In its response to the consultation on the draft tax legislation, the Association believes, whilst existing listed property companies may convert into REITs, if the government does not simplify the regime there is a high risk that no new UK-REITs will be launched as it would be more attractive for managers to launch offshore property funds.
Daniel Godfrey, director general of AITC, said: “Unless the tax regime is radically simplified, we believe there is a very real risk there will be no new UK-REIT launches. It would be more attractive for managers to launch offshore property investment companies rather than REITs in the UK and there is already a thriving market for offshore funds.
"The proposed REITs tax legislation is much longer and the conditions are far more complicated and onerous than those for investment trusts.
“We particularly believe the condition that no person controls 10 per cent or more of the share capital or voting rights of a REIT is completely unworkable and should be removed.
"Inflexible legislation sounded the death knell to Housing Investment Trusts, which have been a complete failure. Not a single Housing Investment Trust has been launched in the ten years since their introduction.
"We urge the government to rethink its position on the tax regime for REITs and to dramatically simplify the legislation otherwise there may well not be a single new UK-REIT launched.”
Draft Tax Legislation UK-REITs
The AITC believes existing property companies may wish to convert into UK-REITs but is concerned that the draft tax regulations are too long and complicated and will represent a major barrier to possible new UK-REIT launches.
The AITC anticipates that the UK REIT legislation will be about twenty pages long. In comparison, the current investment trust tax legislation is approximately two pages long.
The government introduced legislation for Housing Investment Trusts in 1996 which was approximately two pages long but was so inflexible that it still proved an absolute barrier to entry.
Offshore Property Investment Companies
The risk of a failure similar to Housing Investment Trusts is more likely today as there is now an established market of investment companies domiciled overseas with a listing in the UK.
Whereas in the past, UK investors may have had concerns about investing in an offshore company, investment centres such as Guernsey and Jersey are now recognised as being commercially attractive with a robust regulatory regime for investor protection.
Most new UK closed-ended fund launches aimed at UK investors have taken place offshore. In 2005, more than £2.4bn was raised by offshore closed-ended funds in comparison with just £249m onshore. Of the £2.4bn raised offshore in 2005, £1.3bn was raised by offshore property investment companies. This demonstrates there is a tried and tested market for these property funds which will be able to compete with UK-REITs.
The crucial question for the government is whether a UK-REIT will be as attractive from a commercial perspective than the alternative offshore route. If this is not to be the case, then there will simply be no UK-REIT launches.
