A shake-up of the rules governing REITs, which should encourage investment into the sector, has been welcomed by the industry this week.
Key changes in what is the biggest proposed reform of the REIT regime since it was introduced five years ago were included in the Finance Bill 2012, although mention of mortgage REITs was notably absent from the consultation document.
The changes include the abolition of the 2% entry charge, which means that from July next year companies converting to REIT status will not have to pay 2% of the value of their properties upon entry to the regime. This is one of the crucial changes that could see companies which previously viewed conversion as too expensive enter the sector.
Scrapping this financial burden could also unlock the creation of residential REITs, which hold vast amounts of residential land, for the first time.
There are currently 24 UK REITs, most of which are property companies which converted in 2007, including Land Securities, British Land and Hammerson, with only a few companies, such as London & Stamford, converting since.
The relaxation of the diverse ownership rules for institutional investors is also expected to widen the appeal of REITs to institutional investors, according to Deloitte partner Phil Nicklin.
As it stands, a REIT must not be controlled by five or fewer shareholders. The rules do not recognise the underlying diverse ownership that pension funds and life funds have, but a “white-list” approach included in the proposed legislation includes pension funds, insurance companies, sovereign wealth funds, units trusts and their overseas equivalent.
However, Nicklin said it was disappointing that charities, registered housing providers, property investors, such as overseas REITs, and financial institutions, such as banks, are not counted as institutions.
A further change will give new converting companies three years in which to meet the requirement of diverse ownership.
The changes will also see the requirement for a REIT to be listed on a recognised stock exchange relaxed to include firms listed on the AIM and Plus markets and their foreign equivalents.
Nicklin said that the overhaul could result in up to 40 new UK REITs, including British subsidiaries of foreign firms. He added that the government is looking into proposals to introduce mortgage or debt REITs, which could buy debt from banks or become lenders themselves.
