REAL ESTATE - The UK real estate industry last week celebrated near-total victory in its bid to remove controversial conditions affecting companies that set up REITs from January 2007.
IPE Real Estate reported in February that industry bodies including the Association of Real Estate Funds (AREF) and the British Property Federation had attacked draft key conditions for setting up REITs. They included the requirement that income cover interest payments by at least 2.5 times – in effect 40% gearing – and a 10% cap on shareholding.
But share prices in UK property companies surged at the news that the government had reduced the income requirement to 1.25, allowing a higher level of debt.
The 10% cap – which would potentially damage the market’s liquidity – has been relaxed rather than removed. Instead of outright prohibition, REITs breaching the cap will pay a tax penalty proportionate to the shareholder’s interest.
Morgan Stanley real estate analyst John Perry acknowledged the 10% shareholding cap would remain a problem for some companies – notably Liberty International.
Shares in the company, which claims to have structured its above 10% family holding in such a way as to make it eligible, did not share in the surge enjoyed by other UK property companies. According to Perry, Liberty International’s family holding was “still unclear”.
The conversion charge for companies becoming REITs will be 2% of the market value of their investment properties, but it can be staggered in installments over four years.
“The market had been looking at 50% of capital gains tax, which would have been prohibitive for some companies,” Perry said.
Chancellor Gordon Brown may have signed off the industry’s wish-list but it still won’t be enough, according to Powell.
“Before the budget there had been so much discussion and so little movement after two rounds of consultation that people basically lost interest,” he said.
“The acid test for REITs will be the first six months. How many will set up brand shiny new REITs on 1 January 2007?” said Malcolm Powell, a tax director at accountancy firm Robson Rhodes.
“My gut feeling is that the movement to set up REITs will be a slow trickle rather than a flood.”
