Some of Britain's biggest property companies look set to take advantage of new style Real Estate Investment Trusts (REITs) following changes to some of the draft proposals in the Budget.
In the Budget Chancellor Gordon Brown outlined his proposals for the introduction of REITs into the UK market and made some key changes to December's draft proposals that went a long way to allay some of the industry's concerns.
Charles Beer, head of real estate at accountancy firm KPMG, said that as a result it was "now more likely that a significant number of property companies will convert to REIT status in 2007".
Robert Field, a partner at property firm Lawrence Graham, said REITs now look to be a far more likely prospect and set to become a core investment product for institutions and individuals alike.
Investment house Credit Suisse First Boston reckons the REIT market could be worth £100 billion over the next five-to-ten years. The UK-listed property market sector is currently capitalised at around £43 billion.
REITs are tax efficient investment vehicles set up to develop, manage and sell real estate assets, allowing participants to invest in a portfolio of properties. Companies will pay a oneoff 'exit tax' in return for tax exemption which will allow them to pass property profits back to shareholders through higher dividend payments.
The Treasury has decided that the conversion charge will be levied at a rate of two per cent of the gross market value of the investment assets. It also eased the rules governing the minimum level of interest cover from 2.5 times to 1.25 times on a pre-capital allowance basis.
"The level of borrowing permitted in a REIT is now double what was originally proposed. This will allow REITs to borrow 70 to 80 per cent of the value of their portfolio. Most listed companies are already within this limit," said Mr Beer.
In another move, the Treasury reduced the required distribution rate to 90 per cent of net profits to allow greater flexibility for companies to operate within the regime. The previous figure was for up to 95 per cent.
British Land, Land Securities, Liberty International, Slough Estates and Hammerson have all given a tacit "thumbs up" to the proposals and are now studying the fine detail.
Investment house Goldman Sachs also said it thought the Government's intended structure for REITs were "workable"
and that it expected all UK property companies in its coverage to convert in 2007.
British Land, which has property portfolio valued at over £18 billion, said it was looking at the revised REIT proposals with "a constructive mindset".
"We're pleased the Government has listened to our concerns and made some adjustment to the draft proposals," said chief executive Stephen Hester.
British Land particularly welcomed the reduction in interest cover and the two per cent conversion charge, which will now be based on the market value of the investment rather than on capital gains tax liability. This will result in a lower tax charge for companies wishing to convert.
"It all looks pretty promising," said British Land's finance director John Weston Smith.
Slough Estates also welcomed the Budget announcement.
"The Government appear to have addressed some of the big issues. The conversion charge is in line with expectations, but we will have to look at everything in depth," said chief executive Ian Coull.
Land Securities was said to be "positive" about the proposals, but would be looking at the fine detail before deciding whether to convert its £11.5 billion portfolio to REIT status.
Hammerson, which has already taken advantage of a similar tax efficient scheme in France for its French property assets, will also take a close look at the detail.
Capital & Regional, however, said it was unlikely to take advantage of the new REIT regime. The property asset manager, which has a number of prime retail and shopping centre assets, said that while the Government had "gone a long way" to address the concerns of the industry, it felt there were still certain issues. ..SUPL: