our first meeting of the Real Estate Securitisation Alliance at EPRA's conference in Athens. We discussed a whole range of things from tax harmonisation across the world - the OECD project - to international accounting standards. We had a fascinating debate on sustainability. What was interesting was how little NAREIT had focused on this area so far - though clearly this is all about to change. The old Commonwealth nations - ourselves, the Canadians through REALPAC and the Australians through the PCA, agreed that they would spearhead a number of initiatives in this area and we hope to make some real progress in 2008, particularly in the area of sustainability reporting standards.
The sustainability session at the EPRA conference was illuminating. I was staggered at how ill-informed the audience were. Very few people knew of the European legislation affecting this area and yet they are attending a conference about European real estate.
The EPF has always focused very strongly on European legislative and regulatory issues affecting the physical performance of the underlying property, while EPRA has focused much more on the financial performance of the market and transparency issues such as reporting. This is why EPF and EPRA are a perfect fit - neither treads on the other's toes or at least hasn't done until the issue of the EU-REIT. I am very much looking forward to working with EPRA's new CEO, Philip Charls, and the EPRA President Serge Fautre on a joint approach to real estate in Europe. In an ideal world, there would a triumvirate where INREV works side by side with EPRA and both would work with the EPF on lobbying activity in Brussels. But we are a long way from this still.
What is your view of the issue of sustainable property?
Sustainability is the second of BPF's key areas of activity. We aim to cajole the industry in a way to get it to behave well and fend off silly injudicious government intervention. We want to make sure that the government understands that we want to work with it not against it and that there are good ways of progressing this.
Everyone knows that what EU and national governments do regarding tax affects the performance of property. We also now know that a lot of physical things will affect the performance of property - we have always known this in the UK in the context of planning. The planning system can wipe millions off the value of property at a stroke.
Now we are starting to see a whole new raft of physical regulations to do with environmental performance. If national governments and the EU get it wrong this will affect the value of a pension fund's investments. ABP may suddenly find that its €20bn of real estate assets are worth only €18bn, for example. We have the opportunity to make investment managers who have only ever thought about money realise that there is something else out there that could mess up their returns.
Sustainability is the elephant in the room. You've got to see it, start believing in it and start doing something about it because suddenly you will find that your property isn't worth what you thought it would be worth because it is being judged not only by financial performance but also by energy performance, say.
How will we reach this point?
The market will see to it. All EU countries must introduce a system of Energy Performance Certificates by January 2009. If a company has a CSR policy of its own its shareholders will ask what kind of building it is occupying, so the big occupiers are now interested in the quality and environmental performance of what they are occupying. At the AGM of FTSE 100 companies you will find that more and more questions are asked about sustainability in the supply chain.
We will start to see a market differentiation but of course this won't happen overnight because property is lumpy and moves slowly - not everyone breaks a lease and moves on every year. Furthermore that they are looking at the right thing is anyone's guess because on the one hand they might be getting energy performance right but they could also be five miles from the nearest transport hub. And of course the energy performance certificate does not take account of transport costs.
We now have a code for sustainable homes which commits the housebuilding industry to ensure that by 2016 all new homes will be zero carbon - which they define as zero net emissions. Having said that, the Germans are struggling with something similar and are amazed that the UK is aiming for 2016.
The UK government thinks that it has solved the problem in the house-building industry and that the next step is to achieve a similar breakthrough in the commercial property sector. But commercial buildings are more complicated than private residential in that every one is unique. They also have a wider range of more complex uses. So how do you factor in the usage? Then there is the question of how you control tenant activity. Is it through the landlord? In which case a system of green leases would be needed, and we have only just started to look at that. And then there are different grades of green lease. This suggests to me that a rethink of the landlord-tenant balance is needed. There has to be an agreement which allows greater interference and engagement. What is the sanction if the tenant doesn't perform or if the landlord doesn't perform?
What are the other key objectives of the BPF?
Our third objective: occupier satisfaction and lease reform. We must ensure that we don't fall foul of the government's wishes on lease reform. We must also combat the government's obsession with lease reform whereby it naturally assumes that all tenants are poor downtrodden souls who need to be protected from the dastardly landlord; they can do no wrong and would never get themselves into all manner of legal fixes to get out of paying their rents. The way to combat this is not to confront the tenants but to show the government how well we as landlords are changing our behaviour. We have recently launched our commercial landlords accreditation scheme (see Peter Best's article on p36 of the September/October issue: Reward for good conduct) which we think is a huge leap forward for the industry and puts us in a very good position to show government what we are doing if it should argue for legislative change.
The fourth area which we are looking at is the overall shape of taxation on property in the UK. We need to recognise all the associated difficulties - first of all government's main concern of preserving the tax take. It is not about the industry paying less tax but rather about finding ways to levy tax more efficiently. If it is levied more efficiently then more people pay tax and we need fewer new taxes. For example, stamp duty land tax in the UK (commercial) in 2001/2 raised £1.5bn (€2.26bn); in 2006/7 it raised £3.2bn.
What further challenges do you face?
BPF has two further action points on its agenda. The first is a better packaging of information for the industry, more for the layman (including politicians) rather than just for the expert, in the area of performance measurement for example. We have it for house prices but there is nothing equivalent for the commercial sector.
The sixth and final area is how we promote institutional investment in commercial residential property - ie, homes for let rather than homes to buy which is a sadly neglected aspect of home provision. This is not a complete solution to the government's housing problem but it is one way and the government needs to consider it. We are engaged with the government on this subject.
How do you view the issue of membership of associations such as BPF?
Proliferation of representative organisations is always an issue in every industry and every country. Everyone feels the need to create another association that reflects their particular needs, but this leads to a massive duplication. In the UK we have tried very hard to bring some of the property associations together and this has been successful in the form of the Property Industry Alliance. There is always a tendency towards fragmentation - somehow it seems to be a trait of human nature - if in doubt form an association. This is an issue. For as long as the property industry has enough people at the highest level with the substantial resource needed, we will be able to have a good trade body that can not only represent the interests of the industry but also tell the industry when it feels it is not doing itself any favours - for example when it should realise that if it wants concessions from government it may have to make some concessions itself in terms of the way it does its business.