1 January 2007 was “D-day” for the legislation allowing the creation of REITs in the UK. Efforts to persuade the government to introduce REITs date back to the late 1990s, so I apologise in advance if I fail to mention all who were involved in such an extended process.
The lobbying for REITs was successful ultimately because the BPF shifted its approach from a narrow, vested interest (what is good for property companies) to a broader perspective (what is good for the UK capital markets). It also strengthened its case by building a unified platform across the property industry that involved close co-operation with the Investment Property Forum and others.
If we delve into more detail, three key questions emerge: why introduce REITs? How was the initiative achieved? And was it worthwhile?
“Why?” is the simplest of these questions to answer. The rationale was to create a level playing field to ensure that investment in listed property companies had equivalent tax treatment to investment in direct property. Prior to the introduction of REITs, investment in property via property company shares effectively created double taxation. The company paid corporation tax on its income profits and CGT on its capital gains, and then the shareholders in that company also paid tax on dividends and CGT on crystallised gains on the shares. The fact that REITs did exist in some other countries created a real risk that global flows of capital would bypass countries without REIT structures.
The answer to “how” covers an eight- or nine-year period, including a five-year period of intense work leading up to 2007. In the late 1990s, the BPF commissioned a detailed analysis of the benefits of REIT status, but the Treasury did not agree with the conclusions and the initiative came to an abrupt end.
Then, around 2002, government interest in REITs re-emerged. It is not clear why this happened, but the most colourful explanation involves Ian Henderson, David Hunter and Liz Peace booking a small B&B in Blackpool to attend the Labour Party Conference and holding out the carrot of “the democratisation of property”.
As touched on above, this next phase of lobbying was successful because it was more broadly based. It was not just about the vested interests of the listed property companies, but about efficient capital markets and attracting international capital. And it involved the BPF, the IPF and the RICS presenting a united front. Within this coalition, it was probably no coincidence that Nick Ritblat and Ian Marcus were actively involved at senior level in both the BPF and IPF.
The bulk of the analytical work on creating the case for REITs was undertaken with enormous skill and very hard work by John Gellatly, who was then working at Credit Suisse with Ian Marcus. These two worked with the core group promoting REITs – Nick Ritblat, David Hunter, Stuart Beevor and Liz Peace. As a former civil servant, Liz brought invaluable experience in how best to present a case to government.
For years, it was not clear the Treasury was warming to the idea. Then, unexpectedly, it produced a draft bill for the introduction of REITs in autumn 2005. The cynics would say this was because ministers were attracted by the windfall tax receipt from the REIT conversion charge. Liz Peace’s interpretation is different. She attributes the turnaround to old-fashioned competitive spirit between countries, as France had already introduced REITs and Germany was racing to do so.
To get the draft bill was a positive step, but the contents of the draft were not. Among other things, the government was proposing to make REIT eligibility conditional upon a company coming within an LTV gearing limit. If this had been adopted, a number of REITs would have breached the REIT eligibility test on gearing during the subsequent financial downturn. Stephen Hester, then chief executive of British Land, and I jointly wrote to the Treasury to argue for an interest cover ratio test instead. This, thankfully, was accepted by the Treasury.
My final question is was it worthwhile? Views on this are heavily influenced by the fact that on the very day REITs were introduced, property company shares started to fall – and then fell very sharply all the way through the financial downturn. It is now clear that this was a market cycle issue, but the timing of the introduction of REITs at the top of the cycle did mean that Gordon Brown optimised the tax take from the REIT conversion charge, estimated at around £1bn from the initial wave of conversions.
Looking beyond 1 January 2007, even by a few years, shows that a number of the objectives behind the introduction of REITs have been met. For example, at Land Securities the proportion of overseas investors on the shareholder register has increased from 20% in 2002 to 55% in 2013. The company got payback within three years on its REIT conversion charge from taxes no longer payable, and there aren’t many investments in the property world offering a three-year payback. There have been new REITs launched and, in total, there are now 28 listed REITs in the UK.
As I write, shares in the sector are priced at a premium to NAV. That may be temporary, but I would wager money that the pricing of REIT shares relative to NAV will be more favourable in the current decade than in the decade before REITs.
Francis Salway is chief executive of ?Land Securities and a former BPF president
