Osborne set for REIT reform

Autumn Statement will bring tax breaks for cross-REIT investment, but no social housing REIT

The government is poised to make a key change to the REIT regime, but is thought unlikely to introduce social housing REITs.

Chancellor George Osborne is to allow REITs to invest in each other without incurring tax, thus enjoying the same tax treatment as investing in physical buildings. Industry sources suggest Osborne will make an announcement, probably on the day of the Autumn Statement in December.

REITs’ exemption from corporation tax on profits and gains only applies to buildings they own directly.

If a REIT invests in another REIT, income is taxed as income from property, on which corporation tax should be paid.

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Critical mass: Osborne heeded BPF on concerns over social housing REITs

The decision follows a six-month consultation by the Treasury into the role REITs could play in supporting the social housing sector.

The property industry, through the Property Industry Alliance, had argued that “such a change would be a further step in promoting UK REITs as a property investment vehicle of choice, as against offshore corporate or property unit trust vehicles”.

Specifically, the alliance argued that the change would enable joint venture REITs between REITs and other investors, the delisting by REITs of parts of their business into new REITs, the investment by REITs in specialist REITs and better cash management through the investment on a short-term basis of cash in other REITs.

JP Morgan Cazenove property analyst Harm Meijer welcomed the changes: “We don’t see a significant impact on the sector, although the announcement could facilitate more M&A. However, the biggest thing we are waiting to hear on is whether overseas investors can control UK REITs in a tax-efficient way.”

The prospects, however, for social housing REITs are less good. The government has yet to be persuaded to change the rules, particularly after the British Property Federation in June cast doubt on the potential for social housing REITs, claiming they “may not be commercially viable”.

The BPF said: “It is unlikely that a portfolio made up entirely of social housing would provide an attractive enough return to investors.”

It pointed out that a tax-efficient REIT structure did not of itself increase the underlying attractiveness of a particular investment proposition.

“Reforms to the REIT rules will have little impact on investment in residential property, if it is simply not possible to put together a portfolio of residential property [regardless of tenure], which generates an attractive return for investors,” it added.

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