Special pleading

8 January 2006 By Simon Nixon

The UK property industry is up in arms over government plans to impose ownership limits and a gearing cap on real estate investment trusts. But the potential valuation uplift from conversion to reit status means the market can easily navigate its way past these obstacles.

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UK property companies have criticised the government's draft proposals for the introduction of real estate investment trusts (reits) which they claim are too complex and will prevent many listed property companies from becoming reits. Reits are taxefficient vehicles designed to allow retail investors the opportunity to invest in commercial property on the same terms as direct investors. Reits pay no income or capital gains tax providing they distribute at least 95% of their earnings as dividends.

Under the proposals, no single shareholder will be allowed to own more than 10% of a reit, and reits will be required to maintain interest cover of 2.5 times operating profit. These conditions are to ensure no loss of tax revenue to the UK exchequer. Under new EU rules, foreign investors with a shareholding of more than 10% of a UK company are not subject to witholding tax on dividends. And foreign investors do not pay witholding tax on interest income.

Reits will be introduced in the UK under the 2006 Finance Act in March. The entry fee that property groups must pay to convert to reit status has yet to be decided. Companies will be allowed to convert from January 2007.

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