UK: On The REIT Track - Why Ten Years On Reits Remain A Strong Structuring Option

Last Updated: 28 April 2017
Article by Craig Cordle

A decade has passed since its inception, and there hasn't been a more sensible time to invest in the UK-REIT, says group partner Craig Cordle.

With 10 years passing since the introduction of the UK-REIT, why does it remain a popular choice for international investors?

The principal attraction for the UK-REIT remains the favourable tax treatment afforded by HM Revenue & Customs. It benefits from an exemption from UK corporation tax on property investment income and capital gains.

Of course, there are various conditions that must be met, but this is good news for international investors who will want to see their share of UK-REIT profits taxed in their home jurisdiction. The savings can be significant, coupled with the benefit of investing on a pooled basis and spreading investment risk between sector, type, number and geography of properties.

The conditions for qualifying have also gradually become more permissive. For example, institutional investors are now excluded from the 'close company condition', which means that it is now possible for a limited number of institutional investors (even one) to control UK-REITs.

In addition, for international investors, the UK-REIT may be seen as offering easier exposure to property than by way of direct investment, and providing access to types of property that such investors may not be able to access alone. UK-REITs are also required to list on a recognised stock exchange, such as the London Stock Exchange or the International Stock Exchange (TISE) in the Channel Islands, where a quarter of UK-REITs are currently listed, which means that investors benefit from the potential liquidity of owning a traded security.
Listing on a recognised exchange also gives comfort to investors that the UK-REIT is subject to a suitable level of governance and oversight.

Have they been affected by the UK's decision to leave the EU?

The strong likelihood is that the UK-REIT will not be affected significantly by the UK's decision to leave the EU. Although some overseas property investment is permitted, the UK-REIT is predominantly a UK property product and the income that can be made from UK property remains in steady demand from within the UK and internationally.

In the short term, there may be some concerns about the marketability of UK-REITs to EU investors given the restrictions under the Alternative Investment Fund Managers Directive (AIFMD), however, national private placement regimes (NPPRs) continue to work well, particularly for entities domiciled in the Channel Islands.

In fact, in relation to financial services, the third country status of Guernsey and Jersey vis-à-vis the EU is entirely clear and will be unchanged by Brexit. This is good news for the UK-REIT as the Channel Islands continue to offer certain and durable options for structuring funds and fund management operations.

Why is structuring them through the Channel Islands a sensible choice?

There are multiple reasons why structuring UK-REITs through Guernsey or Jersey makes sense, including:

  • Distributions in both Guernsey and Jersey are permitted to be made on a solvency basis, meaning the process of making distributions can be more straightforward than with a UK company.
  • Stamp duty is not payable on the transfer of shares in a Guernsey or Jersey company. This is one of the great attractions of Channel Islands companies. This is particularly relevant to the easy entry/exit of investors in UK-REITs, and is a positive for liquidity.
  • Protected and incorporated cell companies are recognised under the laws of Guernsey and Jersey. Where ring fencing of assets and liabilities is important, the availability of these vehicles can assist greatly in structuring UK-REITs.
  • If listing on TISE, UK-REITs are exempt from the free-float rule requiring 25 percent of the issued share capital to be held in public hands. The availability of this exemption may be particularly attractive to a smaller number of institutional investors investing for the long term and where liquidity is not a priority.

In addition, Guernsey and Jersey already meet the conditions set out in the AIFMD under Article 36 (being the conditions for EU managers marketing third-country funds to EU investors under NPPR) and Article 42 (being the conditions for third-country managers marketing funds to EU investors under NPPR). The Channel Islands have been operating successfully within NPPR since 2013 with cooperation agreements having been entered into with the competent authorities of 25 of the 27 EU member states (that is, all except Austria and Italy).

Guernsey and Jersey are two of only five third-countries that have, to date, been positively assessed by the European Securities and Markets Authority (ESMA) for the purposes of extending the AIFMD marketing passport. Both jurisdictions have already implemented fully compliant AIFMD regimes in anticipation of the availability of the passport, for those Guernsey or Jersey managers that wish to be prepared once a passport becomes available to them, including where a member state automatically switches off its NPPR.

Following Brexit, the timetable for the third-country passport is now unclear, however, our experience tells us that, in most cases, managers tend to market to investors in only very few EU member states. Therefore, marketing under NPPR is a straightforward and far less costly option than marketing under the AIFMD passport.

More generally, there is a wealth of expertise in the Channel Islands in the areas of portfolio and risk management, compliance and reporting, delegation and outsourcing models, and management company services. The tax system is straightforward and not subject to change and management companies are able to operate on a zero-percent corporate tax basis. In addition, UK-REIT overheads may also be lower with service providers based out of London operating in Guernsey and Jersey.
Guernsey and Jersey have led the way in adopting global best practice in transparency and anti-corruption, while maintaining confidentiality and privacy for businesses wishing to protect legitimate commercial interests. Furthermore, the Channel Islands are easily accessible from a number of UK airports, making access and attendance at board meetings very easy. 

What are the main opportunities for UK REITs going forward?

 Existing UK-REITs and those managers considering establishing their own UK-REIT should continue to take advantage of the UK-REIT's unique proposition for investment into UK property, especially with Brexit in mind. In addition, for the international investor with a strong home currency vis-à-vis sterling, they can continue to take advantage of an additional uplift in value when investing. Of course, if the value of the pound rises comparatively against an investor's home currency, then their returns could be reduced, assuming they wish to convert back to their home currency and absent any currency hedging that may be put in place.

What are the main obstacles?

As with many asset classes, there is always a danger that the market may become saturated with competing products and that investors' allocations to UK property may become full. This may, in time, make establishing new UK-REITs a little harder, particularly if existing larger UK-REITs remain open to new investment. It's generally easier to grow an existing fund through secondary fundraising, rather than building a new book leading up to the initial public offering of a new UK-REIT. However, for the right investment proposition, there is plenty of dry powder and sub-sectors into which UK-REITs are yet to venture.

As noted above, currency plays an important role for the non-sterling investor and a stronger pound may gradually dampen the attractiveness of UK-REITs for the international investor. Some financial commentators have started to say that they expect to see a noticeably stronger pound by the end of 2017 and into early 2018, which may have an impact on non-sterling investors investing in UK-REITs.

The tone of the forthcoming Brexit negotiations and the terms of any exit agreement that may be reached will be important to the value of the pound. Of course, many international investors will hold sterling accounts and so currency values may be less relevant to them.

Finally, Base Erosion Profit Shifting (BEPS) Action 4, which relates to the deductibility of interest, may have an impact on the UK-REIT regime, however, the impact of the implementation of the full suite of BEPS sections on the UK-REIT (and certain investment funds generally) currently remains unclear.

This editorial first appeared in Real Estate Investment Times.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions