REITs – the basics
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.
What is a REIT?
A REIT is a UK resident listed company carrying on a “property rental business”. A REIT does not pay UK corporation tax on rental profits or capital gains arising from the property rental business. Tax is instead payable at the shareholder level. The REIT is therefore required to distribute 90% of its rental profits (but not capital gains) to its shareholders. However, where the REIT carries on activities other than “property rental business”, the profits and gains from these activities will be subject to UK corporation tax in the normal way.
Factors to consider when deciding whether to become a REIT
Holding property in a REIT enhances shareholder value by up to 8% for an individual and 35% for a pension fund. REITs do not need to be pure property companies and some of the new REITs are hybrid business such as self-storage.
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.
These issues will include:
- The cost of the 2% entry charge (which is expected to be abolished from late July 2012) compared to the ongoing benefit of tax exemption, together with costs of complying with the listing requirement;
- The requirement for diversity of ownership;
- Implications of meeting the ongoing requirements in order to maintain REIT status;
- Complying with the company, distribution, balance of business and interest cover conditions and tests;
- Whether the company’s existing reporting tools provide the outputs that will be required as a REIT (monitoring of conditions, accurate forecasting, accounting information);
- The need to increase operational efficiency in order to provide attractive yields to investors.
Investing in a REIT
The REIT legislation allows the creation of liquid and publicly available property investment vehicles. These vehicles may therefore be of interest to a wide range of investors for the following reasons:
- Investment into property through a readily tradeable investment asset, as compared to direct investment into property, which is generally an illiquid asset;
- Diversity of investments across a range of property assets;
- Access to parts of the property sector that private investors are not otherwise able to access e.g. shopping centres or industrial property;
- Regular income returns;
- Low entry level compared to purchasing an entire property; and
- Lower transaction costs (i.e. 0.5% stamp duty on shares compared to 4% stamp duty on property).
Our cross service line teams (audit, tax, corporate finance and consulting) are experienced in providing a wide range of services to REITs and potential REITs, including:
- New entrants
- feasibility studies
- helping build and document the investment proposition
- pre-conversion tax structuring and HMRC clearances
- capital raising
- IPO readiness and listing process
- accounting support, including reporting accountant, prospectus support and accounting opinions
- conversion to REIT status
- Compliance with REIT regime/general requirements
- audits of REITs
- tax compliance
- liaison with HMRC and the Treasury regarding general and client specific REIT issues
- building models
- Ongoing issues
- real estate solutions and advisory services, including acquisitions, construction, investment, leasing, planning, property management and valuation services
- acquisition of a REIT by a REIT
- major acquisitions from / by REITs
- rights issues
- joint ventures
- disposal of corporates to REITs
- exit strategy