Property companies may convert to trusts

Plans for real estate investment trusts , funds which will invest in property assets, moved a step closer this week with a consultation paper issued alongside Gordon Brown’s Budget.

The proposed changes mean that in the not so distant near future investors will no longer invest in shares in a property company such as Slough Estates or British Land: instead, they will probablycan buy shares in a property real estate investment trust – or Reit.

UK Reits may be introduced as early as next spring. next year. They will be a type of tax-transparent vehicle similar to products already commonavailable in Australia, the US and elsewhere. And They will also be much more flexible than some experts had expected.

As a result, listed companies, private companies and some funds are expected to convert to these new vehicles because they will no longer have to pay corporation tax . To benefit from this tax perk, they will need to if they pay out 95 per cent of their rental income straight to shareholders.

If a listed property company likesuch as British Land were to turn itself into a Reit, it will be able to could buy any type of property: bridges, schools, even prisons. The buildings can be anywhere in the world, and can be held for as long as the Reit wants. The Reit will also be allowed to develop new buildings, up to a cap of 25 per cent of the total portfolio.

However, exact details of how property companies can convert themselves into Reits still have to emerge. For example, the government may impose an onerous entrance levy at the point they convert. Reits may also have restrictions on borrowings, which could impact future returns. Private investors will be able to buy shares in Reits which specialise in Tokyo apartments, or London offices, or Norwegian retail – the possibilities are endless. For now, however, they will have to wait for more exact details. It is not even definite that all listed property companies will convert themselves into the new investment trusts.

For starters,the government may impose an onerous entrance levy at the point they convert. Reits may also have restrictions on borrowings, which could impact future returns.

And the government is concerned about foreign investment into UK-REITS. “A number of other key issues still need to be resolved,” said Marion Cane, director of Grant Thornton’s property team. “But this is good news and more than we were expecting to hear.”