The REIT choice

What’s happened

Next Tuesday, the eyes of bricks and mortar investors will be on property
group British Land when it publishes its preliminary results for the year end 31
March 2006. They will be looking for further news on if, or when, the group will
turn itself into a Real Estate Investment Trust. Long before the chancellor
announced further details in his last Budget on how the trusts would operate,
British Land’s finance director, former Andersen partner Graham Roberts, will
have been grappling with this weighty decision.

Before the Budget speech in March, there was concern that the exit charges –
the cost of converting a listed company into a REIT – would be set too high, but
those fears have now been allayed.

What next?

Under the rule of chairman and managing director Sir John Ritblat, British
Land looks likely to convert its £18bn property portfolio into a REIT. Along
with other property companies, such as Land Securities, Brixton and Liberty, it
has expressed an interest in becoming a REIT but it is delaying a formal
decision until the Finance Act later this year. Most analysts agree that, if
British Land is happy with the scheme as it now stands, it will convert to a
REIT early next year.

The company will particularly welcome the 2% 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 than had been previously

Rival Hammerson has already fired the starting gun on REITs, saying it plans
to convert by 1 January next year. Before its announcement, the property company
bought back £200m of 10.75% bonds, as the rules will restrict gearing on REITs.
Analysts forecast others, including British Land, will do likewise.

In the meantime, Roberts will see British Land’s share price continue to rise
– analysts at Merrill Lynch and UBS have said the group is now a ‘buy’, based
largely on the chancellor’s Budget announcements.

Merrill Lynch’s Alec Pelmore also said that the company should consider
demerging its office and retail businesses, a process he believes would unlock
greater value for shareholders since both parts would command higher stock
market ratings.


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 one-off ‘exit tax’ in return for tax exemption
that will allow them to pass property profits back to shareholders through
higher dividend payments. REITs have already been very successful in the US and
in France. Under UK rules, companies will have to pay a conversion charge based
on 2% of the gross market value of its assets.

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