Dividend rule could hit 'workability' of UK REITs, says law firm

The listed real estate industry in the UK has been dealt a fresh blow by a recent government decision not to allow real estate investment trusts (REITs) to pay dividend in stock rather than cash, according to law firm Pinsent Masons.

Under current HM Revenue & Customs rules, a REIT must distribute 90% of its profits from its rental income to shareholders. The cash-strapped property industry had been lobbying hard in recent months to allow the payment of stock dividends in order to relieve pressure on balance sheets and conserve cash, Pinsent Masons said.

The law firm warned that the 'lack of flexibility' offered to UK REITS could have dire consequences for the quoted property sector. At a time when most property companies are looking to conserve cash and reduce gearing, the Revenue's recent confirmation that a stock dividend does not qualify as a property income distribution, will be a particularly unwelcome one, the company said.

Robert Moir, a Corporate partner at Pinsent Masons, said: 'When introduced, the REITs regime was a welcome addition to the corporate structuring options for property companies, but now many REITS feel that the Government should cut the industry a little slack in this severe downturn.'

'It will be interesting to see whether companies de-REIT in the coming months, given the need to preserve cash. A case can be made that paying dividends ought to be less of a priority. Forced distributions to fulfil HMRC requirements may cast doubt on the workability of the REIT regime in the current climate.'