REITs update

Graham Chase, Tax Partner, CMS

An informal consultation is announced with a view to reducing barriers to entry and investment for existing and future REITs. Legislation is proposed to be included by Finance Bill 2012.

Few details are provided but overall this looks to be good news for the sector. Of particular interest are:

1. the suggestion that institutional investors might establish REITs;

2. greater flexibility regarding cash assets;

3.  relaxation of the listing requirement , which might perhaps allow private REITs to be established; and

4. abolition of the entry/conversion charge.

Reference is also made to technical changes to the legislation. I hope that the opportunity will be taken to get rid of a number of technical requirements which serve no useful purpose. For example, the three properties rule and the single property value rule.

The consultation is awaited with interest.

2 thoughts on “REITs update”

  1. I am not so sure that the three property and property value rules are as pointless as you suggest. They are designed to protect retail investors by ensuring that the portfolio is diversified.

    Having said that, perhaps the three property rule isn’t that effective after all. Holding four properties may still make for a concentrated portfolio. However, I would still say that the property value rule is sensible on normal investment grounds – are you saying it is better to leave it to the fund managers/investors to judge this issue on its merits, rather than have specific legislation to enforce the position?

    One rule that I would suggest abolishing is the requirement for only one class of ordinary shares. Other types of vehicle don’t have this restriction – TR Property the investment trust recently introduced a second class of sigma shares – so why can’t a REIT do likewise?

    A greater flexibility on cash assets would be welcome. A number of investment trusts moved heavily into cash during the financial crisis – some are still very liquid. One shouldn’t be forced to make an investment when there aren’t many good properties to be had at attractive prices.

    1. I agree that this is the purpose of the rule, but I would say that (i) the rule does not achieve its goal and in any event (ii) why have the rule anyway.

      So far as item (i) is concerned consider two examples. First, ownership of three properties on the same industrial estate or retail park. All of which involves taking essentially the same location and use risks. Second, ownership of diversely sited properties but all let to the same tenant – such as occurs in the context of sales and leasebacks with a supermarket or bank. In this example the tenant risk is the same.

      In addition, the definition of “property” gives rise to curious results. A shopping centre comprises separate units and so multiple properties. On the other hand a department store (think Harrods) is one property.

      So far as item (ii) is concerned it seems to me to be better to let investors choose what sort of risk and hence REIT they want to invest in. So for example investors might consider the relative merits of London West End or City, industrial, retail or residential specialists. Given that a company needs to be of a certain value to justify listing then the number of properties it owns should simply be a function of commercial factors.

      I think that multiple share classes is more difficult, given debt restrictions and dividend obligations.

      I agree with you about cash – the greater the flexibility on this the better it is for the investor.

      Thank you.


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