Issues, trends & solutions within the industry

Proposed changes to the REIT regime
Significant changes to the REIT regime are expected to take effect from late July 2012. The proposed changes are far-reaching and will significantly increase the attractiveness of the regime to a wider investor pool than has previously been the case.
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Mortgage REITs and Social housing REITs
HM Treasury is currently looking into proposals to introduce mortgage REITs and social housing REITs. In the current economic environment, extension of the REIT regime to include these forms of investment would be a positive move for both property lenders and investors.

Entry into the REIT regime
The UK REIT regime was introduced in 2007, and as at 1 November 2011 there were 24 REITs. Entry into the REIT regime will impact every area of a company’s operations. Companies will therefore need to consider a number of issues before deciding whether to become a REIT. Our REITs specialists can assist every step of the way.
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Refinancing & debt advisory
Refinancing continues to be a major issue for all our real estate clients, with up to £600bn of commercial property loans requiring refinancing within the next two years across Europe. Our corporate finance, reorganisation services, tax and audit practices have extensive knowledge and expertise in the real estate backed debt arena. We can help property companies take and maintain control in working with lenders through providing support in preparation of business plans or undertaking a company business review.

In addition, Deloitte has a global team of 60 professionals that provide expert independent debt advice, assisting you in relation to proposed covenant waivers and amendments to design an optimum strategy in the current debt market.

Our capital sourcing advisory team can assist in raising new equity and our corporate finance specialists can advise on the recapitalisation proposal and terms, modelling and structuring.

Distressed real estate opportunities
In this challenging economic environment, recognising and capitalising on the next opportunity is crucial. The growth of distressed real estate situations may offer valuable investment opportunities in real property or real estate backed debt.

Our practical experience means we are well placed to give commercial insight into where and how value may be created. We have in-depth knowledge of the full spectrum of debt structures and have significant experience in (i) understanding the market/the borrower/the lender/the product, and (ii) realising the opportunity. In our view, it is critical to understand and manage the associated risks of the opportunity and it is important to implement a structure which delivers the desired commercial outcome and tax efficient returns.

Subsidiary deregulation
The Government’s consultation on widening the range of audit exemptions available under Companies Act 2006 was published on 6 October 2011 and could impact the property sector in particular due to the nature of the structures with large numbers of subsidiary property holding companies.

The range of exemptions is as follows:

• Subsidiary companies will be exempt from audit where they have an EEA incorporated parent who is willing to enter into a public guarantee of the company’s liabilities and the shareholders publicly agree to the exemption being taken; and
• SME audit exemptions will be extended to companies meeting any two of the three limits (turnover <£6.5m, gross assets <£3.26m,staff <50) rather than, as at present, the turnover and balance sheet limits needing to be met.

Development of regulatory requirements for property companies
In the global economy, continued harmonisation of accounting and regulatory requirements continues, impacting all property companies.  Our technical expertise around accounting, company law and corporate governance matters for property companies is market-leading and we contribute significantly to the industry-wide bodies that drive matters in the sector including the British Property Foundation (BPF), the European Public Real Estate Association (EPRA) and the Investment Property Databank (IPD). The Property Companies Audit group in the UK also operates a Real Estate IFRS technical centre which is consulted by members firms from the global DTT network of firms. Together with our involvement with industry-wide bodies, this makes us a powerful presence in guiding developments in the sector.

Furthermore, the calls for increased transparency and monitoring of systemic risk in the financial services arena generally is also impacting property companies, particularly in the context of the proposed EU Directive for Alternative Investment Fund Managers (AIFM) which is likely to include the listed property sector within its scope.  ESMA’s implementation guidance was issued on 16 November 2011, in order for the Directive to take effect in July 2013.  This guidance has provided more clarity in relation to the scope and requirements of the Directive at a minimum.

One outcome is likely to be increased costs of fund administration for real estate funds, as managers will be required to engage custodian services and potentially hold increased levels of capital as well as comply with increased levels of reporting to investors and authorities. The proposed Directive introduces an ‘EU passport’ allowing alternative investment funds to be marketed to professional investors in Member States by fund managers falling within the new regulations, although unfortunately there is no immediate provision for this to be extended to funds established in third countries and managed by EU AIFM. The regulations were drafted presumably with hedge fund and private equity fund models in mind, and press coverage has focussed on its application in those sectors.

It will be critical to monitor its impact on property companies and identify early any potentially unintended outcomes of being caught within this legislation.