The UK Real Estate Investment Trust (REIT) legislation came into effect in January 2007. A decade later, there has been a rush of new entrants to the market, many externally managed by fund managers. In this article we look at common misconceptions about what a REIT is, how the market has evolved and why we are seeing a flurry of new launches.
Features of a REIT
In the past, REITs may have been perceived as complex, highly regulated, restrictive and costly to set up. Infact, the regime currently offers an attractive structure for many investors, with significant commercial benefits including onshore management, cost savings, liquidity and flexibility.
A REIT is a tax efficient vehicle, promoted by the government to encourage the wider public to pool their investment in real estate. A REIT is not taxed on income and gains from its property rental business, instead shareholders are taxed on a REITs property income when it is distributed.
- REITs are managed onshore and may provide cost savings compared to offshore fund structures. The onshore structure offers a stable tax and regulatory environment that is approved by HMRC. The G20 / Organisation for Economic Co-operation and Development (OECD) are committed to implementing the Base Erosion and Profit Shifting (BEPS) recommendations, meaning that offshore fund structures are under increased scrutiny from Tax Authorities and are becoming more costly and risky to operate.
- Shares in a REIT are typically more liquid than other structures, such as units in a Unit Trust. This means that investors can respond quickly to market conditions, by trading their shares, to facilitate an exit or increase their investment. This was highlighted in the days following Britain’s vote to leave the European Union when non-REIT property funds were forced to suspend trading, as a consequence of their inability to meet redemption requests.
- A REIT must meet certain conditions, including that it must be listed on a recognised stock exchange. A listing on the main market is globally recognised and appeals to a broad investor base. With the right management and business strategy in place, new REITs have been able to expand rapidly, financed by a combination of new equity raises and debt finance.
- If a main market listing is not attractive, then it is possible for a REIT to be listed on AIM, or an equivalent foreign stock exchange such as the Channel Islands. In this way, the cost of setting up a REIT is significantly reduced. It also makes it possible to form private REITs, including joint venture REITs, held wholly by qualifying institutional investors.
How the market has evolved
Historically, the REIT market was dominated by a handful of large property groups that converted to REIT status in 2007. The rules were relaxed in 2012, lowering the barriers to entry, and, in recent times, new REITs have listed focused on a wide range of asset classes within the broad real estate market. Investor demand for sector specialisation and a focused strategy in the market has led to REITs that specialise in healthcare, student accommodation, private rented, logistics, storage, shopping centres and, more recently, social housing, care accommodation and retirement living.
Institutional investors are increasingly seeking sustainable income returns, which means that there is demand for REITs that deliver inflation-protected income and capital growth over the medium-term.
The future role of REITs
REITs look set to play a key role in enabling investment in a wide range of real estate sub sectors. REITs typically take a long term investment horizon, have modest gearing, and are therefore incentivised to actively manage their assets to drive strong and stable returns for shareholders. Ultimately this should result in a quality real estate product and raising standards for tenants.
Building effective partnerships between REITs and institutional investors, business operators, local authorities and government will be key to unlocking value from real estate and delivering fit for purpose solutions to the wide ranging needs of the UK population. Given the UK’s growing and ageing population, government resources are severely constrained and private sector investment including from social housing and healthcare REITs will be an important part of the solution.
If you are interested in discussing this further with us, please contact Matthew Stannard