REAL ESTATE - A semi-optimistic consensus has emerged in the industry response to draft UK Real Estate Investment Trust legislation after initial responses slammed the proposals as opaque and prohibitive.

The draft, published in January, even found a champion in Jeff Schwartz, CEO of distribution firm ProLogis. Schwartz told the Financial Times early in February that the UK government had done “a great job” on draft REITs legislation. He claimed controversial requirements that interest payments must be covered at least 2.5 times by income, and a 10% cap on shareholding, were no more restrictive than REITs legislation in other countries.

Mark Eagan, chairman of the London office of Paul Hastings Janofsky & Walker, pointed out that, despite advocating them, Schwartz had no plans to invest in a UK REIT. Eagan urged the government to leave gearing to the market.

The British Property Federation (BPF) went further, claiming in a letter to the Inland Revenue that the gearing clause “would in practice offer such an unattractive business model for a UK REIT that it is highly unlikely any would choose to set up and operate under such a restriction”. The BPF has put forward compromises including the less stringent requirement that companies achieve a BBB credit rating.

The 10% cap has proved just as intractable an issue. Depending on how the 10% is determined across all clients or as a single bloc holding, Association of Real Estate Funds (AREF) chairman Nick Cooper said the 10% cap on shareholdings will be a problem for investors.

“You won’t be able to persuade those who’ve built up a larger shareholding to come back to 10%,” he said. “For many investors, seeing the manager holding more than 10% is a sign of alignment of interests.”

“We want a market that’s liquid from day one,” said Ros Rowe, a tax partner with PricewaterhouseCoopers’ real estate practice, claims a shareholding cap would negatively affect the market’s liquidity. “New companies could set up with a 10% maximum shareholding but it takes a while for people to get access to property.”

Yet most joined Schwartz in defending the government’s efforts to date. BPF finance and tax director Gareth Lewis described the draft as “unworkable but not insurmountable”.

“The Treasury has done a good job to get us where we are,” he said.