REITs announcement welcomed by property industry

REITs announcement welcomed by property industry

	Published : Thu, 23 Mar 2006 14:30 By : David Simms Print this Story

LONDON: The government announced key proposals for the introduction of tax-efficient Real Estate Investment Trusts (REITs) in 2007, which raised the scope for higher investments in the property sector.

The major proposal is the conversion charge or 'exit tax', which property companies will be required to pay in order to qualify for REIT status. The treasury said the conversion charge will be levied at the rate of 2 per cent of the gross market value of the investment assets.

The charge has been spread over four years and is less than what the market had expected.

The treasury has also eased the rules covering the minimum level of interest cover from 2.5 times to 1.25 times on a pre-capital allowance basis. It has also reduced the required distribution rate to 90 per cent of net profits to allow greater flexibility for companies to operate within the regime. Earlier the rate was 95 per cent.

Property companies can now opt to join the new regime from 1 January 2007.

Analysts said the regime appears to be more flexible and will appeal to more and wider range of companies.

As REITs will be distributing most of their profits to shareholders, who will in turn pay tax on the dividends at their marginal rates, the REITs will not be required to pay any corporation tax unlike property companies now. And the REITs status can be achieved by paying the 2 per cent of the market value of their investment properties instead of the cumbersome capital gains-based tax.

The treasury decided to retain the 10 percent single shareholding limit, but it said it will set out guidelines to enable firms to manage the cap through its internal rules.

Analysts are upbeat that REITs will more than treble Britain's 34-billion-pound quoted real estate market to over 100 billion pounds over the next five to 10 years.

Large listed property companies like Land Securities, Slough Estates and Hammerson will be attracted to the scheme. Shares of some of these companies reached new highs. Land Securities gained 13 per cent to 20.80 pounds, Hammerson rose 9 per cent to 13 pounds and British Land up 12 per cent to 13 pounds.