U.K. real estate investment trusts will be more vulnerable to takeover by investors from outside of Britain under rules proposed today for the tax-exempt companies.
The changes “will allow more cross-border M&A activity,” said Phil Nicklin, head of accounting firm Deloitte LLP’s unit specializing in REITs. “Investment banks are already talking to me about this.”
The U.K. Treasury proposed the draft law today that would allow British units of overseas companies to qualify for REIT tax exemptions by loosening regulations on ownership and stock-exchange listings. The rules would also abolish a charge to become a REIT equal to 2 percent of a company’s net asset value.
U.K. properties or companies would be eligible for REIT status if their owners’ shares trade on overseas exchanges as well as the Alternative Investment Market and the exchange in London run by Plus Markets Group Plc, the Treasury said today.
The rules would adjust the criteria for qualifying as a REIT and change the rules on how and when taxes are collected.
“The changes will make REITs more cost-effective and easier to operate,” said Rosalind Rowe, a partner at PricewaterhouseCoopers LLP. The changes may also “open up the market to a new group of investors, potentially including pension schemes and insurance companies.”
As many as 40 new REITs will be spawned by the modifications announced today, Nicklin estimated. The U.K. currently has 23 with a market value of about 20 billion pounds.
Most new REITs would be conversions of funds now based in low-tax offshore jurisdictions such as Jersey, said Mike Prew, a Jefferies & Co. analyst. The funds would seek REIT status to avoid additional costs created by a European Union directive that will tighten regulation and supervision, he said.
REITs in the U.K. avoid corporation or capital gains taxes in return for paying investors 90 percent of the income generated by their property. The changes proposed, the most sweeping to rules first introduced in 2007, will likely be adopted when lawmakers vote on the next fiscal year budget by the second quarter of 2012.
The new rules may help the creation of residential REITs as the government seeks to attract investment into private rented accommodation, said Marion Cane, an executive director at Ernst & Young LLP’s tax advisory arm for real estate, hospitality and construction. No U.K. residential REITs currently exist.
In March, the government lowered the tax cost of acquiring groups of properties by changing the way it calculates the stamp duty, which is a property-transfer tax.
That change, combined with the rules being proposed today, “will help residential REITs, particularly as they build up a portfolio,” Ernst & Young’s Cane said.
London & Stamford Property Plc, a REIT that owns a stake in one of the U.K.’s largest malls, said last month that it may set up a separate residential REIT as it acquires housing assets.
Helical Bar Plc, which isn’t a REIT, may consider creating one for the residential properties that it’s developing, Chief Executive Officer Mike Slade said in an interview.
“Further changes are still needed to encourage residential and social housing REITs,” said Nicklin at Deloitte. They need to be able to trade real estate, which is something that current rules preclude, he said.
The rules wouldn’t allow for the creation of private REITs, according to the Treasury. Closely held real estate companies can qualify for the tax exemptions if they seek to sell shares on a London exchange within three years.
Current rules require REITs to have 25 percent of their shares widely held by investors. Pension funds, insurance companies, sovereign-wealth funds and mutual funds will be exempted from the rule, the Treasury said today. Charities, banks and REITs domiciled outside the U.K. wouldn’t qualify for the exemption.
The Treasury has asked for responses to the proposals by Feb. 12.