British Land’s and Singaporean partner GIC’s decision to launch the Broadgate REIT last week highlights the value of the tax-efficient structure in easing the working relationships between local firms and overseas investors.
While joint ventures have long been a solution for overseas investors to gain access to local knowledge and skills, these have often had to be weighed up against the tax burden and inflexibility that a corporate partnership adds.
Despite this, in the early part of the decade foreign investors, particularly from Asia, began to increase their interest in UK property markets significantly, as yields in more traditional assets such as bonds became less attractive.
In 2012, changes to the REIT legislation also came into effect, prompted by the coalition government’s desire to kick-start institutional investment in property.
The changes in the law, through the Finance Act 2012, eliminated the previous 2% conversion charge on assets and, for the first time, institutional investors were allowed to make a significant investment in REITs.
“Those two trends have coincided – the relaxation of the REIT laws and the jv phenomenon – so we are starting to see REITs being used as jv vehicles,” says Ion Fletcher, director of policy at the British Property Federation.
Ropemaker points the way
The first significant REIT set up to take advantage of the new rules was the Ropemaker REIT, created for the joint venture of Axa Real Estate Investment Managers, Chinese fund Gingko Tree and another Far Eastern investor.
In doing so it took advantage of a number of features that made a REIT more appealing than more traditional partnerships, says KPMG tax partner Nicole Westbrook.
“If your shareholding means that you can meet the requirements for the entity itself to be a REIT rather than just a jv underneath the REIT, then all of the rents and the gains on the property are tax-exempt. It is a really efficient position to be in,” she says.
For a sovereign wealth fund such as GIC, Westbrook believes the tax advantages may also be better than for other foreign institutions, owing to their exemption from withholding tax through tax treaties.
REITs do not normally benefit from tax exemptions if they distribute 10% or more of their income to a single entity. However, as British Land itself has highly fragmented ownership, as fundamentally does GIC – as it represents the population of Singapore as a sovereign wealth fund – the new vehicle is able to get around this.
For an existing REIT, such as British Land, the advantages appear initially less obvious. Jon Stevens, tax partner at law firm DWF, explains that although a corporate partnership would still be tax exempt in the same way as a REIT, the flexibility of a REIT’s structure has benefits for both parties.
“The point is that the shares are listed, and what this means is that you have shares in a listed property company without the disadvantages of it being a corporate vehicle without the tax charges, so it is more akin to direct property investment from a tax point of view while still owning shares in a listed company,” he says.
Greater flexibility
Fletcher adds that it also gives flexibility in other areas. “It depends on an asset-by-asset basis, but a REIT gives you the flexibility that you can dispose of assets in chunks. You can probably do that with partnerships and unit trusts as well, but it is easier with a REIT because shares are so much easier to transact.
“A REIT makes it more accessible than it used to be,” says Fletcher.
So, is the arrival of the Broadgate and Ropemaker REITs the dawn of a new trend?
Westbrook says: “I think there are going to be some more. The only thing really stopping them is a listing, so if you have a big enough asset to justify a listing, why wouldn’t you do it?”
For Stevens, the trend will spread beyond joint ventures, as demonstrated by the proposed conversion of Schroder REIT to its eponymous status.
“The recovery in property values makes REITs more attractive, so I would be very surprised if we didn’t see more REIT conversions and I expect to see more sector-specific REITs – for example, private rental sector REITs,” he says.
When UK REITs were established in 2007, they got off to a sluggish start. But now the REIT market may finally be on the cusp of a boom.
