Is rewriting the REIT rules worth it?

The rules look likely to change for UK real estate investment trusts – and about time too, according to Rachel Kelly, assistant director of finance policy at the British Property Federation. “The REIT regime has been in place for almost 15 years now, so I think it’s time that we review it and think about whether there are improvements that can be made,” Kelly says. Any improvements will stem from two Treasury consultations underway, one over the treatment of asset-holding companies in alternative fund structures, the other on the UK funds regime more broadly. Both make proposals for changes to how REITs are managed, taxed and treated, including how tax on overseas properties is handled, the various criteria companies must meet to remain a REIT, and even how many assets they can hold. The former consultation closed this week, while the latter runs until 20 April. “Both the holding company consultation and the wider funds review are very much welcome,” Kelly says. “The broad premise is that the UK government has seen there is an opportunity to bring more investment funds into the UK. They’re bold ambitions, but I think they’re very much supported.” Catalyst for change These discussions arguably take on an added weight as the UK moves past its split with the European Union and attempts to ensure that London’s standing as a financial hub is not lost in the process. “People often talk about how London’s pre-eminence came about because it was a sort of staging point to access the European markets. But I think it’s much more than that,” says Roger Clarke, head of capital markets at the IPSX real estate stock exchange. “I think that our time zone, our language and our legal system are all very important to London. And that’s why our fund management industry, and within that real estate, needs to be looked after.” At Palace Capital, a listed real estate investment firm that converted to a REIT in 2019, chief financial officer Stephen Silvester sees the proposed changes as of greater relevance to REITs yet to be established in the UK than existing firms. “It’s about how we attract more investment into real estate. How do we do it in the right way as an industry?” Silvester says. “This is a great opportunity. Brexit creates the catalyst for us to look at all sorts of things and ask: can we get rid of some red tape and make things easier? There is a wall of capital at the moment, and the REIT regime in the UK is relatively small compared with other countries. So there absolutely is plenty more that we could do.” He adds: “You want the UK regime to be the go-to regime for investors. You want them to say: OK, it’s clear, it’s simple, we understand it.” Silvester believes the UK government should be looking overseas for inspiration. “Singapore is a great example, where the regime has grown significantly in the past 10 years, and I think the last 10 IPOs have all been entities invested in property outside Singapore,” he says. “That’s the kind of investor we should be looking to attract. If a company is creating a Kenya REIT or a ‘logistics in South-East Asia REIT’, where do they go to list that vehicle? We would want them to come to London and list within the UK REIT regime. That would be a massive influx of capital if [the government] could make sure the rules and the regulations were simple enough to attract people.” Risk and reward There is hesitance around some of the proposed changes. Clarke is wary of REITs being allowed to operate without being listed on a recognised stock exchange, for example. That’s no surprise from an exchange boss, but he believes there are risks to the UK’s reputation in the suggestion. “It’s to do with the quality, the ‘Kitemark’, of being listed,” Clarke says. “Since Lehman and the global financial crisis, regulators around the world have had a couple of themes they’ve been focused on. One is trying to tax companies properly and in the right place. The other is transparency and protection, and they prefer listed markets to private markets. “When I talk to IFAs, a lot of them dread when their clients say, ‘I’d like to put some money into real estate,’ because they see real estate as largely uninvestable. They can’t put people into open-ended funds, which claim to have daily liquidity but gate for literally years on end. That’s the real challenge we have: we don’t want to see our industry becoming ever more institutional and the retail investor turned away when at the very same time the rest of the capital markets are trying to go the opposite way.” That is a fine balancing act, and the BPF’s Kelly acknowledges that the consultations may present new challenges as fund regimes are altered and adapted. But the potential rewards to the UK, its fund industry and the economy should be worth it. “The benefit in a post-Brexit world, thinking about which economies does the UK want to be supporting, is talking to the UK’s ambition,” she says. “[The government] sees it as an opportunity to have a big investment management industry in the UK because of all the jobs and ancillary Exchequer revenues that that will bring.” To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette Photo © Gerd Altmann/Pixabay