Commercial Property Blog: The Popularity of Real Estate Investment Trusts3rd December 2013

While it may be optimistic to state that the UK economy is in full recovery mode, it is apparent that green shoots are finally starting to appear and confidence in the London and regional commercial property markets is increasing.

However, one of the most important and interesting developments has been the development of Real Estate Investment Trusts (REITs). REITs were introduced in 2007 as a new way of holding and investing in property. REITs are corporation and capital gains tax exempt on the profits of their property rental business provided they fulfill certain criteria.

The REIT must not be a close company (a close company is a company controlled by five or fewer Directors or participators), must be UK tax resident and listed on a ‘recognised stock exchange.’ It must distribute at least 90 per cent of its tax exempt profits. REITs can apply to single as well as group companies. The 2011 budget contained a number of relaxations to the rules concerning REITs, which are as follows:

* The abolition of the 2 per cent conversion charge. The abolition of this charge should make it easier for companies to convert to the REIT regime.

* The requirement for the REIT to be listed on a recognised stock exchange. The above definition now includes alternative markets such as the AIM. The AIM is subject to less stringent requirements and should give the REIT an alternative source of raising capital.

* The relaxation of the rules concerning institutional investors who previously would have fallen foul of the ‘non close’ requirement because they are widely owned. The definition of institutional investors includes pension funds, sovereign wealth funds and open ended unit trusts among others. This is a significant change because it increases the choice and source of funds that may invest in a REIT. It could potentially lead to the creation of industry specific REITs. By way of illustration, it was recently reported in the Daily Telegraph that Tritax Plc has launched the first UK REIT devoted entirely to ‘big box’ industrial property assets. The demand for warehouses and distribution assets will only grow as the retail environment continues to change. We shall have to watch this asset class (and others too) for the introduction and development of industry specific REITs.

* A three year grace period for companies to satisfy the non close company requirement. Again this should facilitate entry and allow a greater degree of investment in the REIT regime.

In short, the above changes, are designed to allow easier entry, investment and participation in the REIT regime. Tax advantages aside, converting to a REIT could allow a property company greater access to capital and take advantage of industry specific knowledge. It will allow companies access to asset classes, which are in huge demand (as illustrated above). We shall have to continue to watch this space, but the above changes indicate that the growth of REITs will continue to be one of the most important developments in the commercial real estate Industry.

About the author

James Norton is a Paralegal at an International Law firm with a keen interest in Commercial Real Estate. His aspiration is to qualify as a Solicitor specialising in this area of law.