UK - PwC has urged the UK government to rethink tax penalties on REITs investing in other REITs, claiming the current tax on rental income restricts both the market and investor choice.

In a submission as part of the government consultation that ended earlier this week, the consultancy said lifting the tax penalty would allow smaller REITs better to use their capital.

Rosalind Rowe, head of the UK real estate tax network, said: "It's an alternative place to park your cash while it is waiting to do its day job.

"If a start-up REIT can't find an asset it wants, rather than put the cash in a bank account and get them minimal return, it could get a REIT return in the short term, then cash out early.

"The [tax authorities] won't suffer because investors pay tax on the returns."

She also pointed to the opportunity for investors in one property asset sub-class to invest in another without the major commitment entailed in direct investment.

"You can buy a few shares in a REIT and see how it works out," she said.

Relaxation of the current rules would also allow investors in joint ventures to choose when to exit - or to reduce their investment - by spinning off property portfolios into a REIT rather than selling them because one partner wants to exit.

Following the news earlier this week that SAF is to launch the first social housing REIT in August, Rowe said there were "challenges on a number of issues" for the social housing REIT model, notably returns.

"The return has to be commensurate with that for commercial REITs," she said.

"If you want more social housing REITs in the pipeline, the numbers have to work - and it has to be something that would work effectively throughout the UK, not just in London where rents are better."

But she added: "If you can get the returns right, people will pile in."

Unlike commercial property REITs, residential REITs do not benefit from the capital allowance and repairs tax regimes.

Rowe urged the government to reduce the required income distribution for social housing REITs to 75% from 90%.

Moreover, she said the social housing REIT regime would need to focus on creating new assets rather than packaging up existing portfolios, pointing to new planning rules that will allow local authorities to open potential residential development land to the private sector.

"Scale is the issue," she said. "If the first social housing REIT comes off, people would look harder at it. But you need more than just one."

Rowe's comments follow claims made last month by the British Property Federation submission that social housing providers, rather than investors, had shown little interest in the residential REIT model.

None of the existing 23 existing UK REITs has significant housing stock.