insight SERIES Property Week Guide to UK Week Property REITs UKGUIDE TO REITs In association with: News CONTENTS 5 Welcome 6 What are REITs and why are they important? Stephen Hester, chief executive of British Land, Residential Professional Analysis explains the significance of REITs 14 What is about to happen in the UK… Will we see more frenzied M&A activity? Plus, a list Regional Regional of companies likely to convert 16 Steps to becoming a UK REIT Joining the REIT regime is straightforward but some of the steps need careful consideration Classified 20 Preaching, from the converted British Land chief executive, Stephen Hester, reveals his vision for the future of REITs 24 REITs and the investment market The impact REITs will have on the investment market 28 REIT FAQs The pros, cons and myths explained 32 Expert forecast Six agents and money-management experts forecast the impact that REITs will have 36 Five years on… The influence of REITs in five year’s time 38 The structure of a UK REIT The precise structure of the UK regime 42 Tax implications How REITs are treated for tax British Land’s Leadenhall 44 Sponsor profiles Building development, London EC3, will provide Grade A office space. 48 Glossary News WELCOME Tel: +44 20 7921 8350 IT IS MY PLEASURE TO INTRODUCE [email protected] this Property Week Guide to UK CMP Information, REITs. From 1 January 2007, Ludgate House, 245 Blackfriars Road, British Land and other major London SE1 9UY property companies expect to Residential Professional Analysis become REITs and so begin a PROPERTY WEEK REIT GUIDE new era for UK property EDITOR Simon Fellows investment. ART DIRECTOR Carla Pryce In narrow terms, REITs are a new tax treatment, ILLUSTRATIONS Matt Pattinson Regional PRODUCTION TEAM providing quoted property companies with tax Laura Hunt, Sarah Jones transparent status, which many less accessible PUBLICATION DIRECTOR Jo Fellows investment vehicles already enjoy. As a result, property strategies are unlikely to change much. But over time, how PROPERTY WEEK Classified EDITOR Giles Barrie property is held influences the nation’s savings’ choices BUSINESS DEVELOPMENT DIRECTORS and a more efficient property market promotes both UK Emma Smith, Stuart Arnold economic productivity and our physical environment. ADVERTISING PRODUCTION REITs’ accessibility and professional management will Fellows Media Ltd directly support these Government goals. SALES DIRECTOR It’s an important time for UK real estate. Asset values Christopher Kilbee have been favourably repriced versus stocks and bonds. PUBLISHER Sanjeev Khaira This new price basis needs to be consolidated, supported EDITORIAL ENQUIRIES Tel: +44 20 7921 8561 by the REITs format. Providing a modern, appealing built environment for its customers, REITs will showcase, in accessible form, the appeal of long-term, predictable and growing cash flow to investors. fml And in a broader context, UK REITs are welcome. Produced by Fellows Media Ltd Globalisation of capital markets powerfully reduces the (FML), The Gallery, Manor Farm, importance of national borders. But London, as a key Southam, Cheltenham, Gloucestershire GL52 3PB global centre to intermediate and direct these capital Tel: +44 1242 259241 flows, needs to stay at the forefront of investor choice [email protected] and freedom. REITs are another tool so to do. www.fellowsmedia.com We look forward to a flourishing REITs market and I © CMP Information Ltd 2006 commend this guide as an essential primer. The profile pages contain paid-for editorial that allows those named to highlight their projects. The information included in them in no way reflects the views of Property Week, Fellows Media Ltd or the editorial/production team. Every care is taken to avoid mistakes but Stephen Hester neither the publisher nor Fellows Media Ltd can accept liability for inaccurate information published in CHIEF EXECUTIVE OFFICER this UK REIT Guide. THE BRITISH LAND COMPANY PLC 6 What are REITs? www.propertyweek.co.uk What are REITs and why are they important? I The introduction of the Real Estate Investment Trust model is being hailed as the most significant development in the UK property industry for a number of years. It is expected to boost publicly-listed companies as vehicles for investment in real estate, writes Stephen Hester, CEO British Land UK REAL ESTATE INVESTMENT TRUSTS (REITs) will be the generic name for listed British property companies opting into a new tax regime beginning 1 January 2007. The regime allows companies to be free of income and capital gains tax, in exchange for one-off tax payments. The companies also submit to a light- touch regulatory regime, including requirements to pay higher dividends, and certain restrictions on capital structure and business focus. The model has been in existence in other countries for many years and has flourished in www.propertyweek.co.uk What are REITs? 7 8 What are REITs? www.propertyweek.co.uk the US, Australia, France, Netherlands, A GREAT OPPORTUNITY THAT WILL NEED Japan and Singapore. INDUSTRY CO-OPERATION TO REALISE… Historically, investment in quoted DAVE BUTLER, PROGRAMME CO-ORDINATOR, REITA property companies has been the domain of institutional, rather than THE POTENTIAL IMPACT OF REITS AS A TRIGGER FOR private investors, whose indirect fund private investors to enter the listed property sector investments have tended to focus on must not be underestimated. Some commentators more tax-efficient property vehicles. have predicted rapid growth from today’s market The new REITs’ regime redresses this value of £40bn to £100bn within a few years, but this balance and should make the quoted growth will not happen unaided, nor will it be property sector more attractive to without risk. investors, both old and new. In the US, more than 30% of investment in the listed property sector comes from private investors, INVESTING IN PROPERTY through direct investment in REITs or collective Property has unique characteristics investment schemes. To grow private investor suitable for savers: participation to anywhere near this level in the UK will I It boasts long-term, stable income require a sustained, cross-industry effort to educate from rents. The security provided by investors and their advisers about both opportunities land, bricks and mortar have combined and risks in the sector. Recent research by Reita, the with prospects for capital growth to campaign to increase awareness and understanding of make it the best-performing asset class REITs and quoted property investment, indicates that of recent years: one that also diversifies less than 20% of financial advisers understand REITs, investors’ risks. while nearly 50% see REITs as being part of their I Investors have always faced a clients’ investment portfolios next year. The dangers of dilemma over the most appropriate this information gap are significant – advisers do not route to property ownership. The most sell products they do not understand, whilst direct route is simply to buy some misunderstood investment opportunities inevitably buildings. However, property comes in lead to market risk and disillusioned investors. large lot sizes, it has to be managed, it It may seem obvious to those in the industry that is costly and time-consuming to buy commercial property is fundamentally different from and sell: selecting investments is a job residential ‘buy-to-let’. It is, however, by no means best left to the experts. obvious to private investors considering investment in a REIT or a property fund containing REITs. The efforts However, owning property through a of individual property and investment companies must UK company has had the disadvantage be supplemented by non-partisan information that that tax is paid twice on the same both the adviser and investor, whatever the state of income – once when the company is their knowledge, can use to make informed, safe and taxed on its rental income and capital realistic decisions. growth, and again when the revenue is Transparency, continual communication and easy paid out as dividends. Many property access to information in language that the private investors have been able to avoid this investor can understand have been key drivers in the tax burden by investing in property held long-term success of the US and Australian markets: offshore, in highly-leveraged vehicles this lesson must also be learned here. The property or through tax-exempt institutional industry has worked together in an unprecedented funds. As a result, quoted property way to bring REITs into reality. This co-operation must companies have had to operate at a be built upon, if their future success is to be assured. considerable fiscal, and therefore commercial, disadvantage to other property investment vehicles. 16 Steps to becoming a REIT www.propertyweek.co.uk Steps to becoming a UK REIT I Joining the REIT regime is straightforward but some steps will need careful consideration reports Christopher Luck, partner, Nabarro Nathanson HOW DOES A UK COMPANY on a property rental business implement the decision to join (broadly, a UK business the UK REIT regime on or after exploiting an interest in land) 1 January 2007? and fulfil a number of conditions: STEP 1. SATISFY THE QUALIFYING CONDITIONS A. The six company qualifying The first step to achieving UK conditions REIT status is to make any A UK REIT must: changes necessary to ensure I be solely resident in the UK that the conditions of the for tax purposes regime are satisfied. The I not be an open-ended potential UK REIT has to carry investment company www.propertyweek.co.uk Steps to becoming a REIT 17 I have a listing on a recognised stock exchange I not be a close company I have one class of ordinary share and no other shares except non-participating fixed rate preference shares I not have any excluded loans (broadly profit linked, asset linked or non-commercial).