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News

9th February 2006

REITs to cause a property re-rating?

Real Estate Investment Trusts (REITs) are set to change the way investors make money from investing in commercial property. After years of mutterings, proposals, working parties and discussions papers, final details for REITs are to be revealed in the forthcoming Budget.

The basic REIT model involves a company paying a conversion charge in return for entering a tax-free vehicle which must abide by a number of restrictions, such as paying out high dividends and the level of new developments which can sit within it.

The Chancellor, Gordon Brown, has wanted to ensure that the whole scheme must be tax neutral as far as the Treasury's position is concerned. He is equally keen to ensure that structures are put in place to ensure that the investing public do not lose out.

The key to all of this is the the conversion charge that the property companies will have to pay to become UK REITs - and we have yet to learn what that important detail is going to be. It is likely to be a proportion of capital gains tax - maybe 40 or 5o per cent - or a percentage of gross asset value - perhaps 2 per cent.

A survey by the Council of Mortgage Lenders suggested at least half of Britain's quoted property companies could convert to REIT status, but it is thought to be far more popular than that. Using one company as an example, Land Securities, this company could increase it dividend to over 70p a share yieldong over 4 per cent at current market prices.

This activity could provide a significant uplift to commercial property over the coming 12 months.